Retailers are evolving to meet the expectations of modern, tech-savvy shoppers. 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 have shed 6.4%. This drop is a far cry from the S&P 500’s 4.5% ascent.
Investors should tread carefully as many companies in this space can be value traps. On that note, here are three consumer stocks we’re passing on.
Designer Brands (DBI)
Market Cap: $134.8 million
Founded in 1969 as a shoe importer and distributor, Designer Brands (NYSE:DBI) is an American discount retailer focused on footwear and accessories.
Why Do We Steer Clear of DBI?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Low returns on capital reflect management’s struggle to allocate funds effectively
- High net-debt-to-EBITDA ratio of 11× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Designer Brands is trading at $2.76 per share, or 11.1x forward P/E. Read our free research report to see why you should think twice about including DBI in your portfolio.
Monro (MNRO)
Market Cap: $432.3 million
Started as a single location in Rochester, New York, Monro (NASDAQ:MNRO) provides common auto services such as brake repairs, tire replacements, and oil changes.
Why Do We Pass on MNRO?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 6 percentage points
- Underwhelming 5% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
At $14.60 per share, Monro trades at 20.4x forward P/E. Dive into our free research report to see why there are better opportunities than MNRO.
OneWater (ONEW)
Market Cap: $259.8 million
A public company since early 2020, OneWater Marine (NASDAQ:ONEW) sells boats, yachts, and other marine products.
Why Are We Cautious About ONEW?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 24.2%
- 8× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
OneWater’s stock price of $15.87 implies a valuation ratio of 11.2x forward P/E. If you’re considering ONEW for your portfolio, see our FREE research report to learn more.
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