Why Barclays Is Turning Bullish On 4 Retailers

For the first time in more than 10 years, Barclays analysts turned positive on the retail industry and said a bullish stance on four retailers is now warranted.

The Retail Analyst: Adrienne Yih upgraded the following retailers:

American Eagle Outfitters Inc AEO: upgraded from Equal Weight to Overweight with a price target lifted from $14 to $18.

Foot Locker, Inc. FL: upgraded from Equal Weight to Overweight with a price target lifted from $30 to $39.

The Gap, Inc. GPS: upgraded from Underweight to Overweight with a price target lifted from $14 to $20.

Urban Outfitters, Inc. URBN: upgraded from Equal Weight to Overweight with an unchanged $26 price target.

Why Barclays Is Positive On Retail: A positive stance on the retail segment was difficult to justify due to an oversupply of items and the margin-dilutive transition from physical sales to e-commerce, Yih said in a industry-wide report Wednesday.

The coronavirus pandemic ushered in several changes in the retail industry, the analyst said: 

• Approximately 10,000 stores will close in 2020 alone, many of which are at lower-volume, C- and D- rated malls.
• Retailers that aren't on the verge of bankruptcy will still close up to 30% of their stores. This will create a "healthier" competitive environment, as "zombie companies" will no longer command a "low-quality market share."
• At the store level, retailers are slashing their inventory and focus on generating higher-margin sell-through and higher inventory productivity to generate more profitable sales.

Related Link: L Brands Trades Up 30% On Victoria's Secret Update

The American Eagle Upgrade: The bullish case for American Eagle is based on the following, Yih said: 1) the return of leverage in the physical channel next year, 2) inventory discipline, 3) a dominant market position in the teen category, 4) increased unit productivity at unclosed stores and 5) momentum at aerie that could translate to higher comparable sales and units growth.

The Foot Locker Upgrade: Barclays' bullish case for Foot Locker is based on: 1) return of leverage in the physical channel next year, 2) encouraging sales-to-inventory growth inflection in the second quarter, 3) broader momentum in the athletic shoe cycle and other styles and 4) major shoe brands continue to demand a physical distribution channel.

The Gap Upgrade: The bullish case for The Gap is based on: 1) the return of leverage in the physical channel next year, 2) a lower store count in malls that will improve comps, 3) a view that Old Navy should stand out, as consumers want cheaper clothing alternatives, 4) the potential for domestic and global unit growth at Old Navy and 5) momentum in the athleisure sector that bodes well for Athleta.

The Urban Outfitters Upgrade: The bullish case for Urban Outfitters is based on: 1) return of leverage in the physical channel next year, 2) positive inventory inflection in the second quarter, 3) a strong brand, 4) improving e-commerce sale trends even before COVID, and 5) ability to pivot towards more casual offerings at all of its brands.

Retail Price Action: Shares of American Eagle were trading higher by 6.16% to $15.78 at the time of publication Wednesday. 

Shares of Foot Locker were trading higher by 2.71% at $37.54. 

Shares of Gap hit a new 52-week high and were up 6.2% at $19.78. 

Shares of Urban Outfitters were trading higher by 6.09% at $24.21. 

Related Link: Investors Pile Into Walmart's Stock After Big Week

Photo by Dwight Burdette via Wikimedia.