Retail stocks have been particularly big losers amid the recent market selloff. While the S&P 500 has dropped 12% off recent highs during the past few months, the SPDR S&P Retail ETF (NYSEARCA:XRT) has plunged more than 20%.
The consensus market belief is that some combination of higher rates and bigger tariffs will suppress currently robust consumer enthusiasm, and that increasing e-commerce competition will continue to drag down margins. Thus, 2019 will be characterized by slowing growth and falling margins, a combination that usually leads to poor stock performance.
As such, retail stocks have been thrown in the dumpster recently.
But, Wells Fargo notes that this selloff is all about 2019 fears, and not current conditions. In a recent note, Wells Fargo points out that retail fundamentals were strong before the holiday season (Q3 comps were 2-3%, on average, marking the fourth consecutive quarter of strong growth), have been strong so far during the holiday season (the early read on holiday sales is quite robust) and project to remain strong for the near future (strong job market and rising wages).
Thus, weakness in retail stocks is all about what could happen. But, if those negatives don’t materialize in 2019 and growth is actually somewhat stable, retail stocks could be due for a huge bounce-back.
In such a scenario, Wells Fargo likes five retail stocks in particular. Which five? Let’s take a deeper look.
Foot Locker (FL)
One of the retail stocks that Wells Fargo likes most amid the recent selloff is Foot Locker (NASDAQ:FL).
There are a great deal of things to like about Foot Locker. The underlying growth narrative of a company that has survived the shifting sands underneath the athletic apparel space and is ready to grow market share through now bankrupt and/or much smaller peers is quite compelling. Also, comparable sales trends have been improving to quantitatively confirm this narrative. Margins are also improving.
Above all else, the most attractive thing about FL stock is the valuation. At just 10X forward earnings with a near 3% dividend yield and a cash-heavy balance sheet, FL stock’s valuation is already dirt cheap. Thus, downside risks are fully priced in. Upside catalysts are not, leaving room for a healthy recovery rally in the event that growth remains good in 2019.
L Brands (LB)
Another retail stock that Wells Fargo sees as potentially interesting here is L Brands (NYSE:LB), the parent company of Victoria’s Secret and Bath & Body Works.
The bull thesis on LB stock is fairly simply. One part of this business — Bath & Body Works — has been on fire for several years, is more on fire today than ever before and will likely remain on fire so long as the consumer remains healthy.
Meanwhile, the other part of this business — Victoria’s Secret — has struggled significantly over the past few years due to secular trends moving away from bombshell beauty. But, bombshell beauty has staying power, and numbers at Victoria’s Secret are finally starting to improve this holiday season, implying that a long overdue turnaround is just around the corner.
LB stock isn’t priced for the VS business to turn the corner. This is a stock with an 11X forward multiple and a 4% dividend yield. Those are dirt cheap multiples. If anything positive happens on the VS front, you could get a big rally in this stock.
The third retail stock that Wells Fargo likes is global lifestyle and apparel company Tapestry (NYSE:TPR), the parent company behind Coach, Kate Spade and Stuart Weitzman.
The bull thesis for TPR stock hinges on a healthy consumer. So long as the consumer remains healthy, brands like Coach, Kate Spade and Stuart Weitzman will report stable to strong sales growth numbers. At just 12X forward earnings with a near 4% dividend yield, TPR stock isn’t priced for stable to strong growth. As such, if stable growth materializes as a consequence of a healthy consumer, TPR stock should rally.
But, there are also risks here. Coach, Kate Spade and Stuart Weitzman aren’t the type of brands consumers buy in bulk when an economy is slowing. Thus, if the economy does slow meaningfully in 2019 and perhaps even enters a recession, the bears will take control of TPR stock, and this stock will drop in a big way because earnings will drop in big way.
Retail Stocks That Wells Fargo Sees As Winners: Carter’s (CRI)
The fourth retail stock Wells Fargo sees as a winner here is children’s apparel retailer Carter’s (NYSE:CRI).
There are a lot of moving parts to the Carter’s narrative. In the near term, international issues, unusual weather patterns and peer liquidation sales during the holiday quarter are weighing on operational results. Importantly, none of these headwinds have staying power. In the long term, this is a retailer who is the leader in the secular and stable demand children’s clothing category with really only one competitor left, The Children’s Place (NASDAQ:PLCE).
Thus, this is a secular growth leader worth buying on dips. The current dip has plunged CRI stock to essentially post-Recession low valuation levels while pushing the dividend yield to a post-Recession high. As such, this current dip looks especially compelling, but only after near-term headline risks pass.
The last retail stock Wells Fargo likes amid the recent retail carnage is premium athletic apparel brand Lululemon (NASDAQ:LULU).
There are a plethora of positives when it comes to Lululemon. Comparable sales growth has been red hot. Margins are trending consistently higher. Profit growth has been robust. But, the most attractive feature is that Lululemon is breaking out from being a niche, female-oriented yoga apparel retailer, to a broad, pan-gender athletic apparel retailer. In so doing, the company is in the early stages of turning into the next Nike (NYSE:NKE) or Adidas (OTCMKTS:ADDYY), a growth trajectory which implies tons of runway for further growth.
The big negative here is valuation. At over 30X forward earnings, one could reasonably argue that all this growth potential is already priced in. But, Lululemon’s market cap is just $15 billion. Adidas has a $40 billion market cap. Nike has a $100 billion-plus market cap. Thus, if Lululemon really is turning into an Adidas or Nike comp, there’s lots of room for the market cap to move way higher.
As of this writing, Luke Lango was long FL, LB, LULU and NKE.