Citi shifts retail stock ratings

Investing.com -- In separate notes Tuesday, analysts at Citi adjusted their ratings on two major retail stocks, Carter's Inc. (NYSE: CRI) and Ross Stores (NASDAQ: ROST), reflecting shifts in their respective business outlooks and potential challenges.

For Carter's, Citi upgraded the stock from Sell to Neutral, maintaining a target price of $50.

According to Citi analysts, much of the anticipated pressure on Carter's sales and margins for fiscal year 2025 is now "more baked in."

Citi highlights Carter's struggle in recent years to retain market share within its U.S. direct-to-consumer (DTC) channel as lower-priced mass and online retailers gained ground.

They note that to regain momentum, Carter's management has started reinvesting in pricing to drive DTC growth, which Citi believes will likely pressure gross margins next year.

Despite these concerns, Carter's stock has dropped 20% since its Q3 earnings report on October 25 and is down 30% year-to-date. With the shares close to Citi's $50 target and offering a 5.8% dividend yield, analysts see a "more balanced risk/reward" now, with adjusted earnings per share forecasted at $4.86 for fiscal 2025, below the current consensus of $5.09.

Meanwhile, Ross Stores was cut from Buy to Neutral due to uncertainty tied to the company's ongoing management transition.

With a new CEO coming from outside the off-price retail industry, Citi suggests that the management shift introduces "increased uncertainty" to Ross's strategy and performance.

Coupled with a relatively high valuation of 14x fiscal 2025 EBITDA, the bank no longer sees a favorable risk/reward profile for Ross. Citi has revised its discounted cash flow-based target price from $179 to $152, reflecting "slightly lower estimates beyond F24" and a lower terminal multiple to account for this uncertainty.

For Q3, Citi anticipates Ross to report an inline performance, though unfavorable weather in key markets like California and Florida may weigh on sales.

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