3 Consumer Stocks to Walk Away From

The consumer staples sector has long been a favorite among investors seeking stability and dividend income. However, not all consumer stocks are created equal, and some may present better opportunities than others. In this article, we will examine three consumer stocks that investors should consider walking away from due to their underperformance and potential risks.

1. Wayfair (W): Volatility and Financial Performance Concerns
Wayfair, an online furniture and home goods retailer, has struggled to maintain its momentum in recent years. The company's shares have been highly volatile, with a significant drop of nearly 11% since the end of 2023. This volatility makes it an unattractive investment for many investors. Additionally, Wayfair has struggled to generate consistent profits. Since its IPO in 2014 at $29 a share, investors who bought in the IPO and still hold have generated a compound annual growth rate of 7.2%, 265 basis points less than the S&P 500. Furthermore, the company has lost $4.3 billion in the past decade, despite generating billions in revenue. Wayfair's CEO and co-founder, Niraj Shah, faced criticism for asking employees to work 80 hours a week without a significant pay increase, damaging the company's brand perception and employee morale. These factors contribute to Wayfair's underperformance and make it a consumer stock to walk away from.
2. Chewy (CHWY): Pandemic-Driven Growth and Financial Performance Challenges
Chewy, an online pet food and supplies retailer, benefited from the surge in companion animal ownership and related purchases during the pandemic. However, as the pandemic subsides, this growth may not be sustainable in the long term. Chewy has a cumulative loss of $637.4 million in the five years since its IPO. In the 39 weeks ended Oct. 29, 2023, it earned $5.3 million on $8.3 billion in revenue, with net income down significantly from the same period in 2022. Chewy faces intense competition from other online retailers and brick-and-mortar pet stores, which could limit its market share as consumers become more price-sensitive. These factors contribute to Chewy's underperformance and make it a consumer stock to walk away from.
3. Carvana (CVNA): Debt Restructuring and Market Share Concerns
Carvana, an online used car retailer, rose from the dead in 2023, gaining 1,117% last year. However, the real money was made by those who bought in the March 2020 correction below $30 and sold in August 2021 above $360. Carvana's stock price surge in 2023 was likely driven by a dead cat bounce, as the company faces intense competition from traditional car dealerships and other online used car retailers. Carvana's debt restructuring, which involved slashing more than $1.3 billion of its debt and extending maturities out three years to between 2028 and 2031, saved $455 million in annual interest expenses in 2024 and 2025. However, this move resulted in a downgrade of Carvana's Issuer credit rating to "D" from "CC" and its senior unsecured debt to "D" from "C." Carvana's market share and competition concerns contribute to its underperformance and make it a consumer stock to walk away from.

In conclusion, investors should be cautious when considering these three consumer stocks due to their underperformance and potential risks. While the consumer staples sector has historically provided stability and dividend income, these specific stocks may not offer the same opportunities. Investors should conduct thorough research and analysis before making any investment decisions and consider alternative investment opportunities within the consumer sector.