Consumer discretionary businesses are levered to the highs and lows of economic cycles. This sensitive demand profile can cause the industry to underperform when macro uncertainty enters the fray, and over the past six months, its 2.3% return has fallen short of the S&P 500’s 6.4% gain.
Investors should tread carefully as many companies in this space are also unpredictable because they lack recurring revenue business models. Taking that into account, here are three consumer stocks best left ignored.
Genesco (GCO)
Market Cap: $463.9 million
Spanning a broad range of styles, brands, and prices, Genesco (NYSE: GCO) sells footwear, apparel, and accessories through multiple brands and banners.
Why Is GCO Risky?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- High net-debt-to-EBITDA ratio of 8× could force the company to raise capital on unfavorable terms if market conditions deteriorate
Genesco’s stock price of $41.32 implies a valuation ratio of 0.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than GCO.
Churchill Downs (CHDN)
Market Cap: $6.07 billion
Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ: CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.
Why Do We Avoid CHDN?
- Muted 8.7% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Low free cash flow margin of 14.9% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Returns on capital are growing as management invests in more worthwhile ventures
At $86.98 per share, Churchill Downs trades at 12.9x forward P/E. To fully understand why you should be careful with CHDN, check out our full research report (it’s free).
American Outdoor Brands (AOUT)
Market Cap: $129.6 million
Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ: AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.
Why Should You Sell AOUT?
- Products and services aren’t resonating with the market as its revenue declined by 4.3% annually over the last five years
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.3% for the last two years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
American Outdoor Brands is trading at $10.28 per share, or 39.4x forward P/E. If you’re considering AOUT for your portfolio, see our FREE research report to learn more.
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