Wells Fargo downgraded shares of VF Corp. as well as Ralph Lauren Corp. and TJX Cos. to “equal weight” from “overweight” and reduced the price targets for many across its “softlines” universe due to heightening macro pressures and overly-optimistic 2022 outlooks.
“While we began the year with a more bullish view on the group, following a laundry list of growing headwinds, we now take a more cautious stance in the near term,” wrote Ike Boruchow, lead analyst in the space. “Bigger picture, this is not the ‘fantastical and magical’ setup we had expected, and we now see ongoing macro concerns and negative revisions keeping our universe under pressure for the time being.”
Wells Fargo reduced its 2022 EPS estimates across the board, and the firm’s estimates are now between 5 percent to 10 percent below Wall Street consensus targets. Price targets on 18 of the companies under Wells Fargo coverage in the space were cut by an average of 15 percent.
In the note, Boruchow wrote that the group has seen a “drastic stock price underperformance” year-to-date with most stocks trading at recessionary levels “in advance of what we believe will be negative revisions in the next 6-to-9 months.”
Stated Boruchow, “Despite the strong consumer backdrop, we’d characterize 2022 guidance as increasingly unrealistic. Especially considering that the market expects that our discretionary categories appear to have ‘overshot’ on consumer spending by 10-to-20 percent in 2021 compared to pre-COVID run rates and normalized wallet share, the setup for our group from here appears very challenged in the near term.”
The analyst wrote that the group overall faces a tough comparison in the first quarter of 2022 as the year-ago quarter was boosted by stimulus-related spending. Current street estimates assume an 800 basis point acceleration in top-line growth from the first quarter to the remaining three quarters that Boruchow believes will be challenging. Wrote Boruchow, “In our view, the market is pricing in that 2022 numbers need to come down, especially if slowing trends yield backed up inventories in the channel.”
The ratings downgrade at VF, Ralph Lauren and TJX reflect Wells Fargo’s “more selective and less broad” view of stocks under its coverage.
The downgrade of VF, in large part, reflects the recent struggles at Vans. On March 17, VF announced that Kevin Bailey had been brought back as global brand president of Vans. Bailey was president of Vans from 2009 to 2016.
Wells Fargo expects Vans to trail its long-term growth target at least through the first half of fiscal 2023 as its China business lags and efforts are being made to “re-energize” its core product over the next few quarters. Wells Fargo wrote, “While we expect that brand’s direction could benefit from Bailey’s fresh eyes and familiarity with the VFC organization, we expect his impact on the brand is likely to take some time, and certainly any LT brand targets around the brand issued this fall at any VFC’s analyst day are likely to push out LT growth targets to FY24 and beyond.”
Wells Fargo reduced its price target on VF to $58 from $75.
Among other stocks in the active-lifestyle space, estimates and price targets were slightly lowered for Under Armour, HanesBrands, the parent of Champion, and Canada Goose but kept the same for Nike, Lululemon, Dick’s Sporting Goods, and Academy Sports.
Wrote Boruchow, “While we are increasingly cautious on the group now, we expect there will be categories of greater resilience to the extent we see a broader consumer slowdown, namely handbags (with top picks TPR (Tapestry) and CPRI (Capri Holdings)), athletic (including top picks UAA (Under Armour) and NKE (Nike)), as well as more staple-like categories such as BBWI (Bed Bath & Beyond.) Bigger picture, we favor names that can see greater resilience particularly relative to more commoditized, mid-tier apparel.”
Photo courtesy Ralph Lauren
