Most consumer discretionary businesses succeed or fail based on the broader economy. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 4.8% return over the past six months has trailed the S&P 500 by 3.7 percentage points.

A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. Keeping that in mind, here are three consumer stocks that may face trouble.

Genesco (GCO)

Market Cap: $295.6 million

Spanning a broad range of styles, brands, and prices, Genesco (NYSE: GCO) sells footwear, apparel, and accessories through multiple brands and banners.

Why Should You Dump GCO?

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. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
3. 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

Genesco’s stock price of $27.39 implies a valuation ratio of 15.7x forward P/E. Read our free research report to see why you should think twice about including GCO in your portfolio.

Cushman & Wakefield (CWK)

Market Cap: $3.50 billion

With expertise in the commercial real estate sector, Cushman & Wakefield (NYSE: CWK) is a global Chicago-based real estate firm offering a comprehensive range of services to clients.

Why Do We Think CWK Will Underperform?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 4.1% over the last five years was below our standards for the consumer discretionary sector
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $15.04 per share, Cushman & Wakefield trades at 11.3x forward P/E. Dive into our free research report to see why there are better opportunities than CWK.

RE/MAX (RMAX)

Market Cap: $143.4 million

Short for Real Estate Maximums, RE/MAX (NYSE: RMAX) operates a real estate franchise network spanning over 100 countries and territories.

Why Is RMAX Risky?

1. Sluggish trends in its agents suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 7.1% annually while its revenue grew
3. Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 8 percentage points over the next year

RE/MAX is trading at $7.15 per share, or 5.6x forward P/E. To fully understand why you should be careful with RMAX, check out our full research report (it’s free).

Stocks We Like More

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