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 1.8% compared to 7.7% for the S&P 500.
A cautious approach is imperative when dabbling in these companies as many will light cash on fire by opening new locations without the proper justifications. Keeping that in mind, here are three consumer stocks we’re swiping left on.
Dollar General (DG)
Market Cap: $25.22 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 Does DG Give Us Pause?
- Annual sales growth of 3.9% over the last three years lagged behind its consumer retail peers as its large revenue base made it difficult to generate incremental demand
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 30.3%
- Earnings per share have contracted by 12.6% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
Dollar General is trading at $117.74 per share, or 15.7x forward P/E. If you’re considering DG for your portfolio, see our FREE research report to learn more.
Victoria's Secret (VSXY)
Market Cap: $6.26 billion
Spun off from L Brands in 2020, Victoria’s Secret (NYSE: VSXY) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.
Why Does VSXY Worry Us?
- 2.6% annual revenue growth over the last three years was slower than its consumer retail peers
- Operating margin of 4.8% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Issuance of new shares over the last three years caused its earnings per share to fall by 6% annually while its revenue grew
Victoria's Secret’s stock price of $75.75 implies a valuation ratio of 16x forward P/E. Dive into our free research report to see why there are better opportunities than VSXY.
Williams-Sonoma (WSM)
Market Cap: $25.76 billion
Started in 1956 as a store specializing in French cookware, Williams-Sonoma (NYSE: WSM) is a specialty retailer of higher-end kitchenware, home goods, and furniture.
Why Is WSM Not Exciting?
- Products aren’t resonating with the market as its revenue declined by 2.6% annually over the last three years
- Store closures and disappointing same-store sales suggest demand is sluggish and it’s rightsizing its operations
- Locations open for at least a year are seeing increased demand as same-store sales have averaged 2% growth over the past two years
At $227.80 per share, Williams-Sonoma trades at 23.9x forward P/E. To fully understand why you should be careful with WSM, check out our full research report (it’s free).
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