Cowen says buy these 10 retail stocks before a colossal wave of consumer spending sends them skyrocketing — including one expected to surge 71%
- The outlook for the retail sector is starting to looking brighter following stimulus checks and vaccine rollouts.
- Investment bank Cowen & Co list four positive themes for the consumer sector set to drive stocks higher.
- We break down the bank’s top 10 stocks to buy to play these themes.
- See more stories on Insider’s business page.
The pandemic has brought a multitude of challenges for retail companies. Some consumers spent less due to fears around job security and the economic environment. Others changed their shopping habits, moving from in-store to online shopping.
Management teams have had to reckon with consistently changing guidance on reopenings and safety measures that need to be in place, as well as falling stock prices.
The outlook for retail for the rest of 2021 looks brighter. Many expect a boost for retailers following the rollout of the stimulus checks to consumers., but these are not the only boost for the sector.
Cowen & Co, an investment bank and research firm, listed a number of other positive catalysts for consumer companies in a March 11 research note.
“We are constructive on leading discretionary ideas heading into the heart of the re-opening and raise outperform-rated TPR, FTCH, and MYTE into our top three picks,” Cowen research analyst Oliver Chen said.
Themes
1) Pent-up savings and wave of discretionary spending
A subset of consumers have been able to save an extraordinary amount throughout the pandemic. A report from the Commerce Department showed American consumers are sitting on approximately $1.6 trillion of pent-up spending.
As society reopens and more options become available for consumers, many economists and investors expect them to unleash a wave of discretionary spending.
Chen said global discretionary and luxury platforms will be able to capture the wallet share from those consumers with healthy saving balances.
2) Stimulus check boom
President Joe Biden approved the $1.9 trillion stimulus package on March 11 and a few day later, some Americans were already receiving a $1,400 stimulus payment in their bank accounts.
The checks, combined with the already high consumer saving rate, and with rising clothing and footwear personal expenditures will disproportionately benefit discretionary retailers, Chen said.
3) Physical store re-openings
Physical store visits started to decline in March 2020 and bottomed in the first week of April 2020, Chen said.
Traffic slowly improved throughout the rest of 2020, as stores implemented COVID-safe measures for their customers.
“In-turn, we expect physical store comps will be strongest in 1Q on easy compares, and normalize through the rest of the year, while on a 2-year stack basis, we expect comps to improve sequentially during 2021,” Chen said. “That being said, ultimately, we are unsure if many retailers’ physical store comps will return to FY19 levels as e-comm takes a permanent step up.”
4) Long-term growth opportunities
As the news cycle focuses more and more on the successful rollout of the vaccination program and the return of more normal economic activity, many investors have focused on playing the reopening trade and have moved away from the “stay-at-home” winners.
Cowen analysts say many e-commerce platforms are now here to stay. The analyst team looks at platform companies that have positive long-term growth opportunities following on from a successful run during the pandemic.
“New platforms saw an unprecedented level of new customer acquisition during the pandemic as more consumers shifted to online, and platform companies – FTCH, RVLV, MYTE, and POSH – are well-positioned to retain these consumers,” Chen said.
Stock picks
We break down Cowen’s top 10 stocks to play the four themes, which they selected from their top 29 retail conviction stock list.
1. Tapestry Inc
Ticker: TPR
Consumer themes: Discretionary spending favorite, stimulus boost
Price target: $46
Price target upside (as of report release): 7%
Cowen’s retail conviction ranking (out of 29): 1
Analyst commentary: “We believe TPR is likely to emerge from the pandemic with increased market share and profitability driven by enhanced e-comm capabilities, fuller understanding of core customers through data, and pruning unprofitable stores while renovating and opening modern/experiential retail. We are also more confident in TPR’s long-term growth trajectory in China, given the robust demand during the pandemic.”
Source: Cowen & Co
2. Farfetch limited
Ticker: FTCH
Consumer themes: Discretionary spending favorite, long-term growth trends
Price target: $70
Price target upside (as of report release): 24%
Cowen’s retail conviction ranking: 2
Analyst commentary: “We are constructive on FTCH’s long-term growth prospects underpinned by: (1) a secular shift in brands’ preferences fore-concession, (2) solid Chinese consumer demand, and (3) margin expansion potential stemming from higher contributions from its Platform Solutions business and improvements in the first-party product margins. FTCH is uniquely positioned to service luxury consumers globally, and its partnership with Alibaba and Richemont underscores the global online luxury momentum among brands and consumers.”
Source: Cowen & Co
3. MYT Netherlands Parent BV
Ticker: MYTE
Consumer themes: Discretionary spending favorite, long-term growth trends
Price target: $40
Price target upside (as of report release): 21%
Cowen’s retail conviction ranking (out of 29): 3
Analyst commentary: “MYTE is a personalized/tailored, Europe-centric, and steady way to play the online luxury trade. We believe MYTE has taken a calculated approach in scaling its business, which has yielded slower, but steady, growth and a profitable business model versus peers that have aggressively scaled that has come with volatility and unprofitability.”
Source: Cowen & Co
4. Costco Wholesale
Ticker: COST
Consumer themes: N/A
Price target: $410
Price target upside (as of report release): 27%
Cowen’s retail conviction ranking (out of 29): 4
Analyst commentary: “We expect COST will maintain a significant portion of the market share it gained during the pandemic and believe the retailer will be able to comp-the comp over the coming quarters. We are constructive on steps management is taking to improve its e-comm operations, including the pilot of curbside pickup, and supply-chain optimization following the acquisition of Innovel last spring.”
Source: Cowen & Co
5. American Eagle Outfitters
Ticker: AEO
Consumer themes: Reopening beneficiary
Price target: $31
Price target upside (as of report release): 4%
Cowen’s retail conviction ranking (out of 29): 5
Analyst commentary: “We recently upgraded AEO to Outperform on AEO’s solid capitalization, relevant brand concepts to younger customers, more clarity on AE store closure strategy, and ongoing merchandise innovation should drive more consistent growth and share gains amidst retail dislocation. Furthermore, Aerie fixed cost leverage, better inventory management, and improved product expansion will drive margin expansion.”
Source: Cowen & Co
6. Poshmark Inc
Ticker: POSH
Consumer themes: Stimulus boost, long-term growth trends
Price target: $88
Price target upside (as of report release): 71%
Cowen’s retail conviction ranking (out of 29): 6
Analyst commentary: “POSH could be another beneficiary of stimulus payments, given its democratic product offerings (average order value of $33) and value-oriented core consumers. Further, we believe POSH could acquire new consumers who are looking to purchase both affordable and aspirational items.”
Source: Cowen & Co
7. Revolve
Ticker: RVLV
Consumer themes: Long-term growth trends
Price target: $45
Price target downside (as of report release): 1%
Cowen’s retail conviction ranking (out of 29): 9
Analyst commentary: “We expect RVLV’s active customer to rebound as pent-up demand, beauty category growth, and international expansion should drive recovery in the next 12 months.”
Source: Cowen & Co
8. Ulta salon
Ticker: ULTA
Consumer themes: Reopening beneficiary
Price target: $300
Price target downside (as of report release): -12%
Cowen’s retail conviction ranking (out of 29): 10
Analyst commentary: “At ULTA, we estimate physical store comps declined (38%) in FY20, including (50%) in 1Q (and 52%) in 2Q, and we anticipate robust improvement in FY21. “
Source: Cowen & Co
9. Kohls
Ticker: KSS
Consumer themes: Reopening beneficiary
Price target: $67
Price target upside (as of report release): 14%
Cowen’s retail conviction ranking (out of 29): 13
Analyst commentary: “Looking ahead, we expect momentum to build in 1H21 as the environment normalizes driven by active, home, and improvements in women’s, and accelerate in 2H as KSS launches the partnership with Sephora on August 1st online, Anadin stores short while later. We continue to believe the market is discounting the lift from Sephora and see upside to Street’s EPS through FY23E.”
Source: Cowen & Co
10. Boot Barn Holdings
Ticker: BOOT
Consumer themes: Stimulus boost
Price target: $68
Price target upside (as of report release): 14%
Cowen’s retail conviction ranking (out of 29): 16
Analyst commentary: “At BOOT, in January trends significantly inflected as stimulus checks hit and comps accelerated to +17%, including +20% in stores from +6% (stores +3%) in Dec.”
Source: Cowen & Co
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