When it comes to buying things for everyday life, consumers have many choices to make. In some cases, the things they purchase are necessary and fall under the “consumer staples” sector of the economy. Conversely, things that consumers don’t necessarily need are considered products bought at their discretion. The stocks of companies that produce these products fall under the aptly named “consumer discretionary” sector of the stock market.
Understanding the Consumer Discretionary Sector
Consumer discretionary stocks span a wide variety of products and industries, but they all have one thing in common: they strive to earn the affection of consumers who don’t necessarily need their wares. You might think of this category as mainly consisting of nice-to-have products and services that generally improve consumers’ quality of life.
Some of the most prominent consumer discretionary stocks include businesses in these categories:
- Restaurants
- Hotel and resort chains
- Cruise lines
- Casinos
- Leisure activities
- Housewares
- Appliances
- Home furnishings
- Home improvement products
- Apparel
- Luxury goods (purses, watches, jewelry, and high fashion)
- Consumer electronics
- Automotive
- Retail chains that generate meaningful revenue from the above categories
Best Consumer Discretionary Stocks to Buy
There are hundreds of high-quality consumer discretionary stocks you can choose from to put your money to work. But these five stocks are shining examples of strong consumer discretionary businesses with long-term staying power in their respective niches:
Home Depot (NYSE: HD)
Home Depot (HD) is the world’s largest home-improvement retailer, with more than 2,300 locations in the U.S., Canada, and Mexico.
The company recently completed a three-year $11 billion investment program to create a “truly interconnected shopping experience” for customers in both its digital and physical stores. The project included building out technological infrastructure and expanding logistics capabilities.
In the process, Home Depot effectively extended its competitive advantages and value proposition relative to other well-known peers in the home-improvement space.
Just under half of Home Depot’s sales come from lucrative “Pro” customers working on projects for homeowners (compared to less than a quarter of total sales at Lowes), while roughly 90% of its DIY customers are homeowners.
And while Home Depot is undoubtedly a mature business — paying a healthy dividend of 2.7% at today’s prices and generating revenue of more than $151 billion in fiscal 2021 — it also boasts a surprisingly long runway for growth. According to the company, in 2021, it still held “only” about 17% of what it estimates as a $900 billion+ total addressable market in North America alone.
Starbucks (NASDAQ: SBUX)
Starbucks (SBUX) is the world’s largest coffeehouse chain, with nearly 35,000 locations worldwide. The company has increased its dividend every year for the past 12 years, with its current payout at just under 2.5% annually.
In October 2022, Schultz unveiled a multi-faceted “Reinvention Plan” through which the company will make targeted investments in its partners, customers, and stores. He also introduced now-CEO Laxman Narasimhan, who recently took the helm and previously served as chief commercial officer of PepsiCo. If all goes to plan, and with just under half of its stores located in the United States today, Starbucks should be able to drive accelerated top-line and bottom-line growth over the next several years as it works to further penetrate its massive global market.
Chipotle Mexican Grill (NYSE: CMG)
Chipotle Mexican Grill (CMG) is a rapidly growing leader in the restaurant industry, with more than 3,000 locations in the U.S., Canada, the U.K., France, and Germany. Chipotle is unique because it’s the only restaurant company of its size (market cap more than $40 billion) that owns and operates all of its locations. This means zero reliance on the franchise model embraced by most other large restaurant chains, including former parent company McDonald’s (which sold its 90% 6controlling stake in Chipotle back to the company in 2006).
By sticking to a company-owned model, Chipotle retains complete control over its operations, food sourcing, and customer experience — all crucial aspects of its unique company values that prioritize the quality of its food, the treatment of customers and employees, and its environmental impact.
However, the company-owned model sacrifices some of the sheer speed and low overhead of expansion enjoyed by franchised restaurants with tens of thousands of locations. But Chipotle is content using its cash and investments of over $1.1 billion (as of Q2 2022) to more steadily expand its restaurant footprint while driving comparable restaurant sales growth sustainably higher. Over the long term, that approach should continue to serve patient investors well.
Lululemon Athletica (NASDAQ: LULU)
Athletic apparel leader Lululemon (LULU) has enjoyed a meteoric rise since its founding in 1998, leveraging local “yogis” and athletes for continuous research and product feedback to better understand what its target customers want. Perhaps best known for its high-quality, technically advanced (and expensive) yoga-centric products, Lululemon’s offerings focus on consumers “who want to live a healthy and active lifestyle.”
Interestingly, Lululemon’s brand has proven exceptionally resilient for a higher-end consumer discretionary name. According to a recent Piper Sandler survey, teens in the U.S. named it their second-favorite clothing brand, trailing only Nike. And management most recently guided for full-year 2022 revenue of roughly $7.9 billion, marking a three-year compound annual growth of 26%, even amid ongoing macroeconomic uncertainty and an increasingly intense promotional environment.
Currently, Lululemon is ramping up a new subscription service called Lululemon Studio through Mirror, a fitness start-up it acquired for $500 million in 2020 in a bid to further bolster its relationship with customers.
Camping World Holdings (NYSE: CWH)
Finally, consider Camping World Holdings (CWH), America’s largest retailer of recreational vehicles (RVs) and related products and services. Camping World was founded way back in 1966, but it only recently became a public company through its IPO in late 2016. With 190 retail locations and 2,613 service bays in 42 states, as well as 2.1 million members of its RV-centric “Good Sam” roadside assistance and insurance service, Camping World has uniquely positioned itself to benefit from a steadily growing cohort of more than 11 million “RV households” in the United States.
Even so, Camping World notes its nationwide market shares for new and used RV sales currently stand at only 15% and 5% respectively, leaving the company ample opportunities to drive growth both organically and through strategic acquisitions of smaller RV dealers.
In the meantime, Camping World stock has been beaten down year to date in 2022 on concerns that slowing RV sales amid macroeconomic uncertainty will mean depressed revenues and lower profits — even as management expressed no such concerns in recent investor presentations. With what seems like an accidentally high current dividend of 8.6%, Camping World stock could prove to be a fantastic buy-and-hold opportunity for patient, long-term investors.
Advantages of Investing in Consumer Discretionary Stocks
Consumer discretionary stocks tend to be somewhat cyclical and often reflect strength in the broader economy. When consumers have excess money to spend beyond the necessities, the highest-quality consumer discretionary stocks usually prove to be the greatest beneficiaries and can drive outsized value for long-term shareholders.
Risks of Investing in Consumer Discretionary Stocks
With some notable individual exceptions like the stocks mentioned above, consumer discretionary stocks tend to be more sensitive to weakness in consumer spending and broader economic turmoil. If consumer spending habits and trends take a turn for the worse — particularly as rising rates and inflation eat away at the power of existing household budgets — those consumers will have less discretionary money to spend on anything beyond the necessities. It follows, then, that in times of economic turmoil, many consumer discretionary stocks may suffer until the adverse economic conditions improve.
The Bottom Line
Whether you’re investing in restaurants, apparel, the leisure industry, retailers or other sub-sectors within the consumer discretionary space, consumer discretionary stocks can provide investors with an effective way to take advantage of pockets of economic strength. It’s important, however, to maintain a long-term view and focus on the highest-quality names in the consumer discretionary sector to maximize your chances of achieving outsized gains.
