Most consumer discretionary businesses succeed or fail based on the broader economy. This sensitive demand profile can cause discretionary stocks to plummet when macro uncertainty enters the fray, and over the past six months, the industry has shed 7.7%. This drop was worse than the S&P 500’s 2.1% loss.
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. On that note, here are three consumer stocks that may face trouble.
Carter's (CRI)
Market Cap: $1.31 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 Steer Clear of CRI?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Low free cash flow margin of 5.4% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $35.90 per share, Carter's trades at 11.7x forward P/E. Check out our free in-depth research report to learn more about why CRI doesn’t pass our bar.
Churchill Downs (CHDN)
Market Cap: $6.21 billion
Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ: CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.
Why Is CHDN Risky?
- 9% annual revenue growth over the last two years was slower than its consumer discretionary peers
- Free cash flow margin is projected to show no improvement next year
- Returns on capital are growing as management invests in more worthwhile ventures
Churchill Downs’s stock price of $89.08 implies a valuation ratio of 13.4x forward P/E. To fully understand why you should be careful with CHDN, check out our full research report (it’s free).
MasterCraft (MCFT)
Market Cap: $330.6 million
Started by a waterskiing instructor, MasterCraft (NASDAQ: MCFT) specializes in designing, manufacturing, and selling sport boats.
Why Do We Avoid MCFT?
- Annual sales declines of 4.7% for the past five years show its products and services struggled to connect with the market
- Projected 2.7 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
MasterCraft is trading at $20.30 per share, or 12.9x forward P/E. Dive into our free research report to see why there are better opportunities than MCFT.
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