Most consumer discretionary businesses succeed or fail based on the broader economy. Over the past six months, it seems like demand trends are working against their favor as the industry has tumbled by 9.6%. This drawdown was particularly disheartening since the S&P 500 stood firm.

While some companies have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three consumer stocks that may face trouble.

Under Armour (UAA)

Market Cap: $2.67 billion

Founded in 1996 by a former University of Maryland football player, Under Armour (NYSE: UAA) is an apparel brand specializing in sportswear designed to improve athletic performance.

Why Should You Dump UAA?

1. Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
2. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

Under Armour’s stock price of $6.35 implies a valuation ratio of 35.5x forward P/E. Check out our free in-depth research report to learn more about why UAA doesn’t pass our bar.

Kontoor Brands (KTB)

Market Cap: $3.72 billion

Founded in 2019 after separating from VF Corporation, Kontoor Brands (NYSE: KTB) is a clothing company known for its high-quality denim products.

Why Do We Steer Clear of KTB?

1. Weak constant currency growth over the past two years indicates challenges in maintaining its market share
2. Projected 3.2 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

At $67.29 per share, Kontoor Brands trades at 10.4x forward P/E. If you’re considering KTB for your portfolio, see our FREE research report to learn more.

Choice Hotels (CHH)

Market Cap: $4.42 billion

With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE: CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.

Why Are We Out on CHH?

1. Softer revenue per room over the past two years suggests it might have to invest in new amenities such as restaurants and bars to attract customers
2. Low free cash flow margin of 9.4% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Choice Hotels is trading at $96.91 per share, or 13.4x forward P/E. Read our free research report to see why you should think twice about including CHH in your portfolio.

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