Retailers have had a rough go of it recently.
The S&P Retail Select Industry Index has dropped 33% so far this year. And Walmart (WMT) shares shed 7.6% Tuesday after a weak earnings report.
One factor hurting retailers is concern that a recession may be coming soon. Bank of America analysts took a look at specialty retailers, mostly apparel companies, in light of the economic threat.
“We cut our 2022-23 [earnings] estimates across our apparel coverage universe by 29% to 32% to reflect our economists' call for a recession in the second half of 2022,” they wrote in a commentary.
Another factor behind the estimate reduction: “data pointing to decelerating apparel demand due to inflationary pressures and versus last year's high levels,” the analysts said.
“In addition to slower sales, high inventory levels and the wrong content have led to higher promotions,” they said.
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Woe is Revolve, American Eagle
“Our estimates are now 26% to 29% below consensus. While stocks have fallen in anticipation of estimate cuts, we see risk to [apparel retailer] Revolve (RVLV) (where the multiple remains high) and American Eagle Outfitters (AEO).”
The analysts downgraded both stocks to underperform. Revolve was previously at buy, and American Eagle was previously at neutral.
As for Revolve, “while we continue to think the company will be a long-term structural winner, we expect near-term macro factors to pressure earnings, resulting in multiple compression,” the analysts said.
“We cut 2022-23 estimates 20% to 30% to reflect slowing demand, higher returns and promotional pressures. We expect downward revisions to cause multiple compression back to pre-pandemic levels.”
Turning to American Eagle, “we expect near-term results to fall short of expectations,” the analysts said.
“We lower our 2022-23 earnings-per-share estimates 24% to 35% to reflect lower sales and steeper gross margin declines.” To be sure, the losses will be tempered by expense cuts, the analysts said.
But, “we see decelerating trends in the teen clothing category and a continued shift from athleisure into occasion wear. Aerie [American Eagle’s women’s clothing brand] is underexposed to the latter category.”
Things Looking Up for Four Companies
There is a bright side: the outlook isn’t bleak for everyone, BofA analysts said.
“Although discretionary apparel spending is at the top of the list to be challenged in a recession, we see some successes in companies that have a differentiated product niche, category expansion or sustainable growth in customer count,” they said.
“We continue to like Lululemon Athletica (LULU) on category expansion opportunities, and Bath & Body Works (BBWI) for its agile supply chain and ability to drive consistent comparable sales over time.”
And that’s not all. “We think Urban Outfitters’ (URBN) profit improvement plan can help offset increasing promotions and view Victoria's Secret's (VSCO) turnaround as a differentiator in a tough environment.”
BofA rates all four stocks buy.
