Barclays picks recession scenario winners and losers from the retail sector
Adam Smigielski
Barclays warned on Tuesday that a product recession could take a deep toll on parts of the retail sector. Analyst Adrienne Yih and team see building risk to a second-half demand recovery.
"For retail specifically, many have guided 1H23 to be weak, with even negative sales, and a recovery in 2H23 as they lap excessively deep promos from the prior year. Of the companies we cover, 46% posted negative y/y sales growth in 4Q22."
Based on the promotional activity tracked by Barclays, the firm believes the notion of broad-based retailer demand improvement in Q1 of 2023 is at risk as well as the forward sales outlook.
With the evidence increasing that a recession could be on hand, Barclays recommends limited exposure to consumer product discretionary and sticking with best-in-class names. As part of its preparation for a recession scenario, downgrades were fired off by Barclays on a number of apparel-related stocks. Canada Goose (GOOS), National Vision Holdings (EYE), Under Armour (UAA), Victoria's Secret (VSCO), and Capri Holdings (CPRI) were issued downgrades to Equal-weight from Overweight. Meanwhile, FIGS (FIGS) was lowered to Underweight from Equal-weight.
Some of the consumer discretionary stocks by Barclays seen as best positioned for relative outperformance during a recession include TJX Companies (TJX), Ross Stores (ROST), Nike (NKE), Dick's Sporting Goods (DKS), and Ralph Lauren (RL).
With evidence mounting of a 2H23 recession, we recommend limited exposure to consumer product discretionary, sticking with best-in-class names to weather a downturn. Despite being an early cycle sector exiting a recession, we note that a slowing consumer spending environment has historically impacted all retailers.
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