Caleres has been treading water for the past six months, recording a small loss of 2% while holding steady at $14.00. The stock also fell short of the S&P 500’s 11.3% gain during that period.

Is now the time to buy Caleres, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Caleres Will Underperform?

We're cautious about Caleres. Here are three reasons you should be careful with CAL and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Caleres’s sales grew at a weak 3.8% compounded annual growth rate over the last five years. This fell short of our benchmark for the consumer discretionary sector.

2. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Caleres’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Caleres’s $961.1 million of debt exceeds the $33.96 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $124.2 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Caleres could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Caleres can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Caleres doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 13.1× forward P/E (or $14.00 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d suggest looking at the most entrenched endpoint security platform on the market.

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