Retailers are evolving to meet the expectations of modern, tech-savvy shoppers. Still, secular trends are working against their favor as e-commerce continues to take share from brick and mortars. This puts retail stocks in a tough spot, and over the past six months, the industry has pulled back by 13.4%. This drop was much worse than the S&P 500’s 2% fall.
Investors should tread carefully as many companies in this space can be value traps. With that said, here are three consumer stocks we’re passing on.
Boot Barn (BOOT)
Market Cap: $3.29 billion
With a strong store presence in Texas, California, Florida, and Oklahoma, Boot Barn (NYSE: BOOT) is a western-inspired apparel and footwear retailer.
Why Is BOOT Not Exciting?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Revenue base of $1.85 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Free cash flow margin dropped by 3.7 percentage points over the last year, implying the company became more capital intensive as competition picked up
At $107.21 per share, Boot Barn trades at 16.4x forward price-to-earnings. Read our free research report to see why you should think twice about including BOOT in your portfolio.
Bath and Body Works (BBWI)
Market Cap: $6.50 billion
Spun off from L Brands in 2020, Bath & Body Works (NYSE: BBWI) is a personal care and home fragrance retailer where consumers can find specialty shower gels, scented candles for the home, and lotions.
Why Does BBWI Worry Us?
- Annual revenue growth of 6.2% over the last five years was below our standards for the consumer retail sector
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Estimated sales growth of 2.8% for the next 12 months implies demand will slow from its five-year trend
Bath and Body Works’s stock price of $30.12 implies a valuation ratio of 8.3x forward price-to-earnings. If you’re considering BBWI for your portfolio, see our FREE research report to learn more.
Leslie's (LESL)
Market Cap: $136.2 million
Named after founder Philip Leslie, who established the company in 1963, Leslie’s (NASDAQ: LESL) is a retailer that sells pool and spa supplies, equipment, and maintenance services.
Why Are We Hesitant About LESL?
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Revenue base of $1.33 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- High net-debt-to-EBITDA ratio of 10× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Leslie's is trading at $0.76 per share, or 11.6x forward price-to-earnings. To fully understand why you should be careful with LESL, check out our full research report (it’s free).
Stocks We Like More
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