3 Consumer Stocks with Open Questions

Retailers are evolving to meet the expectations of modern, tech-savvy shoppers. But many seem to be moving too slowly as their demand is lagging, causing the industry to underperform the market – over the past six months, retail stocks have shed 3.7%. This drawdown is a noticeable divergence from the S&P 500’s 10.1% 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. On that note, here are three consumer stocks best left ignored.

Market Cap: $2.75 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 Hesitant About RH?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand

2. Negative free cash flow raises questions about the return timeline for its investments

3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

RH’s stock price of $139.05 implies a valuation ratio of 13.3x forward P/E. To fully understand why you should be careful with RH, check out our full research report (it’s free for active Edge members).

Market Cap: $7.13 billion

With a strong presence in the Western US, Lithia Motors (NYSE:LAD) sells a wide range of vehicles, including new and used cars, trucks, SUVs, and luxury vehicles from various manufacturers.

Why Does LAD Worry Us?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand

2. Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 15.6%

3. 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

At $287.48 per share, Lithia trades at 7.9x forward P/E. Check out our free in-depth research report to learn more about why LAD doesn’t pass our bar.

Market Cap: $2.82 billion

Founded in 1938 as a tire shop before expanding into fishing equipment, Academy Sports & Outdoor (NASDAQ:ASO) sells a broad selection of sporting goods but is still known for its outdoor activity merchandise.

Why Are We Wary of ASO?

1. Annual revenue growth of 4% over the last six years was below our standards for the consumer retail sector

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. Falling earnings per share over the last four years has some investors worried as stock prices ultimately follow EPS over the long term