Consumer discretionary businesses are levered to the highs and lows of economic cycles. Lately, it seems like demand trends have worked in their favor as the industry has returned 31.9% over the past six months, outpacing S&P 500 by 9 percentage points.

Nevertheless, this stability can be deceiving as many companies in this space lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks we’re steering clear of.

Wynn Resorts (WYNN)

Market Cap: $12.93 billion

Founded by the former Mirage Resorts CEO, Wynn Resorts (NASDAQ: WYNN) is a global developer and operator of high-end hotels and casinos, known for its luxurious properties and premium guest services.

Why Are We Wary of WYNN?

1. Lackluster 9.9% annual revenue growth over the last five years indicates the company is losing ground to competitors
2. Below-average returns on capital indicate management struggled to find compelling investment opportunities
3. 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

At $125.98 per share, Wynn Resorts trades at 24.4x forward P/E. Read our free research report to see why you should think twice about including WYNN in your portfolio.

Xponential Fitness (XPOF)

Market Cap: $245 million

Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE: XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.

Why Are We Out on XPOF?

1. Muted 5.8% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Poor expense management has led to operating margin losses
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Xponential Fitness’s stock price of $6.98 implies a valuation ratio of 8x forward P/E. If you’re considering XPOF for your portfolio, see our FREE research report to learn more.

1-800-FLOWERS (FLWS)

Market Cap: $309.8 million

Founded in 1976, 1-800-FLOWERS (NASDAQ: FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.

Why Is FLWS Risky?

1. Sales tumbled by 8.6% annually over the last two years, showing consumer trends are working against its favor
2. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

1-800-FLOWERS is trading at $4.80 per share, or 14.6x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than FLWS.

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