In today’s unpredictable economic landscape, the performance of consumer discretionary businesses is closely tied to broader market trends. Recent data indicates a concerning trend: discretionary stocks have experienced a significant pullback of 13.3% over the past six months, starkly outpacing the S&P 500’s decline of just 2.4%. This raises important questions about the future of companies in this sector and highlights the need for investors to approach with caution.
Many firms within the discretionary category lack recurring revenue business models, making their financial stability somewhat erratic. As consumers tighten their belts amid economic uncertainties, three specific stocks warrant a closer look for potential trouble: Stitch Fix (SFIX), Churchill Downs (CHDN), and Red Rock Resorts (RRR).
Stitch Fix (SFIX)
Market Cap: $601.5 million
Stitch Fix is among the pioneers of subscription box models, offering a personalized online styling service where fashion selections are tailored to individual preferences. Despite its innovative approach, the company has faced some serious challenges that have put its future into question.
Why Do We Pass on SFIX?
- The company has seen disappointing numbers in active clients over the past two years, reflecting a weak demand for its curated offerings.
- Poor management of expenses has resulted in operating margin losses, complicating financial recovery.
- Stitch Fix’s earnings per share have declined more steeply than its revenues over the last five years, indicating that sales have become increasingly less profitable.
Currently, Stitch Fix is trading at $4.60 per share, which translates to a forward EV-to-EBITDA of 16.5x. For a deeper dive into the reasons behind why SFIX may be a risky investment, you can access our full research report here.
Churchill Downs (CHDN)
Market Cap: $6.94 billion
Known primarily for hosting the iconic Kentucky Derby, Churchill Downs operates a business that spans horse racing, online gaming, and entertainment. Despite its renowned heritage, the company is grappling with some serious financial hurdles that could impact its growth trajectory.
Why Are We Cautious About CHDN?
- Analysts project an estimated sales growth of only 5.5% over the next year, which signals a slowdown compared to its previous two years of growth.
- The company is not generating free cash flow, limiting its options for reinvestment, share buybacks, or other capital distribution strategies.
- A relatively low 7.8% return on capital suggests that management is struggling to find profitable growth opportunities.
With a stock price of $96.03, Churchill Downs trades at a valuation ratio of 14.8x forward P/E. Those interested in understanding the finer details of CHDN should check out our in-depth research report here.
Red Rock Resorts (RRR)
Market Cap: $2.93 billion
Founded in 1976, Red Rock Resorts operates several casinos and entertainment properties, mainly in Las Vegas. Given its established presence in a competitive market, it should be thriving; however, underlying issues may indicate otherwise.
Why Do We Avoid RRR?
- The company’s annual revenue growth of just 1.7% over the past five years falls short of what is typically expected in the consumer discretionary sector.
- Wall Street anticipates flat revenue growth for the next year, adding pressure to an already vulnerable outlook.
- Declining returns on capital suggest that Red Rock Resorts is losing its competitive edge amid rising market competition.
At a trading price of $49.40 per share, Red Rock Resorts boasts a relatively high forward P/E of 30.2x. Further examination of this stock can be pursued through our FREE research report here.
Stocks We Like More
Despite the setbacks faced by various stocks in the consumer discretionary sector, there remain opportunities for long-term investments. Notably, Donald Trump’s 2024 Presidential Election victory initially inspired market optimism, propelling major indices to unprecedented heights. However, recent stock retracements highlight continuing debates about economic health and how potential tariffs might influence market conditions.
In light of these uncertainties, it’s refreshing to discover companies well-positioned for growth, seemingly indifferent to changes in the political or economic landscape. For instance, our Top 5 Strong Momentum Stocks for this week features carefully curated selections that have outperformed the market with a staggering return of 183% over the past five years (data as of March 31st, 2025).
Among the stocks highlighted in that list are both well-known names like Nvidia, which has soared by an astounding 1,545% since March 2020, and lesser-known entities such as Tecnoglass, which has seen an exceptional 1,754% increase over five years. For those eager to uncover promising investment opportunities, StockStory can help you identify your next big winner for free.
