Retailers are adapting their business models as technology changes how people shop. Still, secular trends are working against their favor as e-commerce continues to take share from brick and mortars. This puts retail stocks in a tough spot, and over the past six months, the industry’s 7.4% gain has trailed the S&P 500 by 2.6 percentage points.
Investors should tread carefully as many companies in this space can be value traps. With that said, here are three consumer stocks we’re swiping left on.
RH (RH)
Market Cap: $3.73 billion
Formerly known as Restoration Hardware, RH (NYSE: RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.
Why Does RH Fall Short?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Earnings per share have contracted by 38.3% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
RH’s stock price of $197.43 implies a valuation ratio of 22.1x forward P/E. To fully understand why you should be careful with RH, check out our full research report (it’s free).
Grocery Outlet (GO)
Market Cap: $935.2 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?
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 30.3%
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $9.47 per share, Grocery Outlet trades at 11.6x forward P/E. Check out our free in-depth research report to learn more about why GO doesn’t pass our bar.
Leslie's (LESL)
Market Cap: $12.73 million
Named after founder Philip Leslie, who established the company in 1963, Leslie’s (NASDAQ: LESL) is a retailer that sells pool and spa supplies, equipment, and maintenance services.
Why Is LESL Risky?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 31.6% annually, worse than its revenue
Leslie's is trading at $1.40 per share, or 14.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than LESL.
Stocks We Like More
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