Retailers are adapting their business models as technology changes how people shop. 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 1.2% gain has trailed the S&P 500 by 15.7 percentage points.
Investors should tread carefully as many companies in this space can be value traps. Taking that into account, here are three consumer stocks best left ignored.
Dollar General (DG)
Market Cap: $27.03 billion
Appealing to the budget-conscious consumer, Dollar General (NYSE: DG) is a discount retailer that sells a wide range of household essentials, groceries, apparel/beauty products, and seasonal merchandise.
Why Do We Think Twice About DG?
- Annual sales growth of 4% over the last three years lagged behind its consumer retail peers as its large revenue base made it difficult to generate incremental demand
- Gross margin of 30.7% is an output of its commoditized inventory
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
Dollar General’s stock price of $122.33 implies a valuation ratio of 15.1x forward P/E. Dive into our free research report to see why there are better opportunities than DG.
Floor And Decor (FND)
Market Cap: $4.94 billion
Operating large, warehouse-style stores, Floor & Decor (NYSE: FND) is a specialty retailer that specializes in hard flooring surfaces for the home such as tiles, hardwood, stone, and laminates.
Why Should You Sell FND?
- Muted 2.3% annual revenue growth over the last three years shows its demand lagged behind its consumer retail peers
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
Floor And Decor is trading at $46.48 per share, or 22.5x forward P/E. Read our free research report to see why you should think twice about including FND in your portfolio.
Dillard's (DDS)
Market Cap: $10.18 billion
With stores located largely in the Southern and Western US, Dillard’s (NYSE: DDS) is a department store chain that sells clothing, cosmetics, accessories, and home goods.
Why Does DDS Fall Short?
- Dearth of new stores suggests management is prioritizing the optimization of its existing locations over growth
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Sales were less profitable over the last three years as its earnings per share fell by 6.4% annually, worse than its revenue declines
At $656.63 per share, Dillard's trades at 18.6x forward P/E. Check out our free in-depth research report to learn more about why DDS doesn’t pass our bar.
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