Morgan Stanley says two back-to-school stocks are on the rise | Wilnesh News
Although this year’s back-to-school shopping season has been a mixed bag, Morgan Stanley believes that some popular clothing retailers may overcome the impact of the slowdown in the apparel industry and come out on top at the end of the year. Analyst Alex Straton said overall back-to-school spending should be in line with pre-COVID-19 trends, but spending has weakened year over year given recent weak demand. She remains fairly bullish on soft furnishing spending in the second half of the year, but remains more cautious on hard furnishing retail and brands as consumers remain focused on value. Soft goods retail refers to a category of goods made of soft materials, such as clothing, while hard goods retail refers to products such as appliances and furniture. “While industry sources and investors may have braced themselves for an off-season BTS season, we believe the reality may turn out to be better than expected (in textiles). In fact, we believe 1) demand may increase later in the season, 2) Trends will diverge Stratton wrote in a report on Sunday: “It’s up to the players — winners and losers continue to emerge. ” She noted that Google search interest in “back to school” in August reached its highest level since 2014, suggesting that it may accelerate in the future. Abercrombie & Fitch and Lululemon Athletica are two of the top performers this back-to-school season, according to Morgan Stanley’s early reading of some trends and consumer-related factors. Kohl’s and Torreed Holdings Inc. may be left behind, the company said. The bank noted that apparel retailer Abercrombie has the most relevant exposure to back-to-school fashion trends, screening particularly well for stripes and workwear, while Kohl’s may have the lowest exposure. Abercrombie also ranked high in Morgan Stanley’s most recent intern survey, suggesting it resonates with younger consumers who often drive spending during the season. Abercrombie’s shares are up more than 87% this year and more than 900% over the past two years. Those gains outpaced gains by major tech companies like Meta Platforms, Alphabet and Apple in both periods. Analysts polled by FactSet set 12-month price targets, indicating potential upside of 16%. ANF 5Y mountain Abercrombie stock. Investors are excited about Abercrombie’s strong sales growth. The company, which also owns the Hollister brand, reported its best first-quarter sales growth in history at 22%. Its second-quarter report is scheduled to be released before the market opens on Wednesday. However, Abercrombie ranked lowest among retailers surveyed by Morgan Stanley in terms of net spending willingness, putting the company at risk of an annual sales decline of about 2.9%, the bank said. Urban Outfitters, which has the most relevant back-to-school fashion trend exposure along with Abercrombie, according to the company’s metrics, is also likely to see a significant decline in sales. “We are concerned that ANF could be behind a sharply positive EPS revision and a cautious approach to annual forecasts would result in a higher bar,” Stratton said. “These expectations, a still expensive relative valuation, and continued profits Rate reversion/cyclical risks keep us at equal weight.” Other analysts, including Citi analyst Paul Lejeuz, remained bullish on Abercrombie ahead of the earnings release. Earlier this month, LeJuez initiated a “Positive Catalyst Watch” on the stock, anticipating a stronger third-quarter outlook on positive back-to-school commentary. He added that he sees “no signs of slowing down” for the Abercrombie and Hollister brands. Lululemon is another major potential beneficiary of Morgan Stanley’s school shopping season this year, according to the company’s screens. Unlike Abercrombie, the athletic apparel retailer should enjoy the largest annual growth in back-to-school spending. Lululemon ranks high in neutral colors, tennis and ballet apparel and is popular with younger consumers, but its higher pricing could pose a challenge to the stock. “We believe views/sentiment on LULU are unlikely to change in the near term, while high-frequency data in LULU’s most important North American market is likely to remain impressive,” Stratton said. She added: “This constructive BTS positioning generally bodes well for 2H and holiday results, where LULU will also enjoy easier comparisons, a Week 53 lift, and potential innovation/inventory program gains. “As a result, LULU may quickly turn to a positive rate of change.” The story is even more compelling given the bearish sentiment, lower fiscal year EPS and depressed valuation. Stratton maintained an Overweight rating and said the stock’s risk-reward profile is tilted to the upside. . However, she lowered her price target to $329 from $404, implying a potential upside of 22.5%. Analysts surveyed by FactSet gave a more optimistic average price target, suggesting the stock could rise more than 28% next year. Not everyone can do so well this back-to-school season. Stratton said Kohl’s underperformed in Morgan Stanley’s back-to-school analysis, consistent with the bank’s concerns that the retailer may not be able to attract younger shoppers and increase traffic in its strategic efforts. volume and improved revenue. She said Stratton rates the stock “underweight” given the limited visibility of Kohl’s new management’s actions and the continued likelihood of near- and long-term earnings downgrades. Kohl’s shares are down about 32% this year. Torrid Holdings could become another laggard this fall, the company said. Stratton believes the company – which operates the Torrid, Torrid Curve, Curv and Lovesick brands – may find it difficult to deliver on its strategy as its brand relevance weakens due to increased competition from traditional retailers expanding their size ranges impact on demand and profits. She recently downgraded the stock to underweight.
