Here’s how to play the retail sector.
With former U.S. retail stalwarts like J.C. Penney Co. (ticker: JCP) and Sears Holdings Corp. (SHLD) seemingly on the brink of death, the U.S. retail sector has been difficult for investors to navigate over the last few years. According to Goldman Sachs analyst Alexandra Walvis, the difficulty will continue in coming years. Walvis is generally bullish on the U.S. apparel industry but says it is critical for long-term investors to be selective when choosing stocks. Here’s her take on a handful of popular stocks.
Buy: Nordstrom (JWN)
Nordstrom was aggressive in investing to update its stores and business model in recent years, and Walvis says those efforts are paying off in terms of store experience, luxury-oriented product lines, high online penetration rates and top-tier omnichannel services. Nordstrom has also differentiated itself from other U.S. retailers by offering high-end brands. Walvis says Nordstrom should exceed consensus earnings estimates by 2 percent in fiscal 2018 and 7 percent in fiscal 2019 on the strength of better-than-expected same-store sales growth and margins. Goldman Sachs has a “buy” rating and $73 price target for JWN stock.
Buy: Tapestry (TPR)
Tapestry is the company formed from the 2017 merger of Coach, Kate Spade and Stuart Weitzman. Walvis says Tapestry is an attractive value stock with a favorable risk-reward balance and growth opportunities for long-term investors. While Stuart Weitzman remains a challenge in the near term, Walvis says the valuable Coach brand is performing very well, and Kate Spade could soon see an uptick in growth. In addition, Walvis says Tapestry could also be on the lookout for additional brand acquisitions. Goldman Sachs has a “buy’ rating and $56 price target for TPR stock.
Buy: Kohl’s Corp. (KSS)
Walvis says Kohl’s is positioned for near- and long-term success. Over the next several months, Kohl’s should see upside to its same-store sales numbers given the shrinking U.S. footprint of competitor Bon-Ton, which plans to close 40 stores in 2018 and has another 20 stores on its closure “watch list.” In the longer term, a partnership with Amazon.com (AMZN), an improving brand mix, and an initiative to sublet store space to high-traffic partners are all key drivers for Kohl’s. Goldman Sachs has a “buy” rating and $91 price target for KSS stock.
Sell: Macy’s (M)
Despite a generally bullish outlook for apparel retailers, Walvis says Macy’s still has a number of challenges ahead. Goldman is forecasting fiscal 2019 earnings that are 9 percent below consensus estimates. Walvis says strategic initiatives such as Backstage will not be enough to offset declining traffic at Macy’s core department stores. Macy’s is investing heavily in revitalizing stores and improving its online and omnichannel offerings, but those investments will continue to eat into margins and weigh on earnings in the next couple of years. Goldman Sachs has a “sell” rating and $33 price target for Macy’s stock.
Buy: TJX Companies (TJX)
Walvis says TJX will continue to deliver consistent same-store sales growth thanks to its best-in-class operating model. She says TJX will grow floor space at a higher rate than Wall Street is anticipating, and the company’s more than 20,000 global vendors provide diversification, flexibility and high-quality inventory. Goldman Sachs is projecting 5.8 percent compound annual growth rate in stores through 2020 as management pushes from its current store count of around 4,200 to its long-term goal of 6,100. Goldman Sachs has a “buy” rating and $126 price target for TJX stock.
Neutral: Burlington Stores (BURL)
Given its relatively small current store base, Walvis says Burlington has an attractive long-term runway for store growth. The company plans to expand its footprint by two-thirds in the years ahead, ultimately reaching 1,000 total stores. While competitors are ramping up spending to adapt to the evolving retail landscape, Burlington has been cutting costs and boosting margins by reducing inventory and improving productivity. Unfortunately, Walvis says the stock’s current valuation is fair and there are few near-term catalysts ahead. Goldman Sachs has a “neutral” rating and $179 price target for BURL stock.
Neutral: Ross Stores (ROST)
Walvis likes the Ross Stores growth profile but says margin and earnings growth upside is likely limited in the near term. She expects Ross to continue to add roughly 90 net annual new stores in coming years and grow revenue in the high single digits. Ross also has top-tier operating margins of 14.5 percent, well above the 10 percent average of its peers. Unfortunately for Ross bulls, Walvis says there’s little room for further margin expansion, especially given rising freight and wage-related costs. Goldman Sachs has a “neutral” rating and $104 price target for ROST stock.
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7 Winners and Losers Among U.S. Retail Stocks originally appeared on usnews.com
