2017 Will Be Another Transition Year For Retail

Wunderlich said in a report Tuesday it expects 2017 to be another transition year for retailers, as the shift from brick-and-mortar to omnichannel continues. The firm expects 2017 to be another period of "less" for the specialty retailing/apparel group — with less stores, less inventory, less traffic and maybe less taxes and less discounting.

Business Model Fractured

Analyst Eric Beder said customers are reacting with less willingness to pay full price and less need to go to the remaining stores. The analyst feels the overall business model for the group is fracturing, as retailers are unable to drive solid returns online due to unprepared infrastructure, free shipping and returns.

Process-Focus A Huge Negative

Wunderlich believes the focus on process and not product is a huge negative for apparel and specialty retailers, as they are left to contend with online retailers such as Amazon.com, Inc. AMZN. The firm feels to drive demand, the companies have to create differentiating product, as the Internet provides ubiquity.

Unclear Tax Regime Impact

While believing a cut in corporate tax rate could help retailers, the firm feels the companies may be forced to raise retail prices by 20 percent to keep pace, given the inability to shift production completely to the domestic market in the near to medium term, which might lead to a potential impact from a broader tax adjustment. Given the uncertainty around the tax regime, the firm said it is not modeling in tax changes in its analysis.

In Focus: Top- And Bottom-Line Upside, Brand Integrity Names

Wunderlich clarified that its investment focus will be on firms with the potential to register visible upside to top and bottom line and leverage strong brand loyalty. The firm does not see its formula of combining low expectations and even mediocre market performance changing in 2017.

Wunderlich's Picks

The firm believes companies such as Jos. A. Bank Clothiers Inc JOSB, with tailored brands to see potential upside in 2017, as it returns to positive comps, winds down store closure program and maintains low discounting program. Wunderlich also expects the company to benefit from the expansion of its custom clothing initiative and a shift to more technical-driven items. The firm views 2018 as full of catalysts that should convince investors the tailored turn is real and worthy of a higher multiple.

Wunderlich feels weather-driven weakness provides a greater opportunity to invest in a premier growth company like Duluth Holdings Inc DLTH.

Terming the wait finally over for Perry Ellis International, Inc. PERY, Wunderlich said clarity is finally in sight at the company and that the fourth quarter of 2017 will be the first quarter of year-over-year revenue growth in the last six quarters. The firm expects the trend to continue into 2018, as the company fully anniversaries a shift away from low margin private label programs and begins international rollouts for Nike Inc NKE Swim and key golf lines. The firm believes the current valuation reflects a compelling risk/reward equation.

Ratings/Price Target

• Jos. A. Bank Clothiers: Buy rated with a $36 price target.
• Duluth Holdings: Buy rated with a $30 price target.
• Perry Ellis International: Buy rated with a $35 price target.