What to Watch: A Retail Stock Revival After a Shaky Year?
In the end, 2023 was a tough year for retail, filled with inflation, cautious consumers and a still-complicated geopolitical landscape.
Even so, Wall Street remained filled with opportunity — for some.
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Abercrombie & Fitch Co. had a great year, gaining 285 percent to $88.22. And some of the big leaders pulled further ahead, including Amazon, which jumped 81 percent to $151.94 while the Dow Jones Industrial Average ended the year with a gain of 13.7 percent.
Others were rebounding off a low base, including resellers ThredUp Inc. (up 72 percent to $2.25) and The RealReal Inc. (up 60.8 percent to $2.01).
For some, the rebound never came. The most dramatic case was Farfetch, where the equity is set to be wiped out in a sale to South Korea’s Coupang.
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Also struggling to make their pitch to investors were Rent the Runway Inc. (down 83 percent to 53 cents) and Lanvin (68 percent to $2.95), which saw a change in its top management.
As the tables are reset for 2024, there’s hope for the sector, which ended the year with some momentum.
Traders see retail as an “early cycle” sector. That’s because stores stay in close contact with consumers and are among the first to benefit when the economy improves. Investors look to buy into retail when good times are on the horizon.
And the general economic sentiment is favorable right now, with many betting the Federal Reserve pulled off a “soft landing” and brought down inflation without sparking a recession.
“As an early cycle group with demand that is stabilizing, margins that are bottoming and multiples that remain cheap…it’s hard to ignore the bull case now forming,” said Ike Boruchow, a stock analyst at Wells Fargo, in a research note.
That would mark a big change in market sentiment.
“Simply put, we believe fears were overdone. Concerns around a consumer demise — led by ongoing inflation and student loan resumptions — have thus far proven to be much overblown,” Boruchow said. “To that point, while a material September/October slowdown in [consumer] demand did occur — this now seems to be more a function of warmer weather, lack of promotions and a basic return to ‘normal’ shopping patterns.”
Boruchow noted that the shoppers hit the stores over the holidays and that the stocks he covers were up more than 25 percent between early November and mid-December.
The analyst’s top pick for 2024 is PVH Corp., which saw its stock rise 73 percent to $122.12 last year.
That performance gives shares of the Tommy Hilfiger and Calvin Klein parent company room to move higher if the reinvention plans of chief executive officer Stefan Larsson pan out.
Boruchow noted that there remains some questions among investors who are looking hard at the company’s earnings power this year and just how rich a valuation the shares should get.
But the analyst argued in a separate report on PVH: “With an ‘under-earned’ revenue base relative to peers over the past several years, driven by weakness in U.S. tourism and China lockdowns, we believe new management’s strategy to elevate and enhance Calvin Klein and Tommy Hilfiger will likely lead to significant revenue acceleration over the upcoming eight to 12 months.
“Further, PVH’s decision to bring a number of licenses in-house over the next several years should be a meaningful addition to revs and potentially to earnings before interest and taxes if executed efficiently,” Boruchow said. “We rate PVH overweight.”
If the year goes well, PVH and the rest of fashion might find they also have some more competition for investor attention given the number of retail and fashion businesses said to be headed toward initial public offerings, from Kim Kardashian’s Skims to ultra-fast fashion giant Shein.
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