Wells Fargo has taken another look at what may be coming in 2022, and sees challenges ahead for the fashion and retail sectors.
Analysts there downgraded Ralph Lauren Corp., Vans parent VF Corp. and off-price retailer TJX Cos. to equal weight from overweight and cut the price targets for many across its “softlines” universe.
Wells Fargo says pressure will be on the apparel and accessories categories, including an inflationary squeeze that makes 2022 more uncertain than it had seemed before.
Rising wages, stimulus payments, pent-up demand and other factors through the pandemic contributed to strong consumer spending over the past couple of years. But analysts led by Ike Boruchow say 2022 guidance is looking “increasingly unrealistic.”
“Especially considering that the market expects that our discretionary categories appear to have ‘overshot’ on consumer spending by 10-20% in 2021 compared to pre-COVID run rates and normalized wallet share, the setup for our group from here appears very challenged in the near term,” the note said.
Included in the “resilience” category are handbags, athletic gear and more “staple-like” items. Wells Fargo’s top picks include Coach parent Tapestry Inc.
and Michael Kors parent Capri Holdings Ltd.
; Nike Inc.
and Under Armour Inc.
; and Bath & Body Works Inc.
“The biggest risk if consumer’s pull back on spending is top-line guidance misses, which is problematic in and of itself, but also likely will lead to higher markdowns and gross margin pressure,” the report said.
“[M]any believe there is likely to be some retrenchment in the margin gains experienced in 2021, particularly if inventory levels continue to build and selling conditions normalize (promotions tick up, no stimulus, etc.).”
UBS analysts are upbeat about the handbag category, with “stable” U.S. handbag demand driving plans for continued consumer purchasing activity. The U.S. handbag industry is growing at a compound annual growth rate of 4% with the average U.S. handbag consumer buying two bags per year, analysts say.
But UBS thinks this spending will benefit European luxury brands most, with analysts favoring Capri, which is also the parent to Versace and Jimmy Choo, to Tapestry, which also counts Kate Spade and Stuart Weitzman in its lineup. According to UBS’ latest U.S. Handbag Survey, Dior, Prada, Gucci and Chanel have seen the biggest gains over pre-pandemic levels, and shoppers plan to invest in Gucci and Chanel over the next 12 months.
Other analyst groups that have taken a second look at 2022 given the current economic and geopolitical conditions include JPMorgan and RBC Capital Markets. Both of those groups looked at food and consumer goods in their analysis with heightened wariness.
“[H]eadwinds against the consumer continue to build and may dampen future spend,” Wells Fargo said.
“We believe if there is a slowdown in the apparel category, mid-tier players apparel such as Ralph Lauren are most at risk.”
Ralph Lauren stock was down 3.8% in Tuesday trading, and has fallen more than 9% over the past three months.
TJX has slumped 18.7% over the last three months. And VFC has slumped 25.8% for the period.