Retailers are adapting their business models as technology changes how people shop. 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 1.9% compared to 12.7% for the S&P 500.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. On that note, here is one consumer stock boasting a durable advantage and two we’re steering clear of.
Two Consumer Retail Stocks to Sell:
Best Buy (BBY)
Market Cap: $18.47 billion
With humble beginnings as a stereo equipment seller, Best Buy (NYSE:BBY) now sells a broad selection of consumer electronics, appliances, and home office products.
Why Do We Avoid BBY?
- Store closures and disappointing same-store sales suggest demand is sluggish and it’s rightsizing its operations
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 22.6%
Best Buy’s stock price of $88.58 implies a valuation ratio of 12.5x forward P/E. If you’re considering BBY for your portfolio, see our FREE research report to learn more.
America's Car-Mart (CRMT)
Market Cap: $13.24 million
With a strong presence in the Southern and Central US, America’s Car-Mart (NASDAQ:CRMT) sells used cars to budget-conscious consumers.
Why Is CRMT Risky?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Earnings per share decreased by more than its revenue over the last three years, partly because it diluted shareholders
- EBITDA losses may force it to accept punitive lending terms or high-cost debt
America's Car-Mart is trading at $1.52 per share, or 24.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than CRMT.
One Consumer Retail Stock to Watch:
Costco (COST)
Market Cap: $400.2 billion
Designed to be a one-stop shop for the suburban consumer, Costco (NASDAQ:COST) is a membership-only retail chain that sells groceries, apparel, toys, and household items, often in bulk quantities.
Why Is COST Interesting?
- Locations open for at least a year are seeing increased demand as same-store sales have averaged 6.6% growth over the past two years
- Dominant market position is represented by its $293.6 billion in revenue, which compensates for its subpar gross margin
- ROIC punches in at 35.1%, illustrating management’s expertise in identifying profitable investments, and its rising returns show it’s making even more lucrative bets
At $902.38 per share, Costco trades at 41.3x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
Stocks We Like Even More
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