As apparel shoppers become more discerning, Goldman Sachs likes these retailers’ chances for 2023 | Popgen Tech


Shoppers are becoming more discerning and the drive to update wardrobes is slowing, analysts at Goldman Sachs say, meaning 2023 is likely to be uneven and favor retailers with existing relevance, easier comparisons and narrower inventories.

Against this backdrop, analysts upgraded apparel retailer Gap Inc. and apparel and accessories maker Tapestry Inc., owner of Coach, Kate Spade and Stuart Weitzman. But they downgraded Levi Strauss & Co., describing a shopping landscape where customers are less likely to look for cheaper alternatives for things like handbags, but more likely to look for things like jeans.

“Consumers are becoming more discerning in their spending on apparel, with inconsistent results depending on events, novelty and promotions,” Goldman Sachs analysts Brooke Roach, Jane Kudinova and Evan Dorschner wrote in a report issued late Sunday. “This tendency became more evident in [the fourth quarter] and spans demographic income cohorts.”

“Within this 2023 framework, we look for brands with momentum (which may be a function of easy comparisons), selectively stronger channel backdrops from cyclical overstocking in 2022 (wholesale brands are likely to have tough [first half]/ easier [second half]), and an oversized opportunity to return the margin,” they continued.

Analysts made the diagnosis because rising prices are forcing consumers to be more selective about when to treat themselves. Goldman analysts said the bank’s economists believe customers have largely spent their savings related to the pandemic, with some of that money going toward things like vacations and clothing and accessories for those vacations.

“As a result, we continue to expect somewhat volatile growth forecasts for apparel production in the aggregate, where we believe that particular novelty and brand momentum are key,” they said.

Together with Gap GPS,
and TPR tapestry,
analysts said discount retailers such as Burlington Stores Inc. Burl,
and Ross Stores Inc. ROST,
were well equipped for the potentially bumpier ride ahead.

Analysts at Goldman upgraded Gap to a neutral buy rating and raised their price target to $18 from $10. They said Gap could “beat margin metrics” next year, supported by Old Navy’s new brand leadership and supply chain improvements.

Analysts also said Gap has more potential to improve profitability and same-store sales next year after being one of the first retailers to address the discrepancy between what they had in stock and what actually wanted by consumers. Gap bet on demand for plus-size clothing and cozier, more casual offerings — decisions that led to the glut, analysts said.

Analysts said their more optimistic view of Gap is based in part on improvements in the company’s supply chain after closing factories in Vietnam last year. However, they also said that Gap has benefited from easier year-over-year comparisons compared to U.S. rivals and that management’s performance over the past few years has been uneven. The share price has already been raised, they added.

Analysts also upgraded Tapestry to neutral and raised their price target on the stock to $44 from $37. The new products, they say, will give the company more options to charge more.

“With accessories and handbags operating in a more emotionally driven category with fewer shopping opportunities, we believe [Tapestry] the business is likely to be better insulated from the changing consumer background in the US,” analysts note.

Analysts also said China’s easing of COVID restrictions, share buybacks and an easier backdrop for sea and air transport would help the company. Risks, they said, included competition from rivals more willing to cut prices, a stretched middle-income consumer and strong results in recent months, fueled by higher prices and demand from younger consumers.

Tapestry shares rose 1.2% on Monday. The stock is down 9% this year.

For Levi Strauss LEVI,
analysts saw a big risk. Unlike handbags, when it comes to jeans, shoppers are more likely to delay purchases or look for cheaper options, they said. They also referred to the struggle for the campaign in Europe. Analysts downgraded the stock from buy to neutral and cut their price target to $17 from $18.

“For now [Levi’s] Brand momentum is healthy and showing some recent signs of improvement in our brand momentum dashboard, we believe the denim category is more likely than others in our coverage universe (compared to handbags, for example) that consumer trading is down or on hold demand,” analysts note.

“As a result, we believe the potential softness of the middle-income consumer is likely to weigh [Levi’s] growth algorithm,” they continued, adding that with the company “no longer operating a peer in Europe (partly due to summer weather), we also see a risk that [Levi’s] growth in this geography is starting to fade amid tighter macros.”

Levi Strauss shares rose 1.5% on Monday. Shares have fallen 33% this year. By comparison, the S&P 500 SPX,
during this time fell by 17%.


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