Retailers are overhauling their operations as technology redefines the shopping experience. Still, demand can be volatile as the industry is exposed to the ups and downs of consumer spending. This has stirred some uncertainty lately as retail stocks were flat over the past six months while the S&P 500 was up 5.4%.

A cautious approach is imperative when dabbling in these companies as many will light cash on fire by opening new locations without the proper justifications. On that note, here are three consumer stocks we’re passing on.

RH (RH)

Market Cap: $2.44 billion

Formerly known as Restoration Hardware, RH (NYSE: RH) is a specialty retailer that exclusively sells its own brand of high-end furniture and home decor.

Why Are We Cautious About RH?

1. Products aren't resonating with the market as its revenue declined by 1.4% annually over the last three years
2. Earnings per share have dipped by 36.2% annually over the past three years, which is concerning because stock prices follow EPS over the long term
3. High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate

RH is trading at $129.73 per share, or 23.3x forward P/E. Check out our free in-depth research report to learn more about why RH doesn’t pass our bar.

American Eagle (AEO)

Market Cap: $3.20 billion

With a heavy focus on denim, American Eagle Outfitters (NYSE: AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.

Why Are We Wary of AEO?

1. Lack of new stores puts a ceiling on its growth and reflects a focus on optimizing sales at existing locations
2. Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 3.9 percentage points
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up

At $19.08 per share, American Eagle trades at 11x forward P/E. Dive into our free research report to see why there are better opportunities than AEO.

Genuine Parts (GPC)

Market Cap: $15.47 billion

Largely targeting the professional customer, Genuine Parts (NYSE: GPC) sells auto and industrial parts such as batteries, belts, bearings, and machine fluids.

Why Should You Sell GPC?

1. The company has faced growth challenges as its 3.2% annual revenue increases over the last three years fell short of other consumer retail companies
2. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
3. Already-low operating margin of 4.6% fell over the last year, and the smaller profit dollars make it harder to react to unexpected market developments

Genuine Parts’s stock price of $111.29 implies a valuation ratio of 14.3x forward P/E. To fully understand why you should be careful with GPC, check out our full research report (it’s free).

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