Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can cause discretionary stocks to plummet when macro uncertainty enters the fray, and over the past six months, the industry has shed 1%. This performance is a noticeable divergence from the S&P 500’s 16.3% return.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks we would avoid.
Tapestry (TPR)
Market Cap: $23.66 billion
Originally founded as Coach, Tapestry (NYSE: TPR) is an American fashion conglomerate with a portfolio of luxury brands offering high-quality accessories and fashion products.
Why Do We Avoid TPR?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Free cash flow margin is forecasted to shrink by 3.2 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $118.08 per share, Tapestry trades at 14.4x forward P/E. If you’re considering TPR for your portfolio, see our FREE research report to learn more.
Carter's (CRI)
Market Cap: $1.16 billion
Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE: CRI) is an American designer and marketer of children's apparel.
Why Should You Sell CRI?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 1.3 percentage points over the next year
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Carter's is trading at $31.73 per share, or 8.9x forward P/E. Check out our free in-depth research report to learn more about why CRI doesn’t pass our bar.
Bark (BARK)
Market Cap: $76.97 million
Making a name for itself with the BarkBox, Bark (NYSE: BARK) specializes in subscription-based, personalized pet products.
Why Do We Steer Clear of BARK?
- Sales tumbled by 2.5% annually over the last five years, showing consumer trends are working against it
- Cash-burning history makes us doubt the long-term viability of its business model
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Bark’s stock price of $8.38 implies a valuation ratio of 9.1x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than BARK.
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