It is no secret that retail shoppers want a good deal when they are shopping. Whether that deal comes from online or it comes from the deep value and clearance stores seems not to matter. Both efforts have been trouble for many key retailers over the past decade or more, and the problems may be getting worse for some players while stabilizing elsewhere.

A research report from Credit Suisse’s Christian Buss and team has issued downgrades on Kohl’s Corporation (NYSE: KSS) and J.C. Penney Co. Inc. (NYSE: JCP) in a broader retail call, while upgrading the ratings for Burlington Stores Inc. (NYSE: BURL) and Nordstrom Inc. (NYSE: JWN). The downgrades were effectively moved to Sell ratings and the upgrades were effectively moved to Buy ratings. Whether these downgrades are late and the implied upside targets are enough for investors may be called into question here.

Credit Suisse’s note shows that the ongoing shift to e-commerce and deep value is inevitable and well under way. They also see that retail sales are shifting to lower-return channels.

Burlington Stores was raised to Outperform from Neutral, and Buss raised his target from $75 to $92, implying upside of almost 10% from the prior closing price of $83.87.

Nordstrom was raised to Outperform from Neutral in the call, and the prior target of $48 was raised to $58. If Credit Suisse is right, this implies 8.2% upside from the prior closing price of $44.38. The stock’s 52-week trading range is $35.01 to $62.82, and the consensus analyst target price is $52.19. Sadly, this was a $60 stock as recently as the first week of December. Maybe this just wasn’t enough upside to merit an upgrade, as the shares were down 30 cents at $44.08 after the call’s impact was seen.

The Credit Suisse rating on J.C. Penney dropped to Underperform from Neutral, and the price target is $7.00. Again, this is the equivalent of a Sell rating elsewhere. After closing up 2.7% at $6.94, the shares were down 1.1% at $6.86 early Wednesday. Their 52-week range was $6.00 to $11.99, and the consensus target price was $10.31 coming into Wednesday. The call on J.C. Penney took shares down 10 cents, or 1.4%, to $6.84 in active trading on Wednesday.

Kohl’s was downgraded to Underperform from Neutral. The price target was lowered from $45 to $39. The stock has a 52-week range of $33.87 to $59.67, and its consensus price target was $46.57 coming into the call.

Buss offered this commentary:

Our analysis of industry growth highlights two crucial changes that we expect to drive relative market share over the next 5 to 10 years. First, we believe that eCommerce will grow from 15-20% of industry sales to 35-40%. Second, we believe that deep-value retail (the combination of Off Price and fast fashion retail) will grow from 20% of industry sales to well over 30%. In short, we are at (or even past) a tipping point for the traditional full-price mall environment, particularly in tier-two and tier-three locations.

The transition to eCommerce and deep value has already disrupted store productivity, eroded profitability, and perhaps most important, shifted the marginal productivity of capital investments. Historically high ROIC investments in mall and strip center real estate assets are shifting toward significantly lower ROIC technology investments with rapid depreciation cycles. In addition, the new model faces competition from venture-backed startups with a low-margin market-share gain mindset.

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Credit Suisse also noted that supply chain efficiency is the secret sauce for winning in deep value. Another view is that access to high-value brands (and creating them) is one offset to the deflationary pressure seen in apparel today. Buss said:

One of the key tenets of our thesis on the apparel industry is that price elasticity is greater than one. In short, the retailer with a substitute good at the lowest price will take not just unit, but also dollar share. It is this reality that explains Off Price and fast fashion share gains more than any other.

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