- Chewy (CHWY) – Consumers are cutting back on non-essential pet spending and the stock is trading at an irrational price.
- Nike (NKE) – Valuation is a massive concern considering a potential slowdown in consumer spending power.
- Peloton (PTON) – Its hardware sales are subdued and its valuation remains a concern, even after a drawdown.
The direct-to-consumer (DTC) model is a vertically integrated retail method that eliminates intermediaries to allow for higher profit margins. The concept itself isn’t new; in fact, we saw a surge in DTC models during the 1990s as digital marketing came to prominence. Nonetheless, DTC really sparked during the pandemic as a result of aggressive quantitative easing measures, which allowed brands to spend heavily on advertising with the assurance of a robust consumer base. Retailers with DTC business models yield a significant presence. Thus, it is needless to say that you need an established brand to implement a successful DTC model. The problem now is that even the big players in the retail space face vicious economic headwinds as stagflation is a strong possibility. I identified three must sell DTC stocks that could cause severe damage to your portfolio if they’re held onto.
Here are three stocks to sell now:
|PTON||Peloton Interactive, Inc.||$23.66|
Stocks to Sell: Chewy (CHWY)
Chewy (NYSE:CHWY) missed its fourth-quarter earnings target by 3 cents per share as its gross margins dropped by 170 basis points due to inflationary pressure on its cost of sales. CHWY’s earnings before interest, taxes, depreciation, and amortization (EBITDA) also disappointed with a $6.6 million year-over-year (YOY) drawdown. That suggests that it is struggling to pass through its rising operating costs to its consumers.
It is clear that cyclicality has gotten the best of the pet market. According to Dr. Claudine Sievert and Sara Ochoa, 42% of pet owners have cut down on pet spending during the pandemic. The number is likely to increase as household obligations in the U.S. have increased since this time last year, implying that households may cut back on non-essential pet products.
CHWY stock is in poor shape from a valuation vantage point. The stock is trading at 1.78 times its sales and 64.07 times its cash flow. I’d be selling CHWY stock straight away if I were one of its investors.
Nike’s fourth-quarter earnings per share beat of 87 cents might have been in vain as its stock is significantly overvalued and is facing economic headwinds. NKE is trading at 4.37 times its sales and 33.66 times its cash flow, indicating that NKE investors may have gotten ahead of themselves.
Sure, Nike hit the ball out of the park with its earnings report, but I’m certain that an anticipated inflation rate rise will dent the firm’s earnings prospects. Additionally, Nike’s quarterly cash flow to CapEx ratio has capitulated by 90.51% since a year ago, suggesting that Nike’s operating efficiency is unstable.
Stocks to Sell: Peloton (PTON)
I have been downbeat on Peloton (NASDAQ:PTON) stock since December and my bearish prediction came to fruition as the stock has lost nearly half of its value ever since. Although the firm has made efforts to expand its product range, everything remains very interlinked, with its bike sales setting the tone for its broad-based sales.
Peloton recently missed its second-quarter earnings target by 47 cents per share. The only plus for Peloton at the moment is its subscriptions. PTON’s subscription revenue has increased by 66% on a YOY basis, but it only makes up 29.76% of its total revenue mix.
The stock is poorly valued as it is trading at 2.14 times its sales and 3.37 times its book value. I remain very bearish on PTON.
On the date of publication, Steve Booyens held a long position in SPY, which includes NKE as a constituent. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.