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 were flat while the S&P 500 climbed by 6.4%.
A cautious approach is imperative when dabbling in these companies as many will light cash on fire by opening new locations without the proper justifications. With that said, here are three consumer stocks we’re swiping left on.
Gap (GAP)
Market Cap: $7.87 billion
Operating under the Gap, Old Navy, Banana Republic, and Athleta brands, Gap (NYSE: GAP) is an apparel and accessories retailer selling casual clothing to men, women, and children.
Why Does GAP Give Us Pause?
- Sales were flat over the last three years, indicating it’s failed to expand its business
- Lack of new stores puts a ceiling on its growth and reflects a focus on optimizing sales at existing locations
- Underwhelming 8.4% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $21.83 per share, Gap trades at 8.7x forward P/E. Check out our free in-depth research report to learn more about why GAP doesn’t pass our bar.
Home Depot (HD)
Market Cap: $325.1 billion
Founded and headquartered in Atlanta, Georgia, Home Depot (NYSE: HD) is a home improvement retailer that sells everything from tools to building materials to appliances.
Why Does HD Worry Us?
- Annual sales growth of 2.3% over the last three years lagged behind its consumer retail peers as its large revenue base made it difficult to generate incremental demand
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 33.2%
Home Depot’s stock price of $325.93 implies a valuation ratio of 20.9x forward P/E. Read our free research report to see why you should think twice about including HD in your portfolio.
Kroger (KR)
Market Cap: $39.28 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 Is KR Risky?
- Slow expansion of stores indicates a strategic shift toward maximizing returns from existing locations
- Gross margin of 23.8% is an output of its commoditized inventory
- Falling earnings per share over the last three years has some investors worried as stock prices ultimately follow EPS over the long term
Kroger is trading at $64.00 per share, or 12.3x forward P/E. To fully understand why you should be careful with KR, check out our full research report (it’s free).
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