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 lagged the market over the past six months, posting a return of 20.3% compared to 22.9% for the S&P 500.
Investors should tread carefully as many companies in this space can be value traps. On that note, here are three consumer stocks that may face trouble.
Dollar General (DG)
Market Cap: $22.45 billion
Appealing to the budget-conscious consumer, Dollar General (NYSE: DG) is a discount retailer that sells a wide range of household essentials, groceries, apparel/beauty products, and seasonal merchandise.
Why Are We Hesitant About DG?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 29.9%
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Dollar General’s stock price of $101.85 implies a valuation ratio of 15.9x forward P/E. To fully understand why you should be careful with DG, check out our full research report (it’s free for active Edge members).
Dillard's (DDS)
Market Cap: $9.47 billion
With stores located largely in the Southern and Western US, Dillard’s (NYSE: DDS) is a department store chain that sells clothing, cosmetics, accessories, and home goods.
Why Does DDS Worry Us?
- Lack of new stores suggest it’s attempting to increase revenue at existing locations because demand is sluggish
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Forecasted revenue decline of 2.1% for the upcoming 12 months implies demand will fall off a cliff
Dillard's is trading at $606.24 per share, or 22x forward P/E. Read our free research report to see why you should think twice about including DDS in your portfolio.
Kohl's (KSS)
Market Cap: $1.84 billion
Founded as a corner grocery store in Milwaukee, Wisconsin, Kohl’s (NYSE: KSS) is a department store chain that sells clothing, cosmetics, electronics, and home goods.
Why Should You Sell KSS?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Sales are projected to tank by 4.1% over the next 12 months as its demand continues evaporating
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $16.42 per share, Kohl's trades at 30.3x forward P/E. If you’re considering KSS for your portfolio, see our FREE research report to learn more.
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