Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be slowing as discretionary stocks’ 5.9% return over the past six months has trailed the S&P 500 by 1.8 percentage points.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. On that note, here are three consumer stocks that may face trouble.
Under Armour (UAA)
Market Cap: $2.69 billion
Founded in 1996 by a former University of Maryland football player, Under Armour (NYSE:UAA) is an apparel brand specializing in sportswear designed to improve athletic performance.
Why Do We Avoid UAA?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Under Armour’s stock price of $6.26 implies a valuation ratio of 35.2x forward P/E. Check out our free in-depth research report to learn more about why UAA doesn’t pass our bar.
Oxford Industries (OXM)
Market Cap: $675.3 million
The parent company of Tommy Bahama, Oxford Industries (NYSE:OXM) is a lifestyle fashion conglomerate with brands that embody outdoor happiness.
Why Should You Dump OXM?
- Sales trends were unexciting over the last five years as its 14.6% annual growth was below the typical consumer discretionary company
- Poor free cash flow margin of 2.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $45.38 per share, Oxford Industries trades at 19.1x forward P/E. To fully understand why you should be careful with OXM, check out our full research report (it’s free).
Lindblad Expeditions (LIND)
Market Cap: $1.39 billion
Founded by explorer Sven-Olof Lindblad in 1979, Lindblad Expeditions (NASDAQ:LIND) offers cruising experiences to remote destinations in partnership with National Geographic.
Why Are We Hesitant About LIND?
- Muted 17.4% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Subpar operating margin of 5.8% constrains its ability to invest in process improvements or effectively respond to new competitive threats
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 8.7% for the last two years
Lindblad Expeditions is trading at $21.14 per share, or 90.4x forward P/E. If you’re considering LIND for your portfolio, see our FREE research report to learn more.
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