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2023 Will Be Tough for Retail, Wells Fargo Says. Buy Burlington and Lululemon, Sell Ulta and VF Corp. -- Barrons.com

Barron's · 01/06/2023 10:16
By Sabrina Escobar

This year is going to be a challenging one for retailers, Wells Fargo says, with both the macroeconomic and consumer environment "as uncertain" as the bank can recall in years.

To prepare for the market's vicissitudes, analyst Ike Boruchow issued a flurry of rating changes on Friday.

The analyst upgraded Lululemon Athletica (ticker: LULU) and PVH Corp. ( PVH) to Overweight from Equal-weight, and Stitch Fix (SFIX) to Equal-weight from Underweight. On the flip side, he downgraded Bath & Body Works (BBWI) and the RealReal (REAL) to Equal-weight, down from Overweight, and downgraded Vans parent company VF Corp. (VFC) and Ulta ( ULTA) to Underweight from Equal-weight.

Lululemon and PVH rose on Friday, while the other stocks that saw a rating change opened in the red.

The rating changes are part of Wells Fargo's attempt to reposition its retail portfolio ahead of an uncertain year for discretionary spending.

Although shoppers have remained surprisingly resilient well into the holiday season, macro pressures are likely to catch up to them in 2023 as pandemic-era savings cushions dwindle, Boruchow predicts. That's especially true for middle-income earners, many of whom were able to ride out the past year with relatively healthy balance sheets thanks to favorable tax refund dynamics and delayed stimulus payments. These dynamics are no longer in play this year, he adds, which could crimp these consumers' appetite to splurge on clothes and other nonessential items.

That doesn't mean investors should completely bypass the sector, Boruchow says, highlighting a few tailwinds that could buoy select stocks in the new year. For one, he sees retailers making progress on paring down excess inventories, meaning fewer markdowns and the possibility to recover margins. He also believes that freight costs may come down, which would also help companies expand margins even if top-line gains are muted.

"With the macro and consumer as uncertain as we can recall in years (yet with the market pricing a good amount of bad news in already), we think it's prudent to take a barbell approach," Boruchow wrote on Friday.

A barbell strategy is an investment idea that eschews the middle-of-the-road investment option in favor of the extremes, betting on both high risk stocks with high yield and low risk investments with steady performance.

Boruchow's low risk picks focus on high-quality, defensive stocks whose companies have probability of continuing to gain market share and margin expansion. The analyst's top pick for 2023 -- Burlington Stores (BURL) -- falls within this category, as do Ross Stores (ROST), Lululemon, and Nike (NKE).

At the other end of his barbell are high-beta recovery names that could yield excess returns, especially if macro pressures recede in the second half of 2023. These include PVH, Capri Holdings (CPRI), Farfetch (FTCH), and Kontoor Brands (KTB).

Write to Sabrina Escobar at sabrina.escobar@barrons.com

(END) Dow Jones Newswires

January 06, 2023 10:16 ET (15:16 GMT)

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