Despite a mixed back-to-school shopping season this year, Morgan Stanley thinks a couple of popular apparel retailers could beat the clothing industry slowdown and stand out into year-end. Overall back-to-school spending should come out in-line with pre-Covid trends, but fare weaker year over year given recent demand weakness, analyst Alex Straton said. She remains fairly bullish on softlines spending towards the latter half of the year, but remains more cautious on hardlines retail and brands as consumers remain focused on value. Softline retail refers to a category of goods made from soft materials, such as clothes, while hardlines are products such as appliances and furniture. “Though industry sources & investors may be braced for a muted BTS season, we think it could prove better than expected [in softlines]. In fact, we think 1) demand could potentially build later in the season, & 2) trends will diverge by player – with winners & losers emerging,” Straton wrote in a Sunday note. She pointed out that August “back-to-school” Google search interest is at the highest level since before 2014, suggesting a potential acceleration could be ahead. Two companies that appear best-positioned this back-to-school season are Abercrombie & Fitch and Lululemon Athletica , according to Morgan Stanley’s early reads on several trends and consumer-related factors. Kohl’s and Torrid Holdings could be laggards, the firm said. Apparel retailer Abercrombie has among the most relevant back-to-school fashion trend exposure, screening particularly well on stripes and cargo, while Kohl’s has potentially the least, the bank noted. Abercrombie also ranked the most favorably in Morgan Stanley’s recent intern survey, indicating resonance with younger consumers who often drive spending during this season. Abercrombie has been on a tear, with shares up more than 87% this year and more than 900% over the past two years. Those outpace the gains seen from major tech companies such as Meta Platforms, Alphabet and Apple over the two time periods. Analysts polled by FactSet have a 12-month price target that suggests 16% potential upside. ANF 5Y mountain Abercrombie stock. Investors have been enthused by Abercrombie’s strong sales growth. The company — which also owns the Hollister brand — reported its best first quarter in history with 22% sales growth. Its second-quarter report is slated for Wednesday before market open. Abercrombie ranked the lowest of Morgan Stanley’s surveyed retailers in terms of net spending intentions, however, putting the company at risk of facing about a 2.9% year-over-year decline in sales, according to the bank. Urban Outfitters , which also has the most relevant back-to-school fashion trend exposure alongside Abercrombie, could also see a large decline in sales, per the firm’s metrics. “We fear significant positive EPS revisions could be behind ANF, & caution out-year forecasts make for a high bar,” Straton said. “These expectations, still-expensive relative valuation, & ongoing margin reversion/cyclicality risk have kept us Equal-weight rated.” Other analysts, including Citi analyst Paul Lejeuz, remain bullish on Abercrombie ahead of earnings. Lejuez opened a “positive catalyst watch” on the stock earlier this month, forecasting a stronger third-quarter outlook with positive back-to-school commentary. He added that that he sees “no signs of slowing” for the Abercrombie and Hollister brands. Lululemon is Morgan Stanley’s other major potential beneficiary of this year’s school shopping season, according to the firm’s screen. Unlike Abercrombie, the athletic apparel retailer should enjoy the greatest year-over-year increases in back-to-school spending. Lululemon is ranked high on neutrals, tennis and ballet apparel and favorable among young consumers, but its higher pricing could be a challenge for the stock. “We think LULU theses/sentiment are unlikely to change near-term while high frequency data in LULU’s all-important North America market likely remains underwhelming,” Straton said. “This constructive BTS positioning typically bodes well for 2H & holiday results, where LULU will also enjoy easier compares, a 53rd week uplift, & potential innovation/inventory initiative benefits,” she added. “Thus, it’s possible LULU could quickly pivot to a positive rate-of-change story, which is all-the-more compelling considering bearish sentiment, a low FY EPS bar, & depressed valuation.” Straton kept her overweight rating and said the stock’s risk-reward profile skews to the upside. However, she moved her price target lower from $404 to $329 — which implies 22.5% potential upside. Analysts polled by FactSet have a more bullish average price target that suggests shares could climb more than 28% over the next year. Not everyone is poised to do so well this back-to-school season. Kohl’s screened poorly in Morgan Stanley’s back-to-school analysis, Straton said, aligning with the bank’s concerns about the retailer’s potential inability to pull in younger consumers and increase traffic and revenue improvement amid its strategic efforts to do so. Straton has an underwight rating on the stock given limited visibility on Kohl’s new management’s initiatives and the ongoing potential for negative earnings revisions in the near and long term, she said. Kohl’s shares are down about 32% this year. Torrid Holdings could be another laggard this fall, according to the firm. Straton thinks the company — which runs Torrid, Torrid Curve, Curv, and Lovesick brands — could see its brand relevance diminish under increased competition from expanded size ranges at traditional retailers and struggle to realize the effect of its strategic initiatives on its demand and profit & loss. She recently downgraded the stock to underweight.
