Three Consumer Stocks to Avoid: Designer Brands, Monro, and OneWater

Three consumer stocks with open questions are Designer Brands (DBI), Monro (MNRO), and OneWater (ONEW). DBI's poor same-store sales, low returns on capital, and high debt-to-EBITDA ratio make it a value trap. MNRO's disappointing same-store sales, increased expenses, and underwhelming return on capital also raise concerns. ONEW's commoditized inventory, low gross margin, and high debt-to-EBITDA ratio make it a risky investment.

The retail sector has been evolving to meet the demands of tech-savvy shoppers, yet many retailers are moving too slowly, causing underperformance compared to the broader market. Over the past six months, retail stocks have shed 6.4%, far behind the S&P 500's 4.5% ascent. Investors should proceed with caution as many consumer stocks may be value traps. Here are three consumer stocks with open questions: Designer Brands (DBI), Monro (MNRO), and OneWater (ONEW).

Designer Brands (DBI)
Designer Brands, founded in 1969 as a shoe importer and distributor, focuses on footwear and accessories. However, poor same-store sales performance over the past two years indicates it's struggling to attract new shoppers to its brick-and-mortar locations. Low returns on capital reflect management's challenges in allocating funds effectively. Additionally, a high net-debt-to-EBITDA ratio of 11× could force the company to raise capital at unfavorable terms if market conditions deteriorate. Designer Brands trades at $2.76 per share, with a forward P/E ratio of 11.1x [1].

Monro (MNRO)
Monro, started as a single location in Rochester, New York, provides common auto services such as brake repairs, tire replacements, and oil changes. Disappointing same-store sales over the past two years show that customers aren't responding well to its product selection and store experience. Expenses have increased as a percentage of revenue, leading to a 6 percentage point decline in operating margin. With a 5% return on capital, management has struggled to find profitable growth opportunities. Monro trades at $14.60 per share, with a forward P/E ratio of 20.4x [1].

OneWater (ONEW)
OneWater Marine, a public company since early 2020, sells boats, yachts, and other marine products. Disappointing same-store sales over the past two years indicate that customers aren't responding well to its product selection and store experience. Low gross margin of 24.2% and high competition reflect commoditized inventory and bad unit economics. An 8× net-debt-to-EBITDA ratio suggests overleveraging and potential shareholder dilution. OneWater's stock price of $15.87 implies a forward P/E ratio of 11.2x [1].

Investors should approach these stocks with caution. While there are challenges, it's essential to monitor the companies' progress and consider the broader market conditions.

References:
[1] https://finance.yahoo.com/news/3-consumer-stocks-open-questions-043444464.html
[2] https://seekingalpha.com/article/4808227-monro-shares-cheap-worth-the-risk