Retail stocks took a beating in March as the coronavirus pandemic forced store closures around the world.
Names like Guess (NYSE: GES), Kohl’s (NYSE: KSS), Macy’s (NYSE: M), and Nordstrom (NYSE: JWN) all dropped more than 55% last month, while the XRT S&P Retail SPDR ETF—which tracks the broader sector—logged its worst month ever falling nearly 26%.
But this week, Wells Fargo upgraded a slew of retail stocks—including Canada Goose (NYSE: GOOS), Nike (NYSE: NKE), Ross Stores (NASDAQ: ROST), TJX Companies (NYSE: TJX), and Ulta Beauty (NASDAQ: ULTA)—to Overweight anticipating a long-term rebound in the retail space.
Wells Fargo analyst Ike Boruchow said that while he is cautious in the near-term on the retail sector, he is “longer term bullish, with a clear bias towards higher quality names.”
According to Boruchow, Nike is a “best-in-class operator, can mitigate near-term headwinds via [a] strong Digital platform and good margins/liquidity,” adding that the athletic apparel and sneaker maker’s China business is “about to return to growth. The analyst boosted his price target on NKE from $87 to $99, indicating nearly 24% upside potential.
Boruchow said that TJX Companies is a “market-leading operator in the compelling off-price space” and wrote that Ross Stores offers a “compelling and consistent off-price model,” and has “one of the most robust balance sheets in our coverage universe.” Of both stocks, the analyst wrote that the discount retailers have “a history of more defensive retail characteristics with meaningful outperformance in recovery periods.”
As for Ulta, Boruchow says the cosmetics retailer is in an historically defensive category during recessions and that the stock is “likely share gainer in a recovery as department stores are liable to lose further share.” The analyst raised his price target on ULTA shares from $205 to $250, suggesting possible upside of 55% over the next twelve months.
The Wells Fargo analyst is bullish on Canada Goose given that the coronavirus crisis-impacted quarters will likely have a small impact on the parka maker as around 80% of its full-year earnings come from the holiday shopping season, which means its full year numbers will be more stable “should crisis issues abate.”
Boruchow also noted that Canada Goose has outsized exposure to the “rapidly improving Chinese consumer that is showing compelling signs of recovery,” and boosted his price target on the stock from $30 to $45 – 147.7% higher than the current price.
However, Danielle Shay, Simpler Trading’s options director, believes it’s too early to bet on the stocks on Walls Fargo’s list, especially with a stock like Canada Goose.
“I can certainly understand what they’re trying to do,” Shay said. “These names were names that were previously strong before we got into this coronavirus crisis. However, these are all consumer discretionary names and nobody is going to be going out buying [a] $1,000 Goose jacket when they can’t even afford their mortgage or their rent.”
Shay said that “it’s far too early to look” at the names on Boruchow’s list, “especially on a short-term basis,” and is more positive on a few other names instead.
“Long-term, alright, but in the short term, I’m focused on consumer staples names, particularly those of Walmart (NYSE: WMT), and Costco (NASDAQ: COST), and I also love home improvement stores. Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD) are both currently open, and I think they’re going to remain strong during this time.”
Newton Advisors founder and president Mark Newton agrees that Boruchow’s picks could still be in for some pain in the near-term.
“I really think that this group is still going to be under a substantial amount of pressure on an intermediate-term basis,” Newton said. “Nike, for example. That stock has rallied over 35% just in the last five to eight trading days, and so you’ve had this big bounce off the lows, but yet structurally the stock is still in very difficult shape technically to want to really be optimistic.”
There is one stock Newton likes now, however.
“The only place I would look in this whole group is the online retail stocks like Amazon (NASDAQ: AMZN). … [It’s] far more attractive relatively speaking, but [in] the retail group, my thinking is, it’s still going to have some pressure in the weeks and months to come,” Newton concluded.