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"To deliver steady long-term growth, we believe brands can no longer rely on Malls or Dept. Stores to drive traffic," a UBS analyst team led by Jay Sole writes. "Brands have to generate their own audiences and become destinations."
"Premium" brands should be able to operate in a virtuous cycle that help them at the top of the retail food chain:
A strong value proposition earns high gross margins.
High gross margins help a company build a successful direct-to-consumer operation.
A strong DTC business lets brands better control inventory and their own brand image.
Customer loyalty follows, driving strong returns.
The company can then reinvest those returns to keep the cycle moving.
UBS pinpoints eight Buy-rated stocks it thinks can pull off what it calls a "Go It Alone" model:
Nike (NKE, $98.36), $127.00 PT
Levi's (LEVI, $12.15), $23.00 PT
Skechers (SKX, $29.60), $32.00 PT
American Eagle (AEO, $10.35), $14.50 PT
PVH (PVH, $49.02), $107.00 PT
Capri Holdings (CPRI, $16.31), $26.00 PT
Canada Goose (GOOS, $22.63), $30.00 PT
Deckers Outdoor (DECK, $201.30), $250.00 PT
Indeed, Nike on Wednesday made several changes to its senior leadership team to "support the company's Consumer Direct Acceleration (CDA)" as the athletic apparel company continues its shift to a more direct-sales-focused strategy.
UBS also initiated a few stocks at Neutral, saying "we lack lack conviction these companies will be able to 'Go It Alone' in the future."
Crocs (CROX, $35.83), $40.00 PT
Gildan Activewear (GIL, $16.81), $16.00 PT
Steve Madden (SHOO, $22.34), $23.00 PT
Kontoor Brands (KTB, $17.42), $20.00 PT
As for Macy's and Kohl's, the thesis is no surprise. While Wall Street's outlook on department stores wasn't high in the first place entering 2020, the COVID-19 pandemic has swiftly eroded their businesses and accelerated online buying trends. It has also slammed their stocks: KSS is off 56% year-to-date; M stock has lost a flat 60%.
Importantly, UBS says that they're not factoring in the same comeback in retail that much of the market seems to be.
"Our conversations with investors suggest many are already bearish on Department Stores," Sole's team writes. "However, most think FY21 will be a rebound year as the pandemic ends. While we agree the pandemic ending will help, we don't think it will get Department Store earnings close to FY19 levels.
UBS's analysts see Macy's stock declining to $3.00 per share (~56%) over the next 12 months or so, and Kohl's stock falling to $14.00 (~37%).