For many, 2020 is a year of big changes. For Barclays analyst Adrienne Yih, it is the first time in more than a decade that she’s bullish on specialty retailers, thanks to Covid-19.
Yih upgraded her view of the retail sector to Positive from Neutral on Wednesday, the first time she has been upbeat about the space since before the global financial crisis.
The oversupply of bricks-and-mortar locations and product, along with the margin headwinds that often come with the shift to e-commerce, have long been “driving profits towards zero” in the sector, she writes. Yet Covid-19 has led to major changes, including reduced supply and store closures, which will ultimately benefit the survivors.
“In 2021, we foresee a return to bricks-and-mortar sales growth and lean inventory supporting EBIT (earnings before interest and taxes) margin expansion,” she writes. “As such, we believe the Retail Deleverage or ‘Death Curve’ will, in fact, become the Retail Leverage or ‘Life Curve.’” She is also heartened to see that during the second quarter, many retailers were able to right-size their inventory positions following a “horrific” first quarter.
(Barron’s has also noted that while Covid has exacerbated issues already at play in the sector, the retail shakeout could benefit the survivors.)
Given these changes, Yih also upgraded
American Eagle Outfitters
(URBN) to Overweight from Equal Weight, as she thinks these companies will “materially benefit from sales recovery.”
However, she also cut her rating on
(RL) to Equal Weight from Overweight, and
(PVH) to Underweight from Equal Weight. While Ralph Lauren is trying to execute a shift to a more direct-to-consumer strategy, it still relies on the struggling department store space, and may see a slower sales recovery—two factors that she is concerned will also hamper PVH.
American Eagle was up 6.4% to $15.81 in recent trading, while Foot Locker was rising 3.1% to $37.68, Gap was 6.2% higher to $19.77, and Urban Outfitters was rising 6.6% to $24.32.
Yih isn’t the only analyst that’s been getting more positive on some long-beleaguered names. Gap has nearly doubled over the summer, and while only 17% of analysts tracked by FactSet are bullish on the shares, that’s up from a single buy rating in the spring. In the case of
Bed Bath & Beyond
(BBBY), which spent years out of favor for legitimate reasons, bulls have recently argued that the long-standing skepticism is a potential catalyst: Very low expectations means it’s relatively easy to surprise on the upside—and the stock did soar after its recent strong earnings report.
In terms of the overstored landscape, Barron’s also reported earlier this year about Covid’s unexpected silver lining for retailers with too many brick-and-mortar locations, in that they can decline to reopen underperforming stores in a way that might have been more optically difficult to do pre-crisis.
“The pandemic has allowed management teams to stop and reflect on health rather than growth, adopting a longer term view on the business that is normally handicapped by investors’ demands for short term results,” Simeon Siegel says in an email to Barron’s. The BMO Capital Markets analyst last month published a report titled “Did Covid Actually Save Retail,” further exploring this theme. “Those that take advantage will be able to refashion their businesses for the future, reorienting their trajectories.”
In addition, other analysts are feeling more optimistic about the margin side of Yih’s thesis. On Monday,
Ike Boruchow noted that promotions seemed more muted throughout September—a good sign for gross margins.
“This is a slight improvement from what we witnessed last month and more importantly represents the fifth consecutive month in which promo activity has improved (markdowns seemed to have peaked in April),” Boruchow said.
Write to Teresa Rivas at [email protected]