UBS said it expects the consumer spending environment for softgoods in the U.S. to partly deteriorate over the coming months due to the resumption of student loan repayments in October.

“Through our conversations with investors, we have learned many investors do not think student loans are a meaningful issue,” wrote UBS analysts led by Jay Sole. “Those investors believe two things: a) the student loan issue is too small to matter, and b) many borrowers won’t actually have to start repaying their student loans. However, new September survey data gives us increased conviction that the student loan issue will be significantly negatively impactful to Softline stocks.”

The UBS September survey found that adults with outstanding student loans comprised 14.7 percent of the U.S. population or 38 million adults. Of that number, 65.2 percent, or 25 million adults, did not make repayments during the pandemic, and 78.8 percent, roughly 20 million adults, said they plan to resume making repayments.

Of the 20 million adults who plan to resume making payments against their student loans, the average minimum monthly payment is $225. In addition, roughly 30 percent of those adults said they would make payments of more than the minimum monthly amount.

Tapping into this data, UBS estimated the total annual student loan repayment for U.S. consumers over the next year to be between $65 billion and $70 billion compared to when it paused.

The September survey also found that 40 percent of respondents affected by the resumption of student loan repayments planned to reduce spending on apparel to afford those repayments. UBS noted that 40 percent is one of the highest percentages of any category.

“If the student loan issue causes consumers to shift $10B away from softgoods, estimated to be $500B for all U.S. sales, to repay student loans, this would be a 2 percent headwind on industry sales,” UBS analysts said. “Some investors think this is not a meaningful amount. We believe it is since 200 bps (basis points) is enough to cause a significant softgood industry sales growth rate deceleration, and our view is that the sales growth rate-of-change is the most important Softline stock driver. Plus, the student loan issue is just one of many headwinds facing U.S. consumers.”

The UBS survey also asked participants which apparel brands they purchased over the last six months and where they shop most often for apparel and shoes. Victoria’s Secret, Carter’s, Tapestry, Gap, Crocs, Children’s Place, DSW-parent Designer Brands, Vans-parent VF Corp., and American Eagle Outfitters were among retailers with high leverage to consumers who will begin repaying student loans. UBS found that Finish Line, Hibbett, Shoe Carnival, and Shein also had higher-than-average exposure to apparel weakness caused by student loan repayments.

In a separate note, UPS said it remained bearish on softlines stocks as new market research showed U.S. consumer demand for the category is weakening.

The UBS September market research showed U.S. consumer spending intentions for softgoods over the next 90 days declined 3.5 percent versus September 2022, 14.0 percent versus September 2021, and 6.0 percent versus September 2019. In addition, the year-over-year spending intention trend deteriorated month-to-month versus 2022, 2021 and 2019. UPS wrote, “Our view is the coming slowdown is just one step of a multistep process which will play out over the next 6-12 months.”

UBS also asked survey participants in July and September about their 2023 Holiday season spending plans. The percentage of respondents who said they plan to spend less this Holiday season increased 840 basis points sequentially, while the percentage who said they plan to spend more rose only 340 basis points. This 500 basis-point difference is the second highest in 12 years, noted UBS.

According to UBS, among the factors expected to slow consumer spending over the next twelve months include the lapping of multiple forms of fiscal stimulus, including the end of the student loan repayment moratorium, the end of Medicaid benefits for potentially 14 million Americans, the lapping of the $9.5 billion  Q4 2022 California fiscal stimulus, and the end of American Rescue Plan benefits. UBS also said consumer spending continues to be impacted by inflation concerns and the ramifications of the Federal Reserve interest rate hikes on the U.S. economy.

“Our conversations with investors suggest many believe the U.S. economy will experience a ‘soft landing’ due to solid employment and income growth trends, as well as ongoing forms of U.S. Government stimulus, such as the CHIPS and Science Act and Inflation Reduction Act,” wrote UBS. “We think investors don’t fully appreciate the macro challenges facing U.S. consumers or how acutely these challenges will negatively impact the soft lines industry.”

UBS said its FY 2024 EPS estimates are 13 percent below consensus for the average stock in its 44-stock coverage universe. UBS said some stocks would perform better than others and favors buy-rated On Holdings, Deckers Outdoor, Ralph Lauren, and Skechers over neutral-rated Designer Brands and sell-rated Foot Locker, Macy’s and Victoria’s Secret.

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