As retail stocks have pulled back to close 2018 even as they’ve reiterated or boosted their outlooks, a few companies’ shares stand out as possible winners.
Those companies, according to Cowen & Co. analyst Oliver Chen, are Target (TGT), Kohl’s (KSS) and Ulta Beauty (ULTA). “We like these three stocks given the strong underlying consumer, not easily replicable product assortments, digital investments and innovation,” he wrote Tuesday.
All three stocks are up for the year, but down substantially in Q4. Cowen figures concerns about difficult comparisons with last year’s holiday quarter, margin pressure, and the possibility of diminishing consumer strength are contributing to the pullbacks.
“We believe investors are looking for defensive, less-cyclical, consumer staple-type opportunities as relatively safer places to hide in this time of geopolitical and economic volatility and uncertainty,” Chen wrote.
But Cowen things low unemployment and strong wage growth, as well as retailers that are executing well—particularly as they build digital businesses in the face of Amazon.com ’s (AMZN) growth—make for some bull cases in the sector:
• Target’s selloff “has been overdone and we would be buyers at these levels,” wrote Chen, whose $100 price target on the shares is about 22% higher than Factset’s average. “We have conviction management’s investment plans are gaining traction with shoppers and we anticipate continued physical and digital momentum.”
Target stock closed Monday near $68. It’s up nearly 5% this year, but that includes a drop of more than 22% in Q4.
• Kohl’s “is well positioned to capitalize on retail dislocation given [its] best-in-class loyalty program along with a pilot to further synthesize and integrate rewards; an off-mall presence in addition to dynamically transforming its real estate profile; innovative partnerships with Amazon; and leaning into trend-right active categories and improving the women’s assortment,” Chen wrote.
Cowen has an $82 target on Kohl’s shares that is about 8% above Factset’s average. The stock closed Monday around $63; it is ahead more than 16% in 2018 but down 15% in Q4.
• At Ulta Beauty, wrote Chen, Cowen likes its dominant and data-informed loyalty program of 30.6 million users, its unique “mass-tige” assortment, and its superior vendor relationships, which collectively make it well-positioned to outperform within a competitive beauty space.”
The stock, up some 12% this year but down 11% in Q4, closed Monday near $251. Cowen’s price target on the shares is $340, 6% above Factset’s average.