Consumer Discretionary: A Sector Split in Half

The consumer discretionary sector isn't having a bad quarter. It's having two completely different quarters at the same time.

Eleven companies earned A-grades. Nine earned F-grades. One company sits at B. That's not a normal distribution. That's a sector where the winners and losers aren't just separated by performance. They're operating in different economic realities.

The median FCF margin sits at 10.2%, which puts the sector right at the threshold between competent and excellent cash generation. But that median obscures the real story: half the sector is printing cash at rates that would make tech companies jealous, and the other half is burning through it or barely breaking even.

The A-Grade Cluster

Airbnb leads the sector with a 40.7% FCF margin. Not 12%. Not 20%. Forty percent. That's the kind of margin you expect from enterprise software, not a company in consumer discretionary. The business model is simple: collect fees on transactions you don't need to inventory, warehouse, or ship. The cash flow reflects it.

Booking Holdings sits right behind at 33.3%, proving the travel platform model works at scale. The margin is declining, which drops it from elite to merely excellent, but a 33% FCF margin with declining momentum still beats most sectors' best quarters.

McDonald's at 25.7% shows what happens when you own the brand but franchise the operations. Netflix at 20.9% shows what happens when you finally stop lighting subscriber acquisition money on fire and let the content library generate recurring cash. Electronic Arts at 24.9% shows what selling the same sports game every year with minimal marginal cost looks like on a balance sheet.

These aren't accidents. These are business models built for cash generation. Light capital requirements, strong pricing power, recurring or repeat revenue. The A-grades reflect structural advantages, not temporary tailwinds.

Eleven companies earned A-grades in total. The list includes Deckers (19.2%), Roblox (17.8%), Lululemon (15.0%), Spotify (14.6%), Chipotle (12.1%), and Home Depot (10.2%). Different business models, same result: converting revenue to free cash flow at rates well above the sector threshold of 12%.

The F-Grade Cluster

Nine companies earned F-grades. Five of them are household names: Amazon, Tesla, Starbucks, Ford, GM. Two are cruise lines. One is a game publisher.

Take-Two sits at negative 3.8% FCF margin, which makes sense when you're in the middle of developing the next Grand Theft Auto. Game development involves years of cash outflows before the revenue hits. The trend is improving, which suggests the next major release is getting closer.

General Motors generated a 1.0% FCF margin. Ford generated 3.6%. These are companies with massive revenue bases. GM's trailing twelve-month revenue exceeds $170 billion. A 1% margin on that scale means the company generated cash, just not much relative to how hard it had to work for it. Capital-intensive manufacturing with thin margins and cyclical demand doesn't grade well in a cash flow framework. It shouldn't.

Amazon's 1.1% FCF margin reflects a company still investing heavily in logistics infrastructure while competing on price in retail. The margin is declining, which means the investment pace isn't slowing. AWS prints cash. Retail consumes it. The overall number reflects both.

Tesla's 6.6% margin sits above the D-grade threshold but gets downgraded on debt and consistency. The trend is declining, which matters more than the absolute level. A declining 6.6% suggests the easy margin expansion from scaling production is over. What comes next determines whether this is a temporary pause or a structural problem.

Starbucks at 6.6% with a stable trend and an F-grade signals balance sheet issues pulling down what would otherwise be a marginal cash generator. The cruise lines (Royal Caribbean at 12.1%, Carnival at 9.8%, Norwegian at 8.8%) all earned F-grades despite margins that would look fine in other contexts. Debt loads and capital intensity matter. The modifiers reflect that.

What the Trend Breakdown Reveals

Eleven companies show improving FCF trends. Eleven show declining trends. Three are stable. That's a sector in flux, not a sector in crisis.

The improving list includes some of the F-grades: Take-Two, GM, Ford, Marriott. The declining list includes some of the A-grades: Booking Holdings, Lululemon, Chipotle. Trend direction and absolute grade don't always align. That's the point. A company with great margins can start deteriorating. A company with terrible margins can start improving.

Airbnb, McDonald's, EA, Netflix, Roblox, and Spotify all show improving trends with A-grade margins. That's the best combination: strong absolute performance getting stronger. These are the names where the momentum supports the valuation.

Disney (10.7% margin, D-grade, declining) and Nike (7.1% margin, D-grade, declining) both sit in the middle with deteriorating fundamentals. These aren't companies in crisis. These are companies where the cash generation story got weaker over the last year. Whether that's temporary or structural determines the investment case.

The Sector Health Question

Is consumer discretionary healthy? Yes and no.

The companies winning are winning big. Eleven A-grades in a 25-company sample is an excellent hit rate. The travel platforms, quick-service restaurant giants, streaming services, and asset-light apparel brands all figured out how to generate cash at scale. The business models work.

The companies struggling are struggling in predictable ways. Capital-intensive manufacturing, retail with thin margins, businesses mid-investment cycle. The F-grades aren't surprising. They're exactly what you'd expect when you grade on cash flow instead of narrative.

The sector split reflects something deeper than cyclical performance. It reflects which business models generate cash and which consume it. When we last looked at this sector, we noted the A-grades were built on tourism. That's still true, but the pattern extends beyond travel. The winners are platforms, franchises, and brands. The losers are manufacturers and retailers.

The average debt-to-FCF ratio of 9.0x is manageable but not comfortable. Some companies carry no debt. Some carry multiples of their annual free cash flow. The average obscures individual balance sheet risk.

The sector isn't deteriorating. It's clarifying. The companies built for cash generation keep generating it. The companies built for scale and market share keep consuming it. Both strategies can work. Only one generates the kind of cash flow that earns A-grades.