Retailers are adapting their business models as technology changes how people shop. Digitization has been one of the keys to staying competitive against e-commerce rivals, a move that has enabled the industry to grow same-store sales. Consequently, retail stocks have climbed 23.5% over the past six months, beating the S&P 500 by 6 percentage points.

Regardless of these results, a cautious approach is imperative as many companies in this space can be value traps. Taking that into account, here is one resilient consumer stock at the top of our shopping list and two best left ignored.

Two Consumer Retail Stocks to Sell:

Gap (GAP)

Market Cap: $8.46 billion

Operating under the Gap, Old Navy, Banana Republic, and Athleta brands, Gap (NYSE: GAP) is an apparel and accessories retailer selling casual clothing to men, women, and children.

Why Are We Wary of GAP?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Free cash flow margin dropped by 2.7 percentage points over the last year, implying the company became more capital intensive as competition picked up
3. ROIC of 7.6% reflects management’s challenges in identifying attractive investment opportunities

Gap is trading at $22.82 per share, or 11.3x forward P/E. Dive into our free research report to see why there are better opportunities than GAP.

Tilly's (TLYS)

Market Cap: $60.64 million

With an emphasis on skate and surf culture, Tilly’s (NYSE: TLYS) is a specialty retailer that sells clothing, footwear, and accessories geared towards fashion-forward teens and young adults.

Why Should You Dump TLYS?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
2. Performance over the past six years shows each sale was less profitable as its earnings per share dropped by 25.5% annually, worse than its revenue
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

At $1.96 per share, Tilly's trades at 0.1x trailing 12-month price-to-sales. Check out our free in-depth research report to learn more about why TLYS doesn’t pass our bar.

One Consumer Retail Stock to Watch:

Ulta (ULTA)

Market Cap: $23.71 billion

Offering high-end prestige brands as well as lower-priced, mass-market ones, Ulta Beauty (NASDAQ: ULTA) is an American retailer that sells makeup, skincare, haircare, and fragrance products.

Why Do We Like ULTA?

1. Offensive push to build new stores and attack its untapped market opportunities is backed by its same-store sales growth
2. Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
3. ROIC punches in at 32.1%, illustrating management’s expertise in identifying profitable investments

Ulta’s stock price of $529.86 implies a valuation ratio of 21.3x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.

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