It’s a dog fight for dollars, according to the latest report on specialty retail, luxury and apparel from Hong Kong firm CLSA. The recently released report initiated coverage on several U.S. retailers.
Analyst Rick Patel noted that even though the consumer is healthy, they aren’t shopping like they used to. Unemployment is steady at a five-year low of 4.9 percent, consumer confidence has been trending higher and gas prices have declined significantly. Having said all that, mall traffic is down and each subsector in retail has suffered from its own set of challenges.
CLSA gave only two of the companies it researched a buy rating, Coach Inc. and Ralph Lauren Corp. “Our buy rating on Coach reflects the continuation of top-line growth as the average ticket improves and drives growth in non-handbag areas,” Patel said. He mentioned the Stuart Weitzman and men’s departments as examples of non-handbag businesses. He gave Coach a $45 price target.
“We rate Ralph Lauren as a buy as we believe it’s assembled a very strong management team over the last year and is in the very early innings of a multiyear turnaround,” Patel said. He thinks that the turnaround should improve margins by several hundred basis points and give a big uptick in the earnings. The target price for Ralph Lauren stock is $125.
Patel suggested investors sell Michael Kors Holdings Ltd. He thinks that analyst estimates are too high and that the brand has no needle-moving top-line initiatives coupled with high expenses.
The next group of names suggest upside price potential for the stocks, but not enough to warrant a buy rating. This includes Signet Jewelers Ltd., Tiffany & Co., Kate Spade & Co., G-III Apparel Group Ltd. and Oxford Industries.
Patel thinks Signet is a great long-term story with the potential for market share gains and if they can find a partner for the credit business it would be a positive catalyst. He also stipulates he expects jewelry market conditions to remain difficult in the second half and that Signet’s goal of positive comps in the fourth quarter is optimistic. Patel gives Signet an $87 price target.
When it comes to Tiffany, Patel said, “We rate Tiffany an outperform; we expect foreign exchange will be less of a drag going forward, but it’s not clear if its new product initiatives will be strong enough to drive a return to strong-enough comps to enable margin expansion.” He has an $80 price target for the stock.
On the apparel side, the analyst noted that department stores are buying less up front and striving to do more replenishments, pushing the inventory risk onto vendors. He doesn’t believe that will change. He gave G-III an outperform rating and a $34 price target. He sees a lot of sales opportunities for the brand, but his enthusiasm is tempered by the expensive Donna Karan acquisition.
“We think Kate Spade can significantly grow earnings given how under-penetrated it is, but expectations are also high,” Patel said. Kate has a $21 price target. Oxford Industries also received an outperform rating and a $78 price target. Patel highlighted the company’s potential for new concepts, but thinks the valuation of the stock may be a little too high. It was lately trading at roughly $67.