Yahoo Finance

Retailers are overhauling their operations as technology redefines the shopping experience. Still, demand can be volatile as the industry is exposed to the ups and downs of consumer spending. This has stirred some uncertainty lately as retail stocks have tumbled by 14.2% over the past six months. This drawdown was worse than the S&P 500’s 6.2% loss.

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 that may face trouble.

American Eagle (AEO)

Market Cap: $1.93 billion

With a heavy focus on denim, American Eagle Outfitters (NYSE:AEO) is a specialty retailer offering an assortment of apparel and accessories to young adults.

Why Does AEO Fall Short?

1. 4.3% annual revenue growth over the last five years was slower than its consumer retail peers

2. Forecasted revenue decline of 2.6% for the upcoming 12 months implies demand will fall off a cliff

3. ROIC of 2.6% reflects management’s challenges in identifying attractive investment opportunities

American Eagle is trading at $11.17 per share, or 6.3x forward P/E. If you’re considering AEO for your portfolio, see our FREE research report to learn more.

Advance Auto Parts (AAP)

Market Cap: $1.88 billion

Founded in Virginia in 1932, Advance Auto Parts (NYSE:AAP) is an auto parts and accessories retailer that sells everything from carburetors to motor oil to car floor mats.

Why Do We Steer Clear of AAP?

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. Operating profits fell over the last year as its sales dropped and it struggled to adjust its fixed costs

3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Advance Auto Parts’s stock price of $31.41 implies a valuation ratio of 19.9x forward P/E. Dive into our free research report to see why there are better opportunities than AAP.

Walmart (WMT)

Market Cap: $790.7 billion

Known for its large-format Supercenters, Walmart (NYSE:WMT) is a retail pioneer that serves a budget-conscious consumer who is looking for a wide range of products under one roof.

Why Is WMT Not Exciting?

1. Sizable revenue base leads to growth challenges as its 5.4% annual revenue increases over the last five years fell short of other consumer retail companies

2. Gross margin of 24.6% is an output of its commoditized inventory

3. Poor expense management has led to an operating margin of 4.2% that is below the industry average