The ongoing trade war was escalated yet again on August 23 after China announced that it would be imposing new tariffs on $75 billion worth of U.S. goods and restarting levies on U.S. autos. President Trump then tweeted a response ordering U.S. companies to find alternatives to Chinese manufacturing, sending the market on a downward spiral, with both the S&P 500 and NASDAQ falling 3%.
Amid all of this, investors were left wondering if there’s any hope left for retail stocks as tariffs present a substantial threat to the space. Adding to the bad news, the latest escalation sent the SPDR S&P Retail ETF plummeting 4%. However, Guggenheim’s Robert Drbul believes one retail stock can emerge as a winner in spite of heigtened tensions. On the same day the tariff news broke, the analyst deemed Nike Inc. (NKE) a “best idea” in the retail space while downgrading Macy’s Inc. (M) to a Hold.
Let’s take a closer look at what Drbul had to say about these two retail stocks.
Nike Inc. (NKE)
While Nike shares dropped 3% amid tariff fears, the five-star analyst believes the dip represents a unique buying opportunity.
“We think the concerns over tariffs and market conditions responsible for sending Nike stock lower have created a compelling entry point,” Drbul explained. He adds that NKE’s long-term growth narrative remains unchanged based on several recent positive developments.
Despite the fact that its June 27 fourth quarter release revealed an earnings miss, Drbul notes that the revenue beat was a strong result on both a reported and constant currency basis. Its digital sales from its app and online store have helped drive this growth, with it accounting for 30% of the revenue mix. NKE’s digital sales could get another boost with the launch of Nike Fit, its feature that scans a customer's foot to determine the correct size shoe the customer should be wearing.
Investors have more reasons to be excited as NKE has maintained its commitment to expanding its product offerings. These efforts include the scaling of its React sneakers as well as its new Joyride running shoes and AeroAdapt clothing line. Not to mention the company has made significant improvements to the supply chain with its use of digitized design, automated production and 3D printing.
“Additionally, we believe NKE is one of the best-positioned names in our group to mitigate tariff risk through potential price increases,” Drbul added. Based on all of the above factors, he reiterated his Buy rating and $100 price target. The analyst thinks share prices could surge 24% over the next twelve months.
All in all, the Street takes slightly less optimistic stance on NKE. 14 Buy ratings vs 3 Holds and 1 Sell received over the last three months add up to a ‘Moderate Buy’ analyst consensus. Its $95 average price target suggests 18% upside potential.
Macy’s Inc. (M)
The Guggenheim analyst paints a much bleaker picture of Macy’s long-term growth prospects, downgrading the stock as he no longer believes that the headwinds facing the company are going away.
Much of the bearish sentiment surrounding the retail stock can be attributed to a weak second quarter earnings release on August 14 that revealed earnings came in well below consensus estimates. The results showed that EPS plummeted an alarming 60% year-over-year. Its bottom line also took a beating with gross margin decreasing by 160 bps to 39%.
Management is trying to get back on track by discounting most of its spring inventory to make room for next season’s clothing, but this move could weigh heavily on revenue.
The company also announced that it would place a significant focus on expanding its vendors and its stock keeping units (SKU) as well as maintain a “mobile first” strategy. The mobile app will be updated to include feature improvements like quickly picking up orders, easier access to recommendations and offers and connecting customers with Macy’s stylists.
On top of these efforts, Macy’s partnered with fashion resale company thredUp on August 14. Management hopes this will give it access to a younger customer base that wants to support sustainable fashion.
While Drbul acknowledges the efforts made by Macy’s, he doesn’t believe it will be enough to pull the retailer out of its earnings rut. The company faces stiff competition from eCommerce giants like Amazon (AMZN) and must mitigate the impacts of tariffs on the business.
“We respect management’s attempts to move fluidly in the ever-evolving retail environment, but we no longer see the secular headwinds facing the company abating and are moving to the sidelines on the shares. While we would welcome additional store closures and further debt paydown, with tariffs looming large, we have limited visibility into M’s ability to sustain and/or grow earnings in 2020,” Drbul explained. As a result, he downgraded M to a Hold from a Buy and removed his $20 price target entirely.
Overall, Wall Street takes a bearish stance on Macy’s. It has a ‘Moderate Sell’ analyst consensus and an $18 average price target, implying 21% upside potential.