Retail stocks to watch amid huge back-to-school season: Analyst

·Writer
·3 min read

Amid fervent spending from the back-to-school season and a bounceback in hiring, the consumer discretionary sector is poised to boom. According to Cowen (COWN) Senior Research Analyst Oliver Chen, there are several retail stocks investors should keep an eye on.

“It's one of the biggest back-to-school and back-to-work seasons we'll ever see in our lifetimes,” Chen told Yahoo Finance Live.

Chen joined Yahoo Finance Live to discuss the companies that could gain the most from this back-to-school season, the state of the luxury market, and supply chain disruptions plaguing the consumer discretionary sector.

First, Chen believes that Target (TGT) is uniquely situated to benefit from the uptick in spending.

“Target has done a really comprehensive and great job with drive-up, or curbside pickup. So has Walmart (WMT),” Chen said. “That's been a big modality—where you drive up—and it's extremely convenient, and very important.”

In addition to the progress that Target has made in its curbside pickup business model, Chen cited its diverse product offerings—including home goods, apparel, and food—as being one of the primary factors enabling the company to capitalize upon the back-to-school spending season. He also mentioned Target’s private brands and merchandising ability as strengths.

Of all the products Target carries, however, Chen believes that it will be apparel that stands at the top of consumers’ shopping lists this back-to-school season. He also noted that American Eagle (AEO) is positioned to ride this momentum in apparel spending in terms of its denim product line.

New York City, USA - May 19, 2016: Macy's Herald Square Store which is the flagship store for Macy's located on Herald Square in Manhattan, New York City. People and cars moving alongside the street. Image taken with a wide angle lens
New York City, USA - May 19, 2016: Macy's Herald Square Store which is the flagship store for Macy's located on Herald Square in Manhattan, New York City. People and cars moving alongside the street. Image taken with a wide angle lens

Department stores

As for department stores, Chen named Macy’s (M) as being particularly attractive due to its valuation. Compared to competitors Kohl’s (KSS) and Nordstrom (JWN), which currently have price-earnings ratios of around 11 and 13, respectively, he believes Macy’s sits undervalued at around six.

According to Chen, Macy’s is also making strides in the e-commerce space.

“They're making a lot of changes. It's becoming a digital organization as well as much more agile,” Chen said. “For example, digital will reach about 40% of sales. So transformation of this organization, closure of stores, valuation, as well as inventory, pricing, and planning management—those are all key positives.”

Looking forward, however, Chen cited the volatility of foot traffic in malls as well as closures as being headwinds for department stores and specialty retailers. All of this, in conjunction with persisting supply chain disruptions and inflated transportation costs going into the holiday season, will likely cause prices for products like apparel and footwear to rise by next spring, Chen said.

“But overall, we're very bullish on the discretionary sector just given the consumer backdrop, given the product trends, and selectively on some stocks like Macy's on valuation,” Chen said.

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter: @thomashumTV

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