A Pullback in Discretionary Categories Pushes Citi to Downgrade Several Retail Stocks

Citi analyst Paul Lejuez made a series of rating changes in the firm’s research coverage of North America Apparel/Footwear/Textiles.

The analyst says stars are now “misaligned” after a robust 2021 year. A pullback in discretionary categories is taking place on the back of the slowing demand, which is a result of the lack of stimulus and the higher prices.

“Companies are facing higher-than-expected pressure following escalation of fuel/supply chain costs resulting from the war in Ukraine. Companies should look to pass thru higher costs to the consumer, but this will likely be harder than it was in 2021 given high inventory levels relative to sales. This is especially true in apparel where promos are already increasing (cool weather in 1Q didn’t help). It is this dynamic that is driving significant reductions to our earnings estimates for several companies,” Lejuez said in a client note.

The analyst made moves after Walmart (NYSE: WMT), Gap (NYSE: GPS) and Target (NYSE: TGT) all reported excess inventory.

All in all, Citi downgraded Abercrombie & Fitch (NYSE: ANF), American Eagle Outfitters (NYSE: AEO), Under Armour (NYSE: UAA), and Kohl’s (NYSE: KSS) to Neutral from Buy. The analyst also double-cut Carter's to Sell from Buy, while Gap and Children's Place (NASDAQ: PLCE) are also downgraded to Sell from Neutral.

Urban Outfitters (NASDAQ: URBN) is the only stock that is reaffirmed at Buy.

By Senad Karaahmetovic

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