School starts in some regions of the U.S. as soon as next week, with other openings rolling through mid-August and a few around Labor Day, and that means a key season for softline retailers.
And the latest visit from UBS to its Evidence Lab leaves it bullish on the sector, expecting a healthy back-to-school season feeding into a strong Q4 to give a boost to stocks.
While softlines rose 500 basis points over the past month, they still underperformed the S&P 500 by about 250 bps, UBS says - citing concerns about the Delta variant of COVID-19 and its effect on supply chains, and worries about rising inflation.
But the market is underestimating strength in the sector and that will lead to "stock-catalyzing Q2, Q3 and Q4 EPS beats."
For back-to-school, data show one of the best-selling categories will be footwear, it says - and that bodes well for Under Armour (NYSE:UAA), Nike (NYSE:NKE) and Skechers (NYSE:SKX) (with UBS "particularly bullish on UAA," whose Aug. 3 Q2 report it expects will move the Street's $0.34 full-year EPS outlook closer to its own $0.55 estimate, and provide a positive catalyst in the process).
Its price target of $36 on UAA implies hefty upside of 76%. A price target of $185 on Nike implies 12% upside, while its target of $70 on Skechers implies 29% upside.
Another key trend it's seeing is denim - which it thinks will help deliver big Q2 and Q3 beats for American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF), which it believes aren't priced into those stocks. Its price targets for American Eagle and Abercrombie imply 39% and 62% upside respectively.
Willingness to spend is high as the season begins, with spending intention scores still high like last month, with total spending per adult back-to-school shopper expected to rise 6% vs. 2019, to an all-time high. Some 86% of parents with school-age children are confident or very confident that classes will be mostly or entirely in person in the fall, up from 64% last month.
And turning ahead to the holiday season, UBS expects more strength as well. Typically in its survey, about 7% of respondents say they'll spend more in the holidays, with 25% saying less. This time around, some 12% plan to spend more and 11% will spend less.
We believe this is important because we doubt a robust Holiday season is priced into stocks today," UBS says. "We think the consensus view is 2Q will be the 'peak' of the Softlines recovery.
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