Shares of Ralph Lauren (RL), Levi Strauss (LEVI) and PVH Corp. (PVH) are under pressure on Wednesday after Goldman Sachs analyst Alexandra Walvis downgraded all three stocks to Sell as she expects headwinds for wholesale-led apparel brands to intensity in the second half of 2019.
HEADWINDS TO INTENSIFY: The combination of "persistently tough" first half of the year retail trends and an optimistic spring ordering season has driven inventory overhangs at several multibrand retailers, Goldman Sachs' Walvis told investors in a research note, adding that these retailers are thus tightening up ordering heading into the critical back-to-school and holiday seasons. The analyst added that she sees incremental sell-in risk for apparel brands, particularly those with high exposure to department stores. While brands that have been investing in building strong direct-to-consumer omnichannel commerce are likely to be more insulated, Walvis takes a more cautious view on non-athletic apparel brands whose direct-to-consumer businesses are skewed towards outlet stores, particularly given challenged traffic trends in these locations.
SELL RALPH LAUREN, LEVI, PVH: As Goldman Sachs' Walvis extends her conservative stance on the U.S. apparel retail sector to wholesale apparel brands, she downgraded Ralph Lauren, Levi Strauss and PVH Corp. to Sell from Neutral. Regarding PVH Corp., the analyst forecasts ongoing headwinds at Calvin Klein, expects Tommy Hilfiger growth to fade, and sees risk to total company results given heavy exposure to North America wholesale and outlet channels, and insufficient investments in full-price direct-to-consumer. Walvis also lowered her price target on PVH Corp.'s shares to $82 from $101.
Also bearish on Ralph Lauren, the analyst noted that headwinds in the core North America wholesale market are set to persist, compounded by brand specific challenges at Polo and Lauren, fading AUR growth, and lighter retail comps as outlet pressures weigh. Ralph Lauren operates in a competitive and diffuse apparel market, and its management team is in the midst of leading the company through a turnaround after a several-year pullback from the U.S. wholesale market after a period of over-expansion, she contended. However, the analyst believes the Street has become "overly optimistic" on a near-term growth inflection and anticipates intensifying U.S. wholesale sector challenges will offset incremental gains from execution. Walvis also cut her price target on Ralph Lauren's shares to $103 from $124.
While she acknowledged that Levi Strauss' "solid brand momentum" is driving healthy growth in direct-to-consumer channels and international regions, the analyst argued that recent results were evidence that the company is not immune from headwinds in the U.S. wholesale channel. Walvis has additional concerns about fading growth in tops and stagnant gross margins, while operating margin expansion remains a show-me story for now. The analyst lowered her price target for Levi Strauss' shares to $19 from $21.
WHAT'S NOTABLE: While cautious on top-line trends at Kontoor Brands (KTB), Walvis argued that cost cuts and "solid" free cash flow offset this concern. The analyst sees a "best-in-class dividend yield as supportive of shares," and stays Neutral on the stock. She continues to prefer brands with idiosyncratic margin and growth drivers that offset near-term pressure in wholesale/outlet channels, and reiterates a Buy rating on Under Armour (UAA) and Tapestry (TPR).
PRICE ACTION: In morning trading, shares of Ralph Lauren have dropped about 4% to $110.81, while Levi Strauss' stock has slipped more than 6% to $18.61. Also lower, shares of PVH Corp. have slid over 3% to $89.49.
Ralph Lauren
-4.16 (-3.61%)
Levi Strauss
-1.24 (-6.26%)
PVH Corp.
-3.05 (-3.30%)
Kontoor Brands
-0.88 (-2.76%)
Under Armour
-0.27 (-0.99%)
Under Armour
-0.37 (-1.53%)
Tapestry
-0.56 (-1.79%)