Shares of retailers Macy's (M), L Brands (LB) and Gap (GPS) were under pressure on Friday morning after the trio received a downgrade at Credit Suisse. In a research note to investors, the firm's analyst said he sees a "tougher" road ahead for the softlines space.
'TOUGHER' ROAD AHEAD FOR SOFTLINES: Credit Suisse analyst Michael Binetti, in a note to investors out Friday, said the U.S. softlines retailer group, which includes Macy's, Gap and L Brands, as well as Nordstrom (JWN), Kohl's (KSS) and J.C. Penney (JCP), among others, is now trading at a 3% discount to its five-year average EV/EBITDA, adding some margin of safety for softlines stocks. However, the analyst said that negative near-term industry data points are "adding up," and that he sees the most risk of negative revisions to 2020 Street estimates for Macy's, Gap and L Brands. Binetti said he thinks low valuation alone will not be enough to protect further stock downside.
Binetti said his firm's checks, along with recent commentary from Levi Strauss (LEVI) and Hugo Boss, suggest industry trends in the U.S. remained "sluggish" in Q3 and he expects these pressured trends to continue into the fall/holiday season, with macro pressures weighing on already-weak recent trends like a shorter holiday shopping calendar, tough weather comparisons and ongoing uncertainty surrounding tariffs and tourism. He thinks structural challenges are poised to accelerate in 2020 and thinks consensus estimates for 2020 are likely to be revised significantly lower.
Looking ahead, the Credit Suisse analyst said that if better holiday trends in 2019 don't materialize, he thinks it will be increasingly tough for softline retailers to avoid even more and bigger store closures in 2020. Binetti said his real estate contacts are actually bracing for another round of large scale store closure announcements after the holiday.
Specifically, Binetti downgraded:
Credit Suisse's Binetti also commented on other softline retailers, saying his top picks in the current "volatile" macro environment are VF Corp (VFC), Ross Stores (ROST), Burlington Stores (BURL) and Nike (NKE) given a more conservative view for the second half of 2019 and 2020.
PRICE ACTION: In morning trading, shares of Macy's are down 4.5% to $15.07, L Brands has fallen 9% to $16.48 and Gap has declined about 6% to $16.52.
Macy's
-0.74 (-4.69%)
L Brands
-1.49 (-8.23%)
GPS Industries Inc
+ (+0.00%)
Nordstrom
-0.66 (-1.88%)
Kohl's
-0.1 (-0.20%)
JCP
+
Levi Strauss
+0.08 (+0.47%)
VF Corp.
+0.15 (+0.16%)
Ross Stores
+0.76 (+0.67%)
Burlington Stores
-0.29 (-0.14%)
Nike
-0.3 (-0.31%)