Consumer Cyclicals: Firms Prioritizing Value Proposition Enhancements and Innovation Can Thrive Amid Headwinds

The Morningstar US Consumer Cyclical Index was barely in the green during the fourth quarter, lagging the broader market’s rise. Across our coverage, roughly 45% of firms are in 4- or 5-star territory, indicating attractive investment opportunities. The deepest discounts lie in the apparel and travel and leisure sub-sectors, which trade at 35% and 17%, below our fair value estimates, respectively. Elevated economic uncertainty, fueled by inflation, a softer employment landscape, and shifting trade policies, continues to dampen consumer spending and confidence. Still, we expect firms that remain accessible across channels, innovate, and deliver strong value propositions to stand the test and grow.

Amid persistent economic weakness, discretionary spending has tightened across income levels. Lower-income households are seeking value in air travel and lodging, dining out less, and reducing nonessential purchases, while even higher-income consumers are increasingly opting for value versus indulgence. According to the National Restaurant Association, which surveys operators on their customer traffic trends, October marked the ninth consecutive month in which restaurants saw a net decline in traffic.

As such, many operators have been adjusting prices to retain customers. In the quick-service restaurant segment, price growth has slowed markedly—just 1.5% recently versus a 7.0% average over the past three years—signaling a deliberate effort to align pricing with consumers’ willingness to pay for food away from home. In our view, operators that pair disciplined pricing with innovative, value-oriented menu offerings will be better-equipped to navigate the downturn.

This focus on value also shapes consumer engagement strategies. To capture demand, firms must strengthen consumer connections and ensure omnichannel accessibility. After a brief postpandemic slowdown, e-commerce has resumed a slow climb, now accounting for 30.1% of retail sales versus 28.9% a year ago. Given the critical role that digital channels play, we expect companies to leverage technology—particularly AI—to optimize operations, personalize shopping experiences, and stay competitive in a rapidly evolving retail landscape.

Top Consumer Cyclical Sector Picks

Bath & Body Works

• Fair Value Estimate: $56.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Narrow-moat Bath & Body Works BBWI trades at about a 65% discount to our $56 fair value estimate. While weaker consumer demand has challenged consistent top-line growth since 2021, the firm has launched its Consumer First Formula to reignite sales and profits, emphasizing product newness, brand reinvigoration, broader reach, and cost savings. Management attributes sluggish sales to a lack of evolution in its offerings and believes this plan can transform the business. If executed well, we believe these efforts could bolster profitability and support our 16.9% average annual operating margin forecast, yielding an attractive opportunity.

Spin Master

• Fair Value Estimate: C$36.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

Trading at a 44% discount to our fair value estimate, no-moat Spin Master TOY looks favorable. Tariffs have disrupted retailer ordering, but the firm’s share has held up, with total point of sale down 1.0% versus a 2.5% industry decline in comparable categories. Management expects sequential improvement as delayed shipments are finally replenished, despite an unpredictable holiday season ahead. With capital expenditures and selling, general, and administrative costs set to come in lower than expected, we see a path back to profit growth, supporting 20% EBITDA margins over our forecast.

Under Armour

• Fair Value Estimate: $13.60
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

No-moat Under Armour UA trades at a 68% discount to our $13.60 per share fair value estimate. We believe the company has strengths, including its popularity in performance sports apparel, youthful customer base, and wide distribution. Under Armour is pursuing a turnaround plan with major cuts to personnel and sponsorships, streamlined product offerings, and improvements in marketing, supply chain, and selling channels. In addition, it has a strong balance sheet with more cash than long-term debt. In 2024, to boost growth, Under Armour brought back cofounder Kevin Plank to serve as CEO.