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After a crash for retail stocks over the past week, Citi is signaling even more caution on the space.
Shares of many retailers hit 52-week lows towards the end of May as a margin compression and supply chain issues at retail giants Walmart (WMT) and target (TGT) guest pessimism about the industry as a whole. Given the unfavorable trends reflected in earnings reports from companies that typically outperform, Citi said there was room to lower estimates on Monday.
“On the demand side, the lack of stimulus and the burden of rising food and fuel prices are weighing on low-income consumers, leading to a pullback in discretionary categories,” said Citi analyst Paul Lejuez. “Cost-wise, businesses are facing higher-than-expected pressure from escalating fuel/supply chain costs resulting from the war in Ukraine.”
While price increases could lessen the impact on margins, Lejuez indicated that this action will be increasingly difficult for retailers to push through due to both a weakened consumer and high inventory levels which will require promotional activity.
As a result, the bank downgraded 8 names in the space while reducing price targets for another retailer.
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Downgrade from “Buy” to “Neutral”: Ambercrombie & Fitch (NYSE: ANF), American Eagle Outfitters (NYSE: AEO), Kohl (NYSE: KSS), Ralph Lauren (RL), Under Armor (UAA)
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Double derating of “Buy” for “Sell”: Carter’s Inc. (CRI)
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Downgrade from “Neutral” to “Sell”: Gap inc. (New York Stock Exchange: GPS) and Place des Enfants (PLCE)
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Target price reduction: Urban Outfitters (URBN) cut from $44 to $39. The “Buy” rating is maintained.
Granted, Lejuez was not bearish across the sector, with a few select companies expected to remain largely resilient. In addition to Urban Outfitters, Walmart (WMT), Five Below (FIVE) and TJX Companies (TJX) were cited as industry top picks given their “shared spirit for value and consumer benefit who negotiate.
Learn more about potentially oversold inventory in the retail industry.
