Consumers will be more likely to seek out cheaper alternatives for jeans than for handbags in what is likely to be a ‘choppy’ year, Goldman analysts say.
According to Goldman Sachs analysts, consumers are becoming more selective, and the rush to update wardrobes is slowing down. As a result, 2023 is likely to be uneven, favoring retailers with established relevance, simple comparisons, and constrained inventories.
The analysts upgraded clothing retailer Gap Inc. in light of this. and clothing and accessories maker Coach, Kate Spade, and Stuart Weitzman are all owned by Tapestry Inc. However, they downgraded Levi Strauss & Co., describing a shopping landscape where customers are less likely to seek out cheaper alternatives for items like handbags but more likely to do so for things like jeans.
“Consumers are increasingly discerning with their apparel spend, driving choppy results dependent on events, newness, and promotions,” In a report released late on Sunday, analysts at Goldman Sachs Brooke Roach, Jane Kudinova, and Evan Dorschner wrote. “This pattern, which affects all income demographic cohorts, became more obvious in [the fourth quarter].”
“Within this framework for 2023, we look for brands with momentum (which may be a function of easy compares), selectively stronger channel backdrops as a result of cycling 2022 inventory overhangs (wholesale brands are likely to have tough [first half]/easier [second half]), and outsized margin recapture opportunity,” they continued.
The analysts came to that conclusion as consumers became more selective about when to treat themselves due to rising prices. According to Goldman analysts, the bank’s economists thought that customers had mostly used their pandemic-related savings, with some of that money going toward things like vacations, along with clothing and other vacation-related expenses.
“As a result, we continue to expect a somewhat choppy apparel growth outlook in aggregate, where we believe idiosyncratic newness and brand momentum is key,” they said.
The analysts also mentioned off-price retailers like Burlington Stores Inc., Gap (GPS), and Tapestry (TPR). (BURL), as well as Ross Stores Inc. (ROST) were prepared for what could have been a bumpier ride in the future.
Gap was upgraded by Goldman analysts from neutral to buy, and their price target was increased from $10 to $18. They said Gap could “outperform on margin delivery” in the coming year, backed by new leadership at its supply chains and the Old Navy brand.
After being one of the first retailers to address discrepancies between what they had in stock and what customers actually wanted, analysts also stated that Gap had greater potential for stronger margins and same-store sales next year. According to the analysts, Gap made decisions that created a surplus by betting on the demand for plus-size clothing and cozier, more casual options.
The analysts claimed that one reason for their more optimistic assessment of Gap was the company’s supply chains, which had improved as a result of the closure of its factories in Vietnam the previous year. However, they also claimed that Gap had benefited from simpler year-over-year comparisons than its U.S. rivals and that management’s performance over the past several years had been uneven. They continued by pointing out the stock’s already high value.
Additionally, the analysts raised their price target on Tapestry from $37 to $44 and upgraded the stock from neutral to buy. They claimed that new products would give the business more opportunity to charge more.
“We believe the [Tapestry] business is probably better protected from a choppy U.S. economy because accessories and handbags operate in a more emotionally driven category with fewer trade-down opportunities. consumer backdrop,” the analysts said.
The analysts added that the company would benefit from China’s relaxation of COVID restrictions, stock buybacks, and a more favorable environment for air and ocean freight. Risks, according to them, included competition from rivals who are more willing to offer price reductions, a squeezed middle-class consumer, and strong results in previous months fueled by higher prices and demand from younger consumers.
On Monday, Tapestry stock increased by 1.2%. The stock has lost 9% of its value so far this year.
The analysts perceived a higher risk for Levi Strauss (LEVI). They claimed that, in contrast to handbags, consumers were more likely to put off buying jeans or look for less expensive options. The company’s difficulties in Europe were also mentioned. The price target was reduced from $18 to $17 by the analysts, who downgraded the stock from buy to neutral.
“Although [Levi’s] brand momentum is strong and has recently begun to show signs of improvement, according to our brand momentum dashboard, we think the likelihood of the denim category in our coverage universe is higher than that of other categories (vs. handbags, for example) to see consumer trade-down or demand deferral,” the analysts said.
“As a result, we believe that potential softness in the middle-income consumer will likely weigh on [Levi’s] growth algorithm,” they continued, adding that with the company “already underperforming peers in We also see a risk that [Levi’s] growth in this geography starts to slow down in the face of a more challenging macro (partly due to summer weather in Europe).”
On Monday, Levi Strauss stock saw a 1.5% increase. So far this year, the stock price is down 33%. The S&P 500 Index has decreased 17% during that time, in contrast.