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’s returns were flat while the S&P 500 gained 12.7%.

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. Keeping that in mind, here are three consumer stocks we’re passing on.

Dollar Tree (DLTR)

Market Cap: $24.68 billion

A treasure hunt because there’s no guarantee of consistent product selection, Dollar Tree (NASDAQ:DLTR) is a discount retailer that sells general merchandise and select packaged food at extremely low prices.

Why Is DLTR Not Exciting?

  1. Sales tumbled by 11.8% annually over the last three years, showing consumer trends are working against it
  2. Gross margin of 36.4% is below its competitors, leaving less money for marketing and promotions
  3. Underwhelming 7.1% return on capital reflects management’s difficulties in finding profitable growth opportunities

Dollar Tree is trading at $128.20 per share, or 18.3x forward P/E. If you’re considering DLTR for your portfolio, see our FREE research report to learn more.

Monro (MNRO)

Market Cap: $373.9 million

Started as a single location in Rochester, New York, Monro (NASDAQ:MNRO) provides common auto services such as brake repairs, tire replacements, and oil changes.

Why Are We Bearish on MNRO?

  1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
  2. Earnings per share have contracted by 54.2% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
  3. 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
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At $11.91 per share, Monro trades at 51.8x forward P/E. Dive into our free research report to see why there are better opportunities than MNRO.

Petco (WOOF)

Market Cap: $813.9 million

Historically known for its window displays of pets for sale or adoption, Petco (NASDAQ:WOOF) is a specialty retailer of pet food and supplies as well as a provider of services such as wellness checks and grooming.

Why Is WOOF Risky?

  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. Issuance of new shares over the last three years caused its earnings per share to fall by 34.5% annually
  3. High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Petco’s stock price of $2.86 implies a valuation ratio of 12x forward P/E. Check out our free in-depth research report to learn more about why WOOF doesn’t pass our bar.

Stocks We Like More

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