While this year’s back-to-school shopping season has been mixed, Morgan Stanley believes several popular apparel retailers could overcome the apparel industry slowdown and emerge through the end of the year. Analyst Alex Straton noted that overall back-to-school spending will be in line with pre-COVID trends, but will be weaker year-over-year given recent weakness in demand. Straton is fairly bullish on softline spending heading into the second half of the year, but remains more cautious on hardline retailers and brands as consumers continue to prioritize value. Softline retail refers to the category of goods made from soft materials, such as clothing, while hardline refers to products such as appliances and furniture. “While industry sources and investors may be bracing for a weak back-to-school season, we believe it could be stronger than expected.” [in softlines]”Indeed, we believe 1) demand may be stronger later in the season and 2) trends will split across players, with winners and losers emerging,” Stratton wrote in a Sunday note. She noted that Google search interest for “back to school” in August was at its highest level since before 2014, suggesting a potential acceleration could be on the way. According to Morgan Stanley’s early reading on several trends and consumer-related factors, the two companies that appear to be best positioned this back to school season are Abercrombie & Fitch and Lululemon Athletica. Kohl’s and Torrid Holdings could be laggards, the firm said. Apparel retailer Abercrombie screened particularly well for stripes and cargo, making it one of the most relevant companies with exposure to back to school fashion trends, while Kohl’s likely has the least, the bank noted. Abercrombie also ranked most favorably in Morgan Stanley’s recent intern survey, indicating its resonance with younger consumers who often drive spending this season. Abercrombie shares have soared, with shares up more than 87% this year and more than 900% over the past two years. That’s outpacing the gains of big tech companies like Meta Platforms, Alphabet and Apple over those two periods. Analysts surveyed by FactSet suggest room for upside of 16% for their 12-month price target. ANF 5Y Mountain Abercrombie shares. Investors are enthused by Abercrombie’s strong sales growth. The company, which also owns the Hollister brand, reported its best-ever first quarter with 22% sales growth. Its second-quarter report is due on Wednesday before the market opens. Abercrombie ranked lowest among retailers surveyed by Morgan Stanley in terms of net spending intentions, but the bank said the company is at risk of facing a sales decline of about 2.9% year-over-year. Urban Outfitters, which along with Abercrombie has the most exposure to back-to-school fashion trends, could also see a big drop in sales, according to the company’s metric. “We are concerned that there may be significant positive EPS revisions behind ANF and warn that next quarter’s forecasts are a high bar,” Stratton said. “These expectations, the still-expensive relative valuation, and ongoing margin reversion/cyclicality risks have us maintaining our equal-weight rating.” Other analysts, including Citi analyst Paul Lejoux, remain bullish on Abercrombie ahead of the earnings release. Lejoux initiated a “positive catalyst watch” on the stock earlier this month, expecting positive comments about back-to-school to strengthen his third-quarter outlook. He added that he sees “no signs of slowing” for the Abercrombie and Hollister brands. Lululemon is another key potential beneficiary of this year’s back-to-school shopping season for Morgan Stanley, according to the firm’s research. Unlike Abercrombie, the sportswear retailer is expected to see the highest year-over-year increase in back-to-school spending. Lululemon is highly rated for its neutral, tennis and ballet wear, and is favored by young consumers, but high pricing could pose a challenge for the stock. “Lululemon thesis/sentiment is unlikely to change in the near term, but high frequency data from the North American market, which is crucial for Lululemon, will remain disappointing,” Straton said. “This constructive BTS positioning typically bodes well for second-half and holiday performance, when Lululemon can benefit from easier comparisons, a 53-week upside and potential innovation/inventory initiatives,” he added. “Thus, Lululemon could quickly turn into a positive rate of change story, which is all the more compelling given the bearish sentiment, low full-year EPS bar and sluggish valuation.” Straton maintained her overweight rating and said the stock’s risk-return profile is tilted to the upside. However, she lowered her price target to $329 from $404, implying room for 22.5% upside. Analysts surveyed by FactSet have a more bullish average price target, meaning the stock could rise more than 28% over the next year. Not everyone is in high spirits this back-to-school season. Stratton said Kohl’s received a low rating in Morgan Stanley’s back-to-school analysis, which echoes the bank’s concerns that Kohl’s may not be able to attract younger consumers and improve foot traffic and revenue, despite its strategic efforts. Stratton said he rates the stock underweight due to limited initiatives by Kohl’s new management and the possibility of continued downward revisions to earnings in the near and long term. Kohl’s shares have fallen about 32% this year. Torrid Holdings could also lag this fall, according to the firm. Stratton believes the company, which operates the Torrid, Torrid Curve, Curv and Lovesick brands, could struggle to realize the impact of its strategic initiatives on demand and the bottom line as increased competition from brick-and-mortar retailers’ expanded size ranges reduces the importance of its brands. He recently downgraded the stock to underweight.
Morgan Stanley sees two back-to-school stocks as winning
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