Wolfe Research favors Ross and Burlington as Nike and Lululemon face downgrades

what happened

Spencer Hanus of Wolfe Research, who started coverage of the specialty retail sector on Thursday, says off-price chains are the strongest bets right now. Shoppers are trimming spending because of higher prices, and many full-price retailers are struggling with excess stock they can only clear with discounts. Off-pricers can buy that inventory cheaply. A weak earnings report from TJX Cos. a couple of months ago also weighed on the group's valuation, which he sees as an entry point.

Hanus's top pick in the group is Ross Stores, rated Outperform with a $279 price target. He also likes Burlington Stores, rated Outperform with a $355 target. He is negative on athletic apparel and footwear, rating Nike and Lululemon Underperform with targets of $28 and $75. He rates On Holding as another top pick, with a $47 target against $34.23 on Thursday. He also sees Dick's Sporting Goods as undervalued, with a fair value of $181 versus $148.52.

why it matters

Retail stocks have lagged the broader market this year, with the SPDR S&P Retail and Consumer Discretionary Select Sector ETFs both trailing badly. Consumers are in a sour mood over inflation and rising gas prices, so the upcoming holiday shopping season will be a key test for the sector.

market impact

Retail: pressure across the sector from cautious consumers; off-price chains and athletic brands diverge on analyst views

tags

instruments