Retailers are overhauling their operations as technology redefines the shopping experience. Digitization has been one of the keys to staying competitive against e-commerce rivals, a move that has enabled the industry to grow same-store sales. Consequently, retail stocks have climbed 10.1% over the past six months, nearly mirroring the S&P 500.

Nevertheless, investors should tread carefully as many companies will light cash on fire by opening new locations without the proper justifications. Keeping that in mind, here are three consumer stocks we’re passing on.

OneWater (ONEW)

Market Cap: $223.8 million

A public company since early 2020, OneWater Marine (NASDAQ: ONEW) sells boats, yachts, and other marine products.

Why Is ONEW Risky?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
2. Performance over the past three years shows its incremental sales were much less profitable, as its earnings per share fell by 53.6% annually
3. High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $13.69 per share, OneWater trades at 34.1x forward P/E. Check out our free in-depth research report to learn more about why ONEW doesn’t pass our bar.

Arhaus (ARHS)

Market Cap: $1.50 billion

With an aesthetic that features natural materials such as reclaimed wood, Arhaus (NASDAQ: ARHS) is a high-end furniture retailer that sells everything from sofas to rugs to bookcases.

Why Does ARHS Worry Us?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Modest revenue base of $1.36 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
3. Earnings per share fell by 13.8% annually over the last three years while its revenue grew, partly because it diluted shareholders

Arhaus is trading at $10.61 per share, or 21.5x forward P/E. Dive into our free research report to see why there are better opportunities than ARHS.

Kroger (KR)

Market Cap: $39.91 billion

With a sprawling network of over 2,400 locations offering digital pickup services, Kroger (NYSE: KR) operates supermarkets, pharmacies, and fuel centers across 35 states, offering customers groceries, household items, and private-label products.

Why Are We Out on KR?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Gross margin of 23.7% is below its competitors, leaving less money for marketing and promotions
3. Performance over the past three years shows each sale was less profitable, as its earnings per share fell by 29.8% annually

Kroger’s stock price of $62.81 implies a valuation ratio of 12.1x forward P/E. To fully understand why you should be careful with KR, check out our full research report (it’s free).

Stocks We Like More

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