Retailers are overhauling their operations as technology redefines the shopping experience. But many seem to be moving too slowly as their demand is lagging, causing the industry to underperform the market - over the past six months, retail stocks' 19.3% return has fallen short of the S&P 500’s 22.8% gain.
Investors should tread carefully as many companies in this space can be value traps. Taking that into account, here are three consumer stocks best left ignored.
American Eagle (AEO)
Market Cap: $2.64 billion
With a heavy focus on denim, American Eagle Outfitters (NYSE: AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.
Why Does AEO Give Us Pause?
- 3.9% annual revenue growth over the last six years was slower than its consumer retail peers
- Poor expense management has led to an operating margin of 5.4% that is below the industry average
- ROIC of 9.3% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
American Eagle’s stock price of $15.57 implies a valuation ratio of 11.2x forward P/E. Read our free research report to see why you should think twice about including AEO in your portfolio.
CarMax (KMX)
Market Cap: $6.51 billion
Known for its transparent, customer-centric approach and wide selection of vehicles, Carmax (NYSE: KMX) is the largest automotive retailer in the United States.
Why Do We Think KMX Will Underperform?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 10.9%
- 16× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
CarMax is trading at $44.45 per share, or 12.7x forward P/E. If you’re considering KMX for your portfolio, see our FREE research report to learn more.
OneWater (ONEW)
Market Cap: $245.2 million
A public company since early 2020, OneWater Marine (NASDAQ: ONEW) sells boats, yachts, and other marine products.
Why Is ONEW Not Exciting?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Gross margin of 24.2% is below its competitors, leaving less money for marketing and promotions
- 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $14.98 per share, OneWater trades at 13x forward P/E. Dive into our free research report to see why there are better opportunities than ONEW.
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