Stocks

Macy's, Gap and L Brands Downgraded by Credit Suisse over 'Tougher' Road Ahead for Retail

Macy’s, Gap and L Brands have all been downgraded by Credit Suisse which warned of a “tougher” road ahead for the U.S. retail sector.

Macy’s, Gap and L Brands have all been downgraded by Credit Suisse which warned of a “tougher” road ahead for the U.S. retail sector.

Macy’s, Gap and L Brands have all been downgraded by Credit Suisse which warned of a “tougher” road ahead for the U.S. retail sector.

The trio, known as softlines retailers because they sell ‘soft goods’ such as clothing, shoes and home furnishings, were all downgraded to underperform from neutral as the Swiss bank’s analysts said the sector would face mounting pressures into the holiday season.

The back story. Department store and retail stocks have struggled so far in 2019, as the growth of e-commerce companies, such as Amazon, and global trade tensions have hit sales.

Macy’s stock has fallen 49% year-to-date, Gap has tumbled 36% and L Brands has slid 35%.

The U.S. softlines retailer group, which also includes Nordstrom, Kohl’s, and J C Penney, among others, trades at a 3% discount to its 5-yr average enterprise value to EBITDA ratio, providing some safety for the stocks.

What’s new. Credit Suisse downgraded Macy’s, Gap and L Brands to underperform from neutral on Friday as it warned of a “tougher road ahead” for softlines retailers.

Analyst Michael Binetti said industry trends were sluggish in the third quarter would remain under pressure into the holiday season.

A shorter holiday shopping period - six fewer days between Black Friday and Christmas - tough weather comparisons and ongoing macro uncertainty, made for a gloomy fourth quarter outlook, he added.

He said 2020 estimates, which see the sector accelerate, were still too high and that the trio of retailers would be most exposed when reality hits.

“We see the most risk of negative revisions to 2020 Street estimates for Macy’s, Gap and L Brands - and we think low valuation alone won’t be sufficient to protect further stock downside.”

Looking ahead. It has been a nightmare year for retail, with some suffering more than others. The fall and Christmas holiday period is always crucial for the sector, but this year it has added significance.

A soft trading period leading to 2020 estimate downgrades could send retail stocks tumbling further.

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