Market forecasters have raised concerns about an impending recession in the United States economy. According to a CNBC Fed Survey, the probability of a recession in the U.S. in the next 12 months has risen to 33%. The Federal Reserve faces an inflationary situation alongside uncertainty created by the Russia-Ukraine war and may well hike interest rates faster.
Consumer discretionary goods are not necessary but desirable. Therefore, consumers are likely to forego spending on such products to increase their savings during a recession. Currently, the sector’s valuations appear stretched. And the Consumer Discretionary Select Sector SPDR Fund (XLY) has declined 8.7% over the past month, outpacing the SPDR S&P 500 ETF Trust’s (SPY) 4.5% decline over the same period.
Given this backdrop, we think the overvalued discretionary retail stocks Hermès International Société en commandite par actions (HESAY), Lululemon Athletica Inc. (LULU), e.l.f. Beauty, Inc. (ELF) and Allbirds, Inc. (BIRD) might be best avoided.
Click here to checkout our Retail Industry Report for 2022
Hermès International Société en commandite par actions (HESAY)
HESAY operates in the production, wholesale, and retail of various goods. The company’s offerings include leather goods and saddlery, ready-to-wear garments for men and women, accessories, as well as watches, perfume, and tableware. It is based in Paris, France.
On March 15, HESAY announced the construction of two new leather goods workshops to continue the development of its production capacity. However, the workshops are not expected to open before 2025.
In terms of its forward EV/Sales, HESAY stock is currently trading at 11.12x, which is 866.2% higher than the 1.15x industry average. Its 11.61 forward Price/Sales multiple is 1,125.8% higher than the 0.95 industry average.
For its fiscal year 2021, HESAY’s revenue increased 40.6% year-over-year to €8.98 billion ($9.85 billion). However, its cost of sales rose 28.2% from the prior year to €2.58 billion ($2.83 billion), while its sales and administrative expenses increased 25.8% year-over-year to €2.14 billion ($2.34 billion).
Analysts expect HESAY’s revenue to increase 8% year-over-year to $10.99 billion for its fiscal year ending Dec. 31, 2022.
The stock has declined 30% in price year-to-date and 13.4% over the past month to close yesterday’s trading session at $122.85.
HESAY’s POWR Ratings reflect this bleak outlook. The stock has an F Value grade in the 66-stock Fashion & Luxury industry, it is ranked #47. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Click here to see the additional POWR Ratings for HESAY (Growth, Momentum, Stability, Sentiment, and Quality).
Lululemon Athletica Inc. (LULU)
Based in Vancouver, Canada, LULU is a designer, distributor, and retailer of athletic apparel and accessories for men and women. The company operates through the two broad segments of company-operated stores and direct to consumer.
On March 8, LULU introduced its debut running shoe, Blissfeel, which is expected to be available in select stores across North America, Mainland China, and the United Kingdom from March 22. The company also announced three additional styles to be introduced in the coming months. However, it might take some time before substantial gains are realized from the new products.
LULU’s 5.95 forward EV/Sales multiple is currently trading 417% higher than the 1.15 industry average. In terms of its forward Price/Sales, the stock is trading at 5.99x, which is 532.2% higher than the 0.95x industry average.
LULU’s cost of goods sold increased 26.7% year-over-year to $621.03 million in its fiscal third quarter, ended October 31. Its selling, general, and administrative expenses rose 32.4% from the prior-year quarter to $545.12 million. And for the three quarters of 2021, its net cash used in financing activities increased 542.7% from the same period in the prior year to $523.20 million.
The Street expects LULU’s EPS to increase 11.2% year-over-year to $1.29 for its fiscal quarter, ending April 30, 2022.
Over the past year, the stock has declined 7.8% in price and 25.9% year-to-date to close yesterday’s trading session at $289.92.
LULU has a D grade for Value and Stability. It is ranked #49 in the Fashion & Luxury industry.
To see the additional POWR Ratings for Growth, Momentum, Sentiment, and Quality, click here.
e.l.f. Beauty, Inc. (ELF)
Oakland, Calif.-based ELF is a cosmetic and skincare products provider under the e.l.f, W3LL, PEOPLE, and Key Soulcare brands. The company’s offerings include eye, lip, face, and skincare products. It sells its offerings through national and international retailers and direct-to-consumer channels.
ELF’s 60.61 forward P/E multiple is currently trading 222.1% higher than the 18.82 industry average. In terms of its forward Price/Sales, the stock is trading at 3.30x, which is 167.4% higher than the 1.23x industry average.
For the nine months ended December 31, ELF’s net cash used in investing activities increased 16.1% year-over-year to $4.60 million. Its net cash used in financing activities rose 222.4% from the prior-year period to $28.11 million, while the company’s cash and cash equivalent balance came in at $32.89 million, down 7.2% from the same period the prior year.
The $0.06 consensus EPS estimate for the quarter ending March 31, 2022, indicates a 62.5% year-over-year decrease. And the $90.74 million consensus revenue estimate for the same period reflects a 2.1% decline from the prior-year quarter.
ELF’s shares have declined 16.9% in price over the past year and 27.9% year-to-date to close yesterday’s trading session at $23.93.
ELF has a Value grade of D. It is ranked #55 in the Fashion & Luxury industry.
Click here to see the additional POWR Ratings for Growth, Momentum, Stability, Sentiment, and Quality for ELF.
Allbirds, Inc. (BIRD)
BIRD operates as a manufacturer and seller of footwear and apparel products for men and women. The San Francisco-based company offers shoes, such as running shoes and sneakers, and apparel, including activewear, tops, and bottoms.
In terms of its forward EV/Sales, BIRD is currently trading at 1.30x, which is 12.7% higher than the 1.15x industry average. Its 2.14 forward Price/Sales multiple is 126.2% higher than the 0.95 industry average.
BIRD’s total operating expenses increased 12.4% year-over-year to $55.18 million in its fiscal fourth quarter, ended December 31. Its net loss and total comprehensive loss rose 11.6% and 41.3%, respectively, from the prior-year quarter to $10.44 million and $10.70 million.
Analysts expect BIRD’s EPS to come in at a negative $0.12 for its fiscal quarter ending March 31, 2022.
The stock has declined 65% in price year-to-date and 9.3% over the past five days to close yesterday’s trading session at $5.28.
It is no surprise that BIRD has an overall F rating, which translates to a Strong Sell in our POWR Rating system.
BIRD has an F grade for Sentiment and a D grade for Value, Stability, and Quality. It is ranked last in the Fashion & Luxury industry.
In addition to the POWR Rating grades we have stated above, one can see BIRD ratings for Growth and Momentum here.
Click here to checkout our Retail Industry Report for 2022
HESAY shares were trading at $132.21 per share on Wednesday afternoon, up $9.36 (+7.62%). Year-to-date, HESAY has declined -24.68%, versus a -8.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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