Analyst Betty Chen downgrades apparel retailers after a disappointing start to the spring selling season, that she expects will last through 2017.<\/b>
Apparel retailers\u2019 stocks were sharply lower Thursday, led by Men\u2019s Wearhouse owner Tailored Brands Inc., after Mizuho downgraded five stocks and said weak traffic trends surfacing for the spring season may last through the year.
\u201cWhile one may argue we are downgrading when these stocks already at the \u2018bottom,\u2019 we believe ongoing negative traffic trends and heightened competitive environment will either prolong a turnaround in the case of EXPR, GES and TLRD or lead to disappointing outlook at DSW and FINL,\u201d Chen wrote in a note.
\u201cGiven the lack of positive catalysts and the propensity for investors to penalize retailers for execution mistakes despite discounted valuations, we are moving to the sidelines pending more constructive data points.\u201d
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The sector is expected to replace oil and gas this year as the most distressed, according to the major debt-rating agencies. A number of retailers filed for bankruptcy protection filed for Chapter 11 protection this year, including Hhgregg; Eastern Outfitters , whose chains include Eastern Mountain Sports and Bob\u2019s Stores; and the Limited, whose January filing led the company to close all stores.
In a sign of how investors have been withdrawing from the sector, the SPDR fund has seen outflows of $223.2 million over the past week, the biggest exodus of any equity ETF, according to FactSet data.
Mizuho\u2019s move also comes a day after weaker-than-expected quarterly reports from Tailored Brands and Express sparked sharp selloffs in their stocks. Tailored Brands was down 32% in early afternoon trade, while Express was down a further 1%.
Express fell 12% on Wednesday to close at a record low of $9.51. The stock touched $9.03 in intraday trade, its lowest level since the company went public in May 2010 at an issue price of $17.
Chen lowered her share-price target to $10 from $13 and expressed doubt that Express will be able to turn its business around in the second half as it continues to struggle with weak traffic and competitive pressures.
The analyst cut her stock price target for Tailored Brands to $18 from $25 after it missed quarterly estimates and offered weak guidance for 2017.
The company, which also operates Jos. A. Bank, said the Men\u2019s Wearhouse tuxedo business at Macy\u2019s \u201cdid not ramp as expected.\u201d It said it is currently in talks with Macy\u2019s to restructure the partnership. The business is expected to post an operating loss of $19 million to $20 million in 2017, wider than the $14 million loss posted in 2016.
\u201cWhile skeptics may believe margin gains are over,\u201d Chen wrote, \u201cwe see a plethora of drivers.\u201d She named sales growth from size and product extensions, alternative sales channels, inventory productivity tools and the closure of 100 stores.
\u201cWhile we are encouraged by relative strength in men\u2019s apparel, beauty, home and intimates categories, we believe fashion misses in women\u2019s apparel will require incremental discounts to exit [the first quarter] clean and emerging categories still require scaling to enjoy margins comparable to apparel,\u201d said Chen.
The analyst lowered her stock-price target on shoe discounter DSW to $21 from $25 and cut her stock-price target on sporting-apparel retailer Finish Line to $18 from $23.
She reduced her Guess share-price target to $10 from $14 and questioned the company\u2019s plan to rejuvenate its Americas business and roll out new stores in Europe and Asia.
Children\u2019s Place shares were down 1.4% Thursday but have gained 69% in the last 12 months.
Urban Outfitters was up 0.4% and has fallen 24% in the past 12 months.<\/p>\n