Nordstrom Is A Bright Spot In Retail, UBS Says In Sectorwide Initiation

The investor perception that "stores are dead" is exaggerated, as the retail segment still needs a physical presence, according to UBS.

The Analyst

Analyst Jay Sole initiated coverage of multiple stocks in the sector, including the following: 

• Nordstrom, Inc. JWN initiated at Buy, $69 price target.
• Kohl's Corporation KSS initiated at Neutral, $75 price target.
• Macy's Inc M initiated at Neutral, $39 price target.
• Ross Stores, Inc. ROST initiated at Neutral, $90 price target.
• Burlington Stores Inc BURL initiated at Sell, $135 price target.
• TJX Companies Inc TJX initiated at Sell, $87 price target.

The High End

Concerns that Nordstrom will become "Amazon-ed" are overblown, as the company as the company will continue taking market share in the high-end retail segment, as it has been doing since 2011, Sole said in the research report.

An upcoming inflection in margins isn't priced in, while investments in e-commerce are "creating differentiation" versus rivals, the analyst said. 

UBS' proprietary survey and analysis of physical retail locations found that consumers value Nordstrom's omnichannel offering, while competition is easing around its stores. Employee sentiment appears to be not only "good," but "better than peers," Sole said. 

Related Link: Nordstrom Terminates Go-Private Talks; Now What?

UBS Prefers Kohl's In Midmarket 

Kohl's has lost 17 percent of its market share since 2011, but three key initiatives should stop the market share bleeding and result in revenue growth and EBIT margins that are at least stable, the analyst said. These include: 

Omnichannel service improvements.

A pilot program to accept Amazon returns.

A pilot program to lease store space to discount grocer Aldi.

On the other hand, Macy's 23-percent market share loss since 2012 will be difficult to reverse, and revenue should continue falling, Sole said. UBS forecast for EBIT margins to continue sliding from 10 percent in fiscal 2012 to 6 percent by fiscal 2022. While new initiatives, including a revamping of the loyalty program, could help, the retailer will continue being a "share loss story," the analyst said. 

Off-Price Players

Ross Stores should continue showing positive comps over the medium-term, but longer-term e-commerce trends are working against the off-price retailer, Sole said. Online penetration should rise by 780 basis points to 31 percent of all sales. As long as the company matches same-store sales growth expectations and maintains current margins, the downside case for the stock doesn't apply, he said. 

Rival TJX's stock should be sold despite gaining substantial market share from department stores over the years, Sole said. The company's status as being a "market darling" for two decades could come to an end, as the retail universe is changing, but TJX "is not changing with it," the analyst said. 

UBS is bearish on Burlington for different reasons, Sole said. The company's stores are facing greater competition as the overlap between Burlington and rival stores increases at 3-percent year-over-year rate, he said. Existing stores continue to gradually cannibalize each other, and the company's lean fixed cost base creates a "big downside risk" if sales growth slows, the analyst said.

Related Link: Wells Fargo Calls A Peak In Discount Retail, Downgrades TJ Maxx's Parent Co.

Public domain photo via Wikimedia.