Most consumer discretionary businesses succeed or fail based on the broader economy. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 1.4% over the past six months. This drawdown is a noticeable divergence from the S&P 500’s 16.6% return.
While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. With that said, here are three consumer stocks that may face trouble.
Ralph Lauren (RL)
Market Cap: $21.16 billion
Originally founded as a necktie company, Ralph Lauren (NYSE:RL) is an iconic American fashion brand known for its classic and sophisticated style.
Why Do We Steer Clear of RL?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Operating margin of 15% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Poor free cash flow margin of 11.6% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $358.67 per share, Ralph Lauren trades at 18.1x forward P/E. To fully understand why you should be careful with RL, check out our full research report (it’s free).
Movado (MOV)
Market Cap: $543.7 million
With its watches displayed in 20 museums around the world, Movado (NYSE:MOV) is a watchmaking company with a portfolio of watch brands and accessories.
Why Are We Out on MOV?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.5% for the last two years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Movado’s stock price of $33.28 implies a valuation ratio of 10x forward EV-to-EBITDA. If you’re considering MOV for your portfolio, see our FREE research report to learn more.
Crocs (CROX)
Market Cap: $5.62 billion
Founded in 2002, Crocs (NASDAQ:CROX) sells casual footwear and is known for its iconic clog shoe.
Why Are We Bearish on CROX?
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- Operating margin of 13.5% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
Crocs is trading at $117.76 per share, or 8.5x forward P/E. To fully understand why you should be careful with CROX, check out our full research report (it’s free).
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