Retailers are overhauling their operations as technology redefines the shopping experience. Still, demand can be volatile as the industry is exposed to the ups and downs of consumer spending. This has stirred some uncertainty lately as retail stocks have tumbled by 3.6% over the past six months. This drawdown mirrored the S&P 500’s decline.

Investors should tread carefully as many companies in this space can be value traps. Taking that into account, here are three consumer stocks that may face trouble.

BJ's (BJ)

Market Cap: $12.34 billion

Appealing to the budget-conscious individual shopping for a household, BJ’s Wholesale Club (NYSE: BJ) is a membership-only retail chain that sells groceries, appliances, electronics, and household items, often in bulk quantities.

Why Are We Hesitant About BJ?

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. Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 18.5%
3. Subpar operating margin of 3.8% constrains its ability to invest in process improvements or effectively respond to new competitive threats

BJ's is trading at $95.86 per share, or 21.1x forward P/E. To fully understand why you should be careful with BJ, check out our full research report (it’s free).

Grocery Outlet (GO)

Market Cap: $686.1 million

Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ: GO) is a discount grocery store chain that offers substantial discounts on name-brand products.

Why Do We Avoid GO?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 6.5 percentage points
3. High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate

At $7.01 per share, Grocery Outlet trades at 14.2x forward P/E. If you’re considering GO for your portfolio, see our FREE research report to learn more.

Kroger (KR)

Market Cap: $44.52 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. Lack of new stores puts a ceiling on its growth and reflects a focus on optimizing sales at existing locations
2. Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 23.8%
3. Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term

Kroger’s stock price of $72.72 implies a valuation ratio of 13.9x forward P/E. Read our free research report to see why you should think twice about including KR in your portfolio.

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