Consumer Cyclicals: Amid Uncertainty, Product Innovation and Marketing Are a Winning Formula

The Morningstar US Consumer Cyclical Index underperformed the broader market in the third quarter. Across our sector coverage, stocks trade at a median 24% discount to our intrinsic valuations, with 68% in 4- or 5-star territory. We see particularly enticing opportunities in apparel (which trades 43% below its average fair value estimate) and travel and leisure (26% below). In our view, the market’s concerns appear rooted in how much economic and geopolitical headwinds will pressure consumer discretionary spending, without considering how competitively advantaged operators can spur purchases through consumer-valued product innovation and targeted marketing.

As financially stretched consumers reassess discretionary spending options, restaurant traffic has come under pressure. We partially attribute this to restaurant operators raising prices to offset outsize cumulative inflation in food costs, labor, and transportation since the pandemic. As the broader macroeconomic backdrop remains uncertain, we expect consumers to vet value more stringently across service, convenience, quality, and price. To compete for wallet share, restaurant operators will need to increase marketing spending and enhance menu innovation while balancing premium and value offerings to drive traffic. We believe cost-advantaged firms will be particularly well-positioned to fund these investments and weather future inflationary spikes because of efficiencies gained from prior spending on technology and operations.

While restaurant traffic has waned, consumers still hunger for travel. This is reflected in advance ticket sales at four publicly traded cruise operators, which rose 3% year over year in the second quarter of 2026 to over $19 billion, up from $10 billion before the coronavirus pandemic. We believe operators with strong brands that invest in elevated destination experiences can appeal to consumers, even amid strained consumer spending.

Top Consumer Cyclical Sector Picks

Capri Holdings CPRI

• Fair Value Estimate: $45.50
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

No-moat Capri trades 67% below our $45.50 fair value estimate. After Tapestry’s failed acquisition attempt and the divestment of Versace, Capri is focused on improving Michael Kors and Jimmy Choo. Despite investor skepticism, we believe store renovations, product introductions, and data-driven marketing will return Michael Kors to segment operating margins of 20% by fiscal 2031 from 11% in fiscal 2026. We also think investors overlook the value of the Jimmy Choo brand in women’s luxury footwear. Jimmy Choo should return to positive operating income in fiscal 2027. With healthier brands, we think Capri could be a buyout target.

Bath & Body Works BBWI

• Fair Value Estimate: $54.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

Bath & Body Works shares look compelling, trading near a 70% discount to our $54 fair value. We believe investors are skeptical about the firm’s return to growth. However, the firm’s Consumer First Formula is showing early signs of success, with body care strengthening sequentially and digital sales returning to growth (up 3%) in the second quarter of fiscal 2026. Continued focus on restoring power to its core product lines, elevating tactical marketing, improving distribution, and extracting efficiencies should support 2.5% average sales growth and operating margin expansion to 17.7% from 15.9% in 2025 over the next decade.

Lululemon Athletica LULU

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

Trading 60% below our $255 fair value estimate, narrow-moat Lululemon looks attractive. The firm has struggled with rising competition and merchandising issues, but we think its brand value holds; we forecast a return to sales growth and operating margins of 20% or better through product releases and global expansion. Meanwhile, some of the recent turmoil has subsided with the amicable resolution of its proxy fight with founder Chip Wilson. To regain leadership in categories like leggings (sales fell 20%), we believe recently appointed CEO Heidi O’Neill must improve product development and marketing effectiveness.