UBS Initiates Coverage On Apparel Retailers, Calls Aerie A $2 Billion Brand

UBS has initiated coverage on a several apparel retail names.

The Analyst

Analyst Jay Sole initiated coverage of the following stocks:

• American Eagle Outfitters AEO: a Buy rating, $33 price target.
• Gap Inc GPS: Neutral, $33 price target.
• Michael Kors Holdings Ltd KORS: Neutral, $70 price target.
• Ralph Lauren Corp RL: Sell, $110 price target.
• Tapestry Inc TPR: Buy, $62 price target.
• VF Corp VFC: Neutral, $89 price target.

The Thesis

Aerie Could Grow To $2 Billion Brand

By associating itself with the body positivity movement, Sole believes American Eagle’s Aerie could be a $2 billion dollar brand, roughly four times its current worth, after stealing consumer mindshare from Victoria’s Secret and positioning itself for major share gains.

Aerie has 110 standalone stores and the analyst thinks it can add another 210 stores.

“The emerging fashion trends are around streetwear, denim, and high-priced brands. If AEO can capitalize on the denim trend, it likely causes American Eagle brand results to beat our expectations,” Sole said in a note.

Old Navy And Athleta Weighed Down By Gap And Banana Republic

Old Navy and Athleta’s growth continue to be the main drivers for Gap, but are weighed down by Gap Brand’s and Banana Republic’s weakness.

“These two concepts have weak brand images, poor momentum with consumers, and no easy path to reverse the trends. Store closures, poor same store sales growth and fixed cost deleverage are likely in both brands’ futures,” said Sole.

Michael Kors Challenged By Kate Spade

The analyst says Michael Kors can fend off coming challenges from Kate Spade’s youngfashion brand, but it will cause a drag on North America profits and limit EPS growth. Sole sees the handbags returning to low-to-mid single digit growth, but says it's unlikely the industry it will return to the double-digit growth grates of the past.

Ralph Lauren Lacks Pricing Power

Ralph Lauren continues to be a struggling retailer, with Sole saying the brand still resonates with consumers but less than it has in the past and the situation isn't getting any better. The analyst says the company’s big opportunities have played themselves out and that the company has limited pricing power.

Tapestry Is Improving Coach's Mindshare

Tapestry is working hard to help get Coach take back mindshare consumers and create more favorable impressions, says Sole.

“These are the type of leading indicators which often translate into sales growth. We also believe Coach’s full-price business is about to receive less competition and this should help it end share loss,” said Sole.

Sole is also bullish about Kate Spade’s future growth, estimating the company can grow to $2 billion in revenue by FY2025, up from $1.2 billion in sales today.

M&A A Catalyst For VF Corp

Although Sole doesn't see VF Corp’s big three brands being enough to beat market expectations, but says the company has other drivers. This includes M&A, which the analyst says is the extra ingredient which should help the company meet market expectations.

“We think M&A can add 200 bps to VFC’s annual EPS growth rate. VF’s M&A often doesn’t work out, but its successful deals have more than offset the disappointments,” Sole said.

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