Barclay said it is taking a selective stance on the retail sector as it balances a positive post-pandemic structural outlook and a relatively stable consumer backdrop with pockets of cyclical risk that include categories with sales pulled forward or exposed to increased interest.
Overall, analyst Seth Sigman and team see supply/demand dynamics that have supported record margins normalizing and the balance of power within the retail ecosystem shifting back to the consumer. However, the strong year-to-date moves in many retail stocks are said to contain some risk to earnings per share. Consumer spending power is expected to normalize this year as wage growth shifts away from stimulus/austerity driven growth. Margin outlook is mixed with risk seen for the first half as high costs continue to flow through gains and losses, but tailwinds are expected for the second half.
Overall, Sigman rated the US Broadlines, Hardlines & Food Retail sector neutral, although some outperforming candidates were called out. The analyst favors names that have defensive characteristics plus other drivers, or those that can grow through the cycle through market share or earnings compensation.
New overweight ratings were assigned by Barclays on Walmart (NYSE: WMT), AutoZone (AZO), Tractor Supply (TSCO), Five Below (FIVE), Driven Brands (DRVN), and Arhaus (ARHS). WMT makes the bulls list as a defensive-attacking playstyle, while TSCO, AZO, and DRVN are noted as steady risers in every case. FIVE and ARHS are discretionary plays due to their “different” business models. Target ( TGT ), Home Depot ( HD ) and Best Buy ( BBY ) all launched with equal weight ratings because it’s “too early” to count on a stock price recovery. Meanwhile, the firm believes that Floor & Decor (FND) and Advance Auto Parts (AAP) are not well positioned for the current economic climate and is initiating coverage on both stocks with Underweight ratings.
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