Retailers are evolving to meet the expectations of modern, tech-savvy shoppers. Still, secular trends are working against them as e-commerce continues to take share from brick-and-mortar stores. This puts retail stocks in a tough spot, and over the past six months, the industry’s returns were flat while the S&P 500 gained 11.8%.
While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Taking that into account, here are three consumer stocks we would avoid.
Zumiez (ZUMZ)
Market Cap: $300.7 million
With store associates called “Zumiez Stash Members”, Zumiez (NASDAQ:ZUMZ) is a specialty retailer of street and skate apparel, footwear, and accessories.
Why Is ZUMZ Risky?
- Store closures demonstrate a defensive approach to eliminating underperforming locations
- Subscale operations are evident in its revenue base of $938.1 million, meaning it has fewer distribution channels than its larger rivals
- ROIC of 1.4% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
Zumiez is trading at $17.81 per share, or 17.6x forward P/E. Read our free research report to see why you should think twice about including ZUMZ in your portfolio.
OneWater (ONEW)
Market Cap: $199.2 million
A public company since early 2020, OneWater Marine (NASDAQ:ONEW) sells boats, yachts, and other marine products.
Why Do We Avoid ONEW?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 60.4% annually, worse than its revenue
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
OneWater’s stock price of $11.96 implies a valuation ratio of 11.2x forward P/E. To fully understand why you should be careful with ONEW, check out our full research report (it’s free).
Kroger (KR)
Market Cap: $35.52 billion
With a sprawling network of over 2,400 locations offering digital pickup services, Kroger (NYSE:KR) operates supermarkets, pharmacies, and fuel centers across 35 states, offering customers groceries, household items, and private-label products.
Why Should You Sell KR?
- Lack of new stores puts a ceiling on its growth and reflects a focus on optimizing sales at existing locations
- Gross margin of 23.9% is below its competitors, leaving less money for marketing and promotions
- Earnings per share fell by 20.9% annually over the last three years while its revenue was flat, showing each sale was less profitable
At $57.99 per share, Kroger trades at 10.9x forward P/E. Check out our free in-depth research report to learn more about why KR doesn’t pass our bar.
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