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 tumbled by 6% over the past six months. This drop is a far cry from the S&P 500’s 7.9% ascent.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. On that note, here is one consumer stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Consumer Retail Stocks to Sell:
Walmart (WMT)
Market Cap: $862.7 billion
Known for its large-format Supercenters, Walmart (NASDAQ: WMT) is a retail pioneer that serves a budget-conscious consumer who is looking for a wide range of products under one roof.
Why Is WMT Not Exciting?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 5.3% over the last three years was below our standards for the consumer retail sector
- Widely-available products (and therefore stiff competition) result in an inferior gross margin of 24.9% that must be offset through higher volumes
- Subpar operating margin of 4.2% constrains its ability to invest in process improvements or effectively respond to new competitive threats
Walmart’s stock price of $108.07 implies a valuation ratio of 36.7x forward P/E. Dive into our free research report to see why there are better opportunities than WMT.
Grocery Outlet (GO)
Market Cap: $884.4 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?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 9.2 percentage points
- 7× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $8.96 per share, Grocery Outlet trades at 17.9x forward P/E. Check out our free in-depth research report to learn more about why GO doesn’t pass our bar.
One Consumer Retail Stock to Buy:
Abercrombie and Fitch (ANF)
Market Cap: $4.04 billion
Founded as an outdoor and sporting brand, Abercrombie & Fitch (NYSE: ANF) evolved to become a specialty retailer that sells its own brand of fashionable clothing to young adults.
What Makes ANF Stand Out?
- Same-store sales growth averaged 7.3% over the past two years, showing it’s bringing new and repeat shoppers into its stores
- Its collection of products is difficult to replicate at scale and leads to a best-in-class gross margin of 62.4%
- Share repurchases have amplified shareholder returns as its annual earnings per share growth of 147% exceeded its revenue gains over the last three years
Abercrombie and Fitch is trading at $90.50 per share, or 8.8x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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