It’s a retail wreck on Wall Street.
Karen Short, analyst at Barclays Capital, said stores like Walmart are trading like consumer staples and people should start valuing them as such.
“Walmart — it’s trading like a staples name … staples names are trading at 15 or 16 times EBITA, Walmart is at 11. So if it’s going to trade like a staple, maybe people should start considering valuing it like a staple name. A flip side on Target is there’s still a pretty meaningful multiple gap between Target and Walmart. And Target is only one quarter into having strong same-store sales growth combined with gross margin expansion and operating margin expansion.”
Matt Boss, equity research analyst at J.P. Morgan, said retail is a game of winners and losers — department stores and mall-based retailers are potholes but some athleisure, discount companies and other solidly run businesses will do well in the fourth quarter.
“The consumer backdrop is solid, but I think retail will continue to be winners and losers. And you really need to avoid the potholes from a structural perspective. So department stores and specialty mall-based retail, we’re still not there. Global brands we’re split where I think there’s opportunity on the athletic side as you look at a Nike, a Lululemon, you think about action sports with a VF Corp with North Face and Vans. You look in the off-price sector, we like that sector. I think there’s an opportunity with Burlington. And then you look at the discount space and I think the dollar stores and this pullback that we’ve recently seen on Five Below, I think sets up well … as long as we don’t have weather disruption that creates store closures. I think that the retailers that are set up well are going to be fine in the fourth quarter.”
Oliver Chen, senior retail analyst at Cowen, said Target is the stock to own as department stores are struggling to adjust to the way Gen Z has changed how people shop.
“Macy’s faces really stiff competition from off prices, such as TJ Maxx and Ross and don’t forget about Amazon. Macy’s was a little late to the game in terms of more speed and their execution of brands and trends. We’re in a new Instagrammable nation with Gen Zs and the transformation of the way people shop and you really need a special product. In addition, you need a really special store experience and the mall has been a horribly tough place with negative mall traffic. So our preference this week is for customers to own Target. We think Target comes at a nice P/E relative to Walmart. It’s well positioned for tariffs. There’s private label there and there’s curbside pickup. So we’re cautious on the department store sector. And Macy’s has some unique challenges. They are working hard across different themes, but it’s still very small as a percentage of total in terms of e-commerce, what they’re doing with growth 150 and what they’re doing with their loyalty program.”
Liz Dunn, founder and CEO of Pro4ma, said that retail is in need of rescue and Macy’s will likely be the first to feel the pressure.
“I think we have seen some instances of department stores that are making some positive changes. Nordstrom [and] Kohl’s [are] doing a lot of innovative things to transform their fleet, but it’s the worst neighborhood to be in. And I would say, second to a J.C. Penney, or Sears type situation, Macy’s has become one of the worst houses in a bad neighborhood. Maybe there’s value through financial engineering, but as a going concern to try to turn around the Macy’s business, I think that’s a really, really tough turn.”