Retailers are evolving to meet the expectations of modern, tech-savvy shoppers. Digitization has been one of the keys to staying competitive against e-commerce rivals, a move that has enabled the industry to grow same-store sales. Consequently, retail stocks have climbed 15.9% over the past six months, beating the S&P 500 by 4.6 percentage points.
Nevertheless, investors should tread carefully as many companies will light cash on fire by opening new locations without the proper justifications. Keeping that in mind, here are three consumer stocks best left ignored.
Dollar General (DG)
Market Cap: $23.87 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 Are We Cautious About DG?
- 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 29.9%
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Dollar General is trading at $108.84 per share, or 17.7x forward P/E. To fully understand why you should be careful with DG, check out our full research report (it’s free).
Home Depot (HD)
Market Cap: $409.8 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 Are We Hesitant About HD?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Estimated sales growth of 1.4% for the next 12 months implies demand will slow from its six-year trend
- Free cash flow margin shrank by 2.4 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
At $412.48 per share, Home Depot trades at 26.2x forward P/E. Dive into our free research report to see why there are better opportunities than HD.
MarineMax (HZO)
Market Cap: $560.4 million
Appropriately headquartered in Clearwater, Florida, MarineMax (NYSE: HZO) sells boats, yachts, and other marine products.
Why Does HZO Give Us Pause?
- Store closures and disappointing same-store sales suggest demand is sluggish and it’s rightsizing its operations
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders
MarineMax’s stock price of $26.11 implies a valuation ratio of 9.9x forward P/E. Read our free research report to see why you should think twice about including HZO in your portfolio.
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