In an out-of-consensus call on Tuesday, analysts at Barclays raised their rating on the U.S. Specialty Retail, Apparel & E-Commerce sector to Positive from Neutral. With the sector move, the analysts also upgraded shares of American Eagle Outfitters (NYSE: AEO ), Bath & Body Works, Inc. (NYSE: BBWI ), Gap, Inc. (NYSE: GPS ), and Tapestry (NYSE: TPR ) to Overweight.
The firm's confidence in an FY24 sector recovery is rising for three reasons. Firstly, they expect the U.S. consumer discretionary goods inventory issue to be mostly resolved by year-end 2023, leading to improved merchandise margins in 2H23 and FY24. Secondly, freight and supply chain recapture should notably improve in 2H23 and continue to strengthen in FY24. Finally, the drag of "Essential"-category inflation on household spending for discretionary goods is diminishing.
Analysts cited seven catalysts that "could deliver a roadmap to sector outperformance in 2024."
- Inventory (Supply) is Fixed with 2024 a Replenishment Year Catalyst
- Positive-to-Accelerating Sales Growth
- Retail Sector Promo Inflection from “Deeper” to “Flat” in 2H23 Catalyst
- 2H23 Sales and Profit Reset to De-risk 2024 Estimates Catalyst
- Relief on Discretionary Spend Within the Household Catalyst
- The Resumption of Student Loan Repayment to Get to Normalized Spending
- Fed Nearing the End of the Hiking Cycle
Looking at individual stocks, the analysts said for the 2nd-half of 2023, they are sticking with recessionary beneficiaries like off-price retailers Burlington Stores, Inc. (NYSE: BURL ), Ross Stores, Inc. (NASDAQ: ROST ), and The TJX Companies, Inc. (NYSE: TJX ); highly desirable brands like Nike (NYSE: NKE ) and Lululemon Athletica Inc (NASDAQ: LULU ); best-in-class branded retailers like Dick’s Sporting Goods Inc (NYSE: DKS ), Pet Valu (TSX: PET ), Urban Outfitters (NASDAQ: URBN ), and Ulta Beauty Inc (NASDAQ: ULTA ); and branded apparel brands PVH (NYSE: PVH ) and Ralph Lauren (NYSE: RL ).
However, as they look for FY24 offensive positioning, they upgrade AEO, BBWI, GPS, TPR to Overweight, notably for early-stage value investors seeking more beta.
"To be clear, sales remain under pressure currently, reflecting still-high inflationary headwinds that have only recently begun to ease in essential categories, combined with the latent impact on demand from Fed hikes," the analysts commented. "We are upgrading each of AEO, BBWI, GPS, and TPR given their improving sales-to-inventory growth metrics, as well as company-specific drivers to return to growth in 2024 despite what we expect could be lowered top-line sales guidance for 2H23."
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