Morgan Stanley Sees Holiday Strength In These 2 Apparel Retailers

A recent report by Morgan Stanley focuses on apparel discounting and gross margins for the month of November, 2014. The study uses pricing data collected weekly on thousands of apparel items.
Discounting
Morgan Stanley’s AlphaWise Apparel Discounting Index indicates that apparel discounting for November is nearly identical to the discounting seen in November 2013. During the first half of 2014, apparel was more heavily discounted than last year. That year-over-year gap has since closed, and discounting trends are now closely aligned with last year’s.

Margins
Apparel gross margins for the period are in line with last year. Margins appear to be trending upward going into the holiday season, and the year-over-year margin environment seems to be improving.

Stock picks
Morgan Stanley has overweight ratings on the stocks of L Brands Inc LB and Ross Stores Inc ROST.
Morgan Stanley got strong results from in-store reads of L Brand’s Victoria’s Secret and Bath & Body Works stores. Both stores showed strong, consistent customer traffic flow throughout the day on Black Friday. Analysts note that Bath & Body Works “buy three get three free” promotion was fairly typical for the brand and not very deeply discounted, so the strong traffic to the stores was particularly impressive. Morgan Stanley is forecasting year-over-year growth for L Brands in November. “We forecast a +3% LB November comp… driven by [Victoria's Secret] +3% and [Bath & Body Works] +3%. However, we see upside to our estimates.”
The analysts project that Ross will continue to benefit from its position in the apparel space as a low-price, high-value retailer. The report highlights the company’s stellar record of beating earnings guidance, as the company has not fallen short of quarterly earnings guidance a single time in the past seven years. Over that time period, Ross has beaten the high end of estimates by an average of 13 percent. Morgan Stanley expects that Q4 2014 guidance is likely conservative as well.