The performance of consumer discretionary businesses is closely linked to economic cycles. Over the past six months, it seems like demand trends may be working against their favor as the industry’s returns were flat while the S&P 500 was up 7.3%.

While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Taking that into account, here are three consumer stocks we’re passing on.

Carter's (CRI)

Market Cap: $1.39 billion

Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE: CRI) is an American designer and marketer of children's apparel.

Why Do We Avoid CRI?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
2. Poor free cash flow margin of 6.5% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Carter’s stock price of $38.07 implies a valuation ratio of 14.4x forward P/E. To fully understand why you should be careful with CRI, check out our full research report (it’s free).

Wolverine Worldwide (WWW)

Market Cap: $1.45 billion

Founded in 1883, Wolverine Worldwide (NYSE: WWW) is a global footwear company with a diverse portfolio of brands including Merrell, Hush Puppies, and Saucony.

Why Do We Think WWW Will Underperform?

1. Products and services fail to spark excitement with consumers, as seen in its flat sales over the last five years
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 7.2% for the last two years
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $17.72 per share, Wolverine Worldwide trades at 14.2x forward P/E. Dive into our free research report to see why there are better opportunities than WWW.

Smith & Wesson (SWBI)

Market Cap: $519.7 million

With a history dating back to 1852, Smith & Wesson (NASDAQ: SWBI) is a firearms manufacturer known for its handguns and rifles.

Why Do We Steer Clear of SWBI?

1. Annual sales declines of 10.2% for the past five years show its products and services struggled to connect with the market
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Smith & Wesson is trading at $11.67 per share, or 42.1x forward P/E. If you’re considering SWBI for your portfolio, see our FREE research report to learn more.

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