Retailers are overhauling their operations as technology redefines the shopping experience. Still, secular trends are working against them as e-commerce continues to take share from brick-and-mortar stores. This puts retail stocks in a tough spot, and over the past six months, the industry has pulled back by 1.8%. This drop was disappointing since the S&P 500 climbed 7.2%.
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. With that said, here are three consumer stocks we’re swiping left on.
Best Buy (BBY)
Market Cap: $16.25 billion
With humble beginnings as a stereo equipment seller, Best Buy (NYSE: BBY) now sells a broad selection of consumer electronics, appliances, and home office products.
Why Is BBY Risky?
- Recent store closures and weak same-store sales point to soft demand and an operational restructuring
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Gross margin of 22.6% is below its competitors, leaving less money for marketing and promotions
At $79.68 per share, Best Buy trades at 11.6x forward P/E. If you’re considering BBY for your portfolio, see our FREE research report to learn more.
CarMax (KMX)
Market Cap: $7.32 billion
Known for its transparent, customer-centric approach and wide selection of vehicles, Carmax (NYSE: KMX) is the largest automotive retailer in the United States.
Why Should You Dump KMX?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 6.6%
CarMax’s stock price of $51.02 implies a valuation ratio of 20x forward P/E. Check out our free in-depth research report to learn more about why KMX doesn’t pass our bar.
BJ's (BJ)
Market Cap: $11.61 billion
Appealing to the budget-conscious individual shopping for a household, BJ’s Wholesale Club (NYSE: BJ) is a membership-only retail chain that sells groceries, appliances, electronics, and household items, often in bulk quantities.
Why Do We Think Twice About BJ?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 4% for the last three years
- Gross margin of 18.5% is below its competitors, leaving less money for marketing and promotions
- Poor expense management has led to an operating margin of 3.8% that is below the industry average
BJ's is trading at $85.61 per share, or 18.7x forward P/E. To fully understand why you should be careful with BJ, check out our full research report (it’s free).
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