Consumer Cyclicals: Bifurcated Spending Patterns Are Dispersing Outcomes Across the Sector

The Morningstar US Consumer Cyclical Index materially underperformed the broader market’s decline. This has resulted in a slew of bargains across the sector, with the median stock trading at a 14% discount (up from 10% three months ago), as nearly half of our sector coverage trades in 4- or 5-star territory.

We see particularly attractive opportunities in the travel and leisure and apparel subsectors, which trade at 21% and 34% discounts, respectively, reflecting investors’ trepidation about the uncertain macroeconomic and consumer spending backdrop. To counter this, we expect firms to lean into innovation and to enhance their value propositions to ensure their brands continue to win with consumers across income cohorts.

Bifurcation in demand is acutely evident in the travel realm. Despite inflationary and labor market pressures that have disproportionately affected lower-income households, we believe higher-income households benefited from outsized exposure to stock market appreciation, which has hovered near record highs, leading to healthy discretionary consumption. The dichotomy in spending is reflected in revenue per available room growth between select hotel companies that skew toward luxury versus economy. Since the third quarter of 2024 and through the fourth quarter of 2025, luxury hotels averaged 0.8% revPAR growth, while economy hotels averaged a 2.1% decrease over the same period. We anticipate these trends to continue, with higher-income households supporting revPAR growth at luxury-oriented chains, reflected in our forecast of 2.5%-3.0% growth for 2026, compared with a flat outlook in the economy segment.

The effects of a pressured consumer can also be seen in restaurants, which have succumbed to increases in food and wage costs, contributing to more than 35% inflation over the last five years, above the 31% inflation in the grocery channel. As such, restaurant traffic has been sluggish. Although operators are employing promotions to drive near-term visits, we surmise that investments in the experience, menu, and technology will position them to make durable inroads with consumers and emerge stronger over time.

Top Consumer Cyclical Sector Picks

Kohl’s

• Fair Value Estimate: $41.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

No-moat Kohl’s KSS looks attractive, trading at a 71% discount to our $41 fair value estimate. Although Kohl’s revenue has declined since 2022, we forecast average annual revenue growth to be flat to up 1% over the next 10 years. We believe Kohl’s will achieve this through investment in its stores, an enhanced product assortment, and its digital capabilities. From where we sit, the market fails to appreciate the benefits that should flow from its marketing, merchandising, and operational efforts, complemented by its more than 30 million loyalty members, off-mall locations, and proprietary brands.

Flutter Entertainment

• Fair Value Estimate: $255.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating:
• Morningstar Uncertainty Rating:

Trading around a 58% discount to our $255 fair value estimate, narrow-moat Flutter FLUT strikes us as undervalued. While the market seems to be pricing in severe competitive pressures, we expect the continued legalization of sports and i-gaming, combined with continued user growth in states that have already passed legislation, to result in average annual US revenue growth of 9% over the next 10 years. In addition, we expect operating margins to expand to 19% over the next decade, up from 6% in 2024, as revenue scales and Flutter’s risk management platform reduces marketing, technology, and general and administrative costs.

PVH

• Fair Value Estimate: $133.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

PVH PVH trades at a 53% discount to our $133 fair value estimate. The firm has disposed of most of its smaller brands to concentrate on its global apparel brands, Calvin Klein and Tommy Hilfiger. Its PVH+ plan to elevate marketing and merchandising, reduce operating costs as a percentage of revenue by 200 basis points-300 basis points, and return capital to shareholders is progressing despite challenges such as product delays and tariffs. Through better management of its brands (including taking back licenses) and inventory while cutting costs, we project operating margins to rise to above 11% by 2029 from below 9% in 2025.