Bloomberg/ New York
Retailing stocks may after a broad apparel call from Credit Suisse analyst Michael Binetti, who turned bearish on a trio of stocks and cut estimates for much of his retail coverage, saying slowing trends may linger through the holiday shopping season.
Binetti downgraded Macy’s Inc, L Brands Inc and Gap Inc to underperform from neutral yesterday after his checks, along with commentary from Hugo Boss AG and Levi Strauss & Co, suggested that US trends “remained sluggish” in the third quarter.
He anticipates “pressured trends” will continue through the fall and holiday buying seasons, with macro economic pressures “weighing on already-weak recent trends”. Among the weakness impacting the sector, Binetti called out a shorter holiday calendar, ongoing tariff/tourism concerns, and tough weather comparisons lapping the cold weather that hit last during last year’s fourth quarter.
“US wholesale declined 4% in the third quarter, reflecting the ongoing challenging environment in the channel.”
“In particular, in North America, the market environment further deteriorated during Q3, hence weighing on the group’s sales and earnings development,” Levi’s CFO Harmit Singh said on an October 8 conference call.
Macy’s, L Brands and Gap are poised to extend their year-to-date declines, which already place the three stocks in the bottom of the S&P 500 Retailing Index performers for 2019. Each stock has lost at least 29% of its value this year, while the retailing index advanced 24% through Thursday.
Macy’s shares fell as much as 5.4% ahead of the bell yesterday, L Brands lost as much as 7.1% and Gap dropped 6.6% at its worst level pre-market.
And next year’s Street estimates are “still too high,” Binetti added. Current estimates call for industry comparable store sales, gross margin and EBIT margin trends all to pick up from their current run-rates, he said. “We don’t see any clear drivers to support such an acceleration.”
On average, Binetti lowered his EPS estimates by 3.0% for this year and by 5.5% for next year for US department stores Macy’s, Nordstrom, Kohl’s, and J C Penney & Co, brands with significant exposure to US department stores (Ralph Lauren, PVH and Hanesbrands) and challenged mall-based retailers (Gap and L Brands).
“As we look across our coverage, we see the most risk of negative revisions to 2020 Street estimates for Macy’s, GPS and LB — and we think low valuation alone won’t be sufficient to protect further stock downside,” he said. Binetti’s new price targets on Macy’s and Gap, $12 and $14, respectively, are Street lows, according to data compiled by Bloomberg, while his new $14 price target on L Brands matches the current lowest target.
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