Even before COVID-19, retail was in a tough spot. Turning up the heat, the virus and the ensuing store closures have had a devastating impact on the space. High unemployment rates and a shift in consumer shopping behavior have done little to help the situation. But just how destructive has the crisis been? 

According to a July report from S&P Global Market Intelligence, so far, 2020 has seen 40 retailers file for bankruptcy. This figure has already exceeded the number of retail bankruptcies in both 2019 and 2018. Based on tracking data from S&P Global, this year’s number could top the 48 filings in 2010, which was driven by the lethal impacts of the Great Recession.  

With a second wave of COVID-19 infections only intensifying pressures, more filings could be on the way. Bearing this in mind, we used TipRanks’ database to see if the pros on Wall Street think three apparel stocks in particular have what it takes to weather the COVID storm. 

Macy’s Inc. (M) 

Over the last 161 years, Macy’s has become one of the largest retail chains in the U.S. While the company has taken steps to drive a recovery, will these efforts be enough to keep it afloat? 

Writing for Deutsche Bank, four-star analyst Paul Trussell tells clients that traffic trends have been improving and applauds “management on taking aggressive cost-saving actions and a prudent approach to 2H outlook/ inventory receipts.” However, this by no means implies the outlook is rosy. 

“Nonetheless, our view on the stock remains relatively neutral, and we believe investor sentiment is also mixed as numerous headwinds remain, including: 1) increases in COVID-19 cases across the U.S. (potentially leading to a slowdown in traffic trends as already experienced in Texas); 2) an aggressive promotional backdrop as retailers work to move through Spring receipts; and 3) higher shipping costs due to increased penetration of digital sales,” Trussell explained. 

Looking at sales expectations, management is calling for a 35% decline in brick & mortar sales trends in the second half of 2020. Digital sales are only expected to see a high-teens gain even though trends have been strong recently. As for margins, Trussell points out “M now anticipates its merchandise margin to be better than its previous outlook leading to an improvement in the GPM rate in Q2 vs. Q1 with further improvement in the back half.” 

Reflecting another positive, M unveiled a new restructuring plan slated to yield expense savings of $365 million for 2020 and $630 million on an annualized basis. “These savings are additive to the anticipated $1.5 billion in annual expense savings announced back in February, which M expects to fully realize by year-end 2022,” Trussell added. 

To this end, Trussell thinks Q2 EPS could be better than he previously expected, but he still estimates the figure will land at a loss of $2.09. “In addition, our sales forecast includes brick & mortar comp down 67%... Looking at margins, we are forecasting GPM down 1,980 basis points and core SG&A dollar growth down 23% (leading to SG&A deleverage of 885 basis points),” he commented.  

Based on all of the above, Trussell stays on the sidelines, rating M a Hold. Along with the call, he increased the price target from $5 to $6. This figure implies shares could drop 7% in the year ahead. (To watch Trussell’s track record, click here) 

Turning now to the rest of the Street, other analysts take a more bearish approach. 3 Holds and 7 Sells add up to a Moderate Sell consensus rating. The $5.17 average price target brings the downside potential to 20%. (See Macy's price targets and analyst ratings on TipRanks) 

Kohl’s Corporation (KSS) 

Moving on to another major department store chain, 2020 has been brutal to Kohl’s, with shares falling 59% year-to-date. Even though it has been gaining traction with respect to its digital presence, there are still plenty of challenges ahead, according to some members of the Street. 

Wedbush’s Jen Redding points out that a 43.5% decline in net sales drove the weak Q1 performance, with KSS missing the estimates by a long shot. Alarmingly, gross margin plummeted by 2,000 basis points, versus the Street’s call for a decline of 330 basis points.  

What was behind the gross margin deterioration? Redding argues it was management’s inventory actions that included the establishment of a reserve for excess seasonal inventory, incremental promotions and clearance.  

Expounding on this, the analyst stated, “The company pulled back in March and April orders when COVID-19 first impacted the economy, reducing inventory receipts by over 30% in Q1 and expects to lower Q2 receipts by over 60%. The higher cost of shipping driven by digital sales and unfavorable product mix contributed to the decline in the margin as well.” 

The news does, however, get a bit better. During the quarter, digital sales jumped 24%, and the gain for April was 60%. As for digital penetration, it increased from 21% last year to 45% in the quarter.  

Redding explained, “During the quarter, more than 40% of digital orders were fulfilled by ship-from-store and customer pickup, and the number is much higher in April when the company launched store drive-up service, which has received great response from customers, making up 15% of digital demand fulfillment in over 900 stores that offers the new service, exceeding what BOPIS had pre-COVID. By category, Home was the strongest, increased by more than 50% in digital sales for the quarter, followed by active, toys and beauty, while similar to our Promo Trackers apparel and footwear lagged in the quarter.” 

Digital sales are still ramping up and many of its stores have reopened, but Redding believes lower sales and the incremental cost of shipping from higher digital sales could push gross margin lower. “The company expects SG&A to decline for the year, but the savings could be limited as stores implement new safety measures post-COVID,” she added.  

Summing it all up, Redding noted, “We could become more constructive on shares if inventories are managed tightly, promotional cadence reins in, traffic-driving initiatives begin to track within investor expectations for conversion, and if KSS's long term goals start to materialize ahead of pace in a post-COVID environment.” 

To this end, Redding kept her Neutral rating as is. Additionally, she gave the price target a trim, cutting it from $20 to $16. A twelve-month drop of 23% could be in store, should the analyst’s thesis play out in the next year. (To watch Redding’s track record, click here)         

Looking at the consensus breakdown, 3 Buys, 5 Holds and 2 Sells have been assigned in the last three months. So, KSS gets a Hold consensus rating. At $21.30, the average price target indicates 2% upside potential. (See Kohl's price targets and analyst ratings on TipRanks) 

Urban Outfitters (URBN) 

Fashion retailer Urban Outfitters also hasn’t been able to escape COVID-19's grasp, with its most recent quarterly performance making this especially clear. Now, investors are wondering if the situation could get even worse. 

Covering the stock for Deutsche Bank, analyst Tiffany Kanaga was most surprised by the company’s Q1 gross profit margin (GPM), which tumbled from 31.1% last year to 2% in the quarter. That said, management attributed the result to a series of one-time headwinds including a $43.3 million inventory obsolescence reserve increase, a $14.5 million provisional store impairment charge and product liability charges related to specific key suppliers. In addition, certain agreements with landlords could lead to a significant benefit for occupancy in Q2. 

However, that doesn’t mean GPM will bounce back anytime soon. “However, as the top-line recovery could take some time to gain traction (we expect Q2 comp at -30%, below Q1's -28%) especially as online was up only LDD in Q1 and store sales and traffic have been ‘tepid’ to date, we expect margin pressure to remain in focus for investors. The company had struggled to drive EBIT growth pre-virus (four straight quarters of 20%-plus declines in 2019) with a myriad of outsized GPM headwinds historically (down 614 basis points annually since 2013 vs. AEO up 77 basis points),” Kanaga explained. 

Throwing more bad news into the mix, Kanaga thinks sentiment surrounding URBN will most likely be poor. “We expect sentiment to lean negative post-print, as some modest signs of top-line acceleration likely fell below investor expectations, and are more than offset by nearly negative GPM with an underlying rate (i.e. excluding Q1's extraordinary impacts as outlined above) still implying significant ongoing margin pressure ahead,” she commented. 

As a result, Kanaga can’t recommend that investors snap up shares. The analyst noted, “Looking forward, we remain sidelined with 2021 EBIT modeled at only 40% of 2019's level, reflecting ongoing challenges through sales deleverage, e-commerce mix impact, wholesale headwinds, and promotional pressure.” 

To accompany her Hold rating, Kanaga reduced the price target from $16 to $15. The implication for investors? Possible downside of 3%. (To watch Kanaga’s track record, click here)        

Most other analysts agree with Kanaga’s assessment. With 4 Buys, 8 Holds and 1 Sell handed out in the last three months, the word on the Street is that URBN is a Hold. However, the $18.82 average price target puts the upside potential at 22%. (See Urban Outfitters price targets and analyst ratings on TipRanks) 

The post Are These 3 Apparel Stocks Falling Out of Style? Analysts Weigh In appeared first on TipRanks Financial Blog.