Retail

Analyst Stays Wildly Bullish on a Red-Hot Retail Sector: 4 Stocks to Buy

Lee Jackson

Published: August 22, 2018 8:55 am

Last Updated: January 11, 2020 7:01 pm

Usually, investors pondering what’s hot and what’s not always tend to lean on the hot technology companies, especially the internet-related stocks, whether they be social media or cloud computing oriented. The fact of the matter is that one of the hottest sectors going is retail, and with consumer spending expected to continue to grow along with the current strong economy, the sector is expected to stay smoking hot.

Jefferies analyst Randy Konik has been one of the biggest cheerleaders for the sector, and with good reason. The future looks bright, and for apparel retailers, he makes the case that for all of its retail clout, Amazon, which continues taking share in commoditized goods, is not in the fashion apparel arena. In fact, he says that ever since the fall of 2017, the mention of Amazon by companies as a threat has dried up.

When noting the very positive sector story, the report said:

We remain very bullish on Retail as evidence continues to mount that consumers are the strongest they have been since 1999, company margins are tracking higher, capex needs are lower, free-cash-flow is accelerating and stock prices look cheap. The sea of red on Macy’s results presents a major buying opportunity for the group.

The Jefferies team has four favorite companies for investors to consider now, all are rated Buy.

Gap

This top retailer could be poised to benefit from the extra consumer spending. Gap Inc. (NYSE: GPS) sells private label merchandise through three main retail concepts: The Gap, Old Navy and Banana Republic, along with smaller growth vehicles Athleta and Intermix. The company also sells its products through its company websites. Most of its international stores are Gap stores, concentrated in Western Europe (France, United Kingdom), Japan, China and Canada. The company has over 3,500 stores worldwide.

The company announced this summer that Neil Fiske would take over the role of president and chief executive of its Gap brand. Fiske previously had been chief executive of Billabong, Eddie Bauer and Bath and Body Works. He will permanently replace Jeff Kerwin, who left the company in February.

Gap shareholders are paid a solid 3.0% dividend. The Jefferies price target on the stock is $50, and the Wall Street consensus target is much lower at $32.77. The shares closed Tuesday’s trading at $32.31.

Michael Kors

This top retailer looks to be breaking through a multiple top chart formation. Michael Kors Holdings Ltd. (NYSE: KORS) is an accessible luxury lifestyle brand led by an experienced management team and a famous designer with a presence in over 85 countries. The company offers two primary collections: The Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury collection.

The company’s sales inflection remains choppy and sustained improvement is needed to drive the multiple higher. However, across Wall Street the estimates for fiscal 2019 are being raised, largely due to better comparison estimates. The Jefferies team cites the company’s great and recognizable brand and the potential for margins to move up, and they think flat out the stock is cheap.

Jefferies has a price target of $93, which compares with the posted consensus target of $77.19. The shares closed trading at $75.41 on Tuesday.

Kohl’s

This top retailer has been on fire and just posted solid quarterly numbers. Kohl’s Corp. (NYSE: KSS) operates department stores in the United States that offer private label, exclusive and national brand apparel, footwear, accessories, beauty and home products to children, men and women customers. The company also sells its products online at Kohls.com and through mobile devices.

While retail chains have suffered from internet pressure, Kohl’s has held its own as consumers see the company as a solid discount retailer. In addition, Amazon is growing its partnership with the department store chain. Last summer, the two companies announced that Kohl’s would begin selling Amazon devices, such as the Echo and Fire tablets, at 10 of its stores. Kohl’s also will be accepting Amazon.com returns at certain U.S. locations.

The company posted earnings and sales numbers that beat estimates on Tuesday, and it also raised forward guidance. It may have been a buy the rumor, sell the news situation as the stock was sold off. This may provide investors with a better entry point.

Kohl’s investors are paid a 3.04% dividend. The stunning $115 Jefferies price target is well above the $76.35 consensus target. The stock closed trading on Tuesday at $80.20.

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Under Armour

This apparel leader has struggled mightily over the past year and may be finally turning the corner. Under Armour Inc. (NYSE: UAA) bills itself as the originator of performance footwear, apparel and equipment that has revolutionized how athletes across the world dress. Designed to make all athletes better, the brand’s innovative products are sold worldwide to athletes at all levels.

The Under Armour Connected Fitness platform powers the world’s largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal.

Jefferies remains very bullish on the company, citing the fact that it has the lowest market capitalization among the top athletic retail stocks, sales and margins are moving higher and overall better management of the business is a huge positive going forward.

Jefferies has set its price target at $29. The consensus target is a remarkably low $15.28, and the shares ended Tuesday trading at $21.65 apiece.

These four top picks from Jefferies all look like bargains compared to some of the overpriced momentum stocks. With the economy and consumer optimism rising, this group could be a great play for the rest of 2018, especially with the fourth quarter and the holiday shopping season on tap.