Jefferies On Specialty Retail: Planet Fitness Loses Muscle, Genesco Fits Perfect

Even as consumers continue to migrate to online shopping, don’t expect Amazon.com, Inc AMZN to capture all the growth.

Traditional brick-and-mortar retailers are gaining more flexibility as they continue to cut stores and invest in their own e-commerce channels. 

Real estate flexibility is the "ace in the hole," as nearly 50 percent of department and specialty softline stores leases are expiring within the next two years, providing the ability to address the channel shift to digital, according to Jefferies. 

Jefferies analyst Randal Konik named Gap Inc GAP, Michael Kors Holdings Ltd. KORS, Foot Locker Inc FL, and Under Armour Inc UAA as his best long ideas for 2018 and made three key rating changes to start the year.

Planet Fitness Hit By New Year's Competition

Although considered the leading low-cost operator in a growing health and fitness club industry, Konik has downgraded his rating from Buy to Hold on Planet Fitness Inc PLNT due to intensifying competition in the value segment of the industry. Jefferies maintains a $33 price target on Planet Fitness. (See the analyst's track record here.) 

“While these competing players are smaller in scale and membership, rapid growth over several quarters could pave the way for market share shifts,” Konik said.

The shift will likely accelerate unit growth at Planet Fitness’ low-cost peers which is expected to moderate new membership acquisition and comparable sales growth as gyms aggressively entice consumers with New Year's resolution deals.

Smaller Brands A Distraction For Deckers

Deckers Outdoor Corp DECK was downgraded from a Buy to Hold by Jefferies, despite making solid progress in a transition toward a more direct-to-consumer business model. Jefferies lowered its Deckers price target from $82 to $75.

“Sector headwinds in department stores give us pause regarding growth prospects in the wholesale channel and smaller brands appear to have less compelling trajectories ahead,” said Konik.

While the UGG brand is continuing to see strength and running shoe brand HOKA is showing significant potential, the smaller brands are seen as more of a distraction to management, the analyst said. 

Although recent channel checks are showing solid traffic trends, record cold weather is likely priced into current trading levels, and Konik said a multiple compression is more likely to occur at Deckers than an expansion.

Trends Hit Journeys' Sweet Spot

Genesco Inc. GCO's Journeys' segment is underappreciated as product trends fall back into Journeys’ "sweet spot," according to a sum-of-the-parts analysis, Konik said. Jefferies upgraded Genesco from Hold to Buy and raised the price target from $27 to $40. 

“Conversely, we believe market fears over the company’s real estate exposure are overblown, given significant lease flexibility and progress in negotiating lower rent expense,” Konik said. 

The biggest driver of Genesco’s share price appreciation will be a multiple expansion after investors gain confidence that performance has stabilized, the analyst said. 

Genesco shares were soaring 8.31 percent at $35.20 at the time of publication. 

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