Why The Set Up Ahead Of Retail's Q2 Earnings Season Is 'Poor'

Retail stocks are in for further pain amid late-cycle or recession fears, weaker fundamentals and the tariffs becoming a reality, according to UBS analyst Jay Sole.

Investor Confidence at Rock Bottom

The analyst said there is very little the companies can say to infuse confidence in investors that macro/earnings environment won't deteriorate in the next 6-12 months.

"This makes most stocks' "bar" for the quarter essentially unreachable, creating unfavorable upside/downside skews for stocks," Sole wrote in a Monday note.

Although valuation of retail stocks are at rock bottom levels, the analyst said the trust in earnings for most Softline stocks have eroded, prompting investors to treat bad news as bad until the market has a reason to think the macroeconomic condition gets better.

Sole sees tariffs as major risk to margins in the fourth quarter of 2019 and in 2020.

"The more companies signal they won't raise prices, the more likely it is tariffs will have a large negative impact on margins," he added.

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American Eagle Outfitters AEO

With 30% of its goods manufactured in China, macro fears and tariffs are likely to overshadow good fundamentals of American Eagle, UBS said. The stock typically moves +/- 6.5% on earnings.

Burlington Stores Inc BURL

UBS expects Burlington to deliver an in-line report, but does not believe this would change its fundamental sentiment or positioning. The options market is currently pricing in a +/- 7% move.

Foot Locker, Inc. FL

Even if Foot Locker meets expectations, the market is likely to continue to see low second-half EPS estimate achievability, limiting upside. The options market is currently pricing in a +/- 12.9% move on earnings.

Gap Inc GPS

For Gap, UBS sees tariffs, macro fears, and tough fundamentals to make for a challenging set up. As opposed to the typical 5% jump on earnings, the options market is pricing in a +/- 7.8% move

Kohl's Corporation KSS

UBS sees tariff and macro fears making it hard for Kohl's stock to pop over earnings. The firm also believes the company could lower its guidance. The options market is pricing in a +/- 7.1% move.

L Brands Inc LB

For L Brands, UBS is modeling 0% comps, 19 cents EPS and an unchanged fiscal year guidance. The options market is pricing in a +/- 9% move on earnings.

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Lululemon Athletica inc. LULU

UBS expects Lulu's earnings and stock price momentum to continue, as the market has been favoring growth stocks. The firm noted that the company has the best organic sales growth outlook in its coverage universe.

Macy's IncM

Tariffs are a potential major negative for Macy's even as the valuation of the shares are at a 20-year low. The options market is pricing in a +/- 8.5% move on earnings.

Nordstrom, Inc. JWN

Nordstrom is neither a growth stock nor one which has defensive characteristics, according to UBS. The firm therefore believes macro weakness will likely limit upside. The options market is pricing in a +/- 8.6% move on earnings.

PVH Corp PVH

PVH's fundamentals, according to UBS, are fine. However, the firm said it doesn't see a catalyst to change its bearish sentiment. The firm said the market hasn't appreciated the underlying strength of the company's business or its long-term opportunity.

Ross Stores, Inc. ROST

UBS braces for an in-line report from Ross Stores. The company's shares fits the description of a stock with defensive characteristics because of its Off-Price business model.

Tiffany & Co. TIF

Tiffany can't weather the macro weakness despite its luxury brand status, UBS said.

"…..we think the choppy macro environment, global political events, and weak tourist spending could weigh on TIF's 2Q19 sales growth rate," the firm added.

TJX Companies Inc TJX

TJX is unlikely to take market share or deliver EPS growth in-line with market expectations, and this will eventually lead to P/E contraction, according to UBS.