Goldman Turns Bearish On Fashion Retailers Nordstrom, Ross Stores

The retail sector continues to show signs of headwinds that could impact the earnings growth of multiple companies, according to Goldman Sachs.

Those companies include high-end fashion retailer Nordstrom, Inc. JWN and off-price fashion retailer Ross Stores, Inc. ROST.

The Analyst

Alexandra Walvis downgraded Nordstrom from Neutral to Sell with a price target lowered from $37 to $30.

The analyst also downgraded Ross Stores from Neutral to Sell with a price target lowered from $102 to $91.

Nordstrom: Problems Ahead

The macro retail industry continues to suffer from near-term challenges, including weather, heavy levels of inventory, promotional activity and higher-income consumers spending less money, Walvis said in the Thursday downgrade note. (See her track record here.)

Nordstrom is not immune to the industrywide challenges, as is evident in its weak comps performance throughout the 2018 holiday season and the first quarter, the analyst said.

The company's near-term problems could result in the Street revising estimates, Walvis said; the retailer's commentary has set expectations for material improvements in comps and earnings in the back half of the year, she said.

Over the medium-term, Nordstrom faces challenges from declining mall traffic and premium brands looking to sell their products direct to consumers, according to Goldman Sachs.

Ross: Execution Risk, Minimal Upside

The off-price retail segment will likely remain a "long-term secular winner," but Ross Stores has disappointed investors with recent execution problems, Walvis said.

Ross called out execution problems in its core ladies apparel for weak comps in recent quarters, and the company now needs to show signs of improved execution, the analyst said. The Street is already expecting the company to quickly return back to historic execution levels, she said.

Ross Stores' NTM EV/EBITDA multiple trades at a historic premium to its peers, which creates a "disconnect," Walvis said.

Ross Stores has almost fully benefited from inventory rationalization initiatives, and it doesn't have the same upside opportunity as rivals have in ancillary categories like home goods, according to Goldman Sachs.