Sell Macy’s and Kohl’s, buy ‘go it alone’ stocks like Nike, says UBS

Shares of Macy’s and Kohl’s ended lower on Wednesday, falling 5% and 3.9% respectively, after UBS downgraded both stocks to sell. The rating cut comes as the firm’s data suggests the acceleration to online shopping as a result of COVID-19 will persist after the pandemic ends. Instead, UBS recommends ‘premium’ stocks that can operate a ‘go it alone’ model, such as Nike, Levi’s and Capri Holdings. The Final Round panel discusses the outlook for the retail landscape.

Video Transcript

[MUSIC PLAYING]

MYLES UDLAND: All right, welcome back to The Final Round. Time now for our Call of the Day. And today, we're talking about UBS's latest note on shares of Macy's and Kohl's, the firm downgrading both stocks to a sell rating. And really, this is part of UBS has an evidence lab, a series of research, very long reports looking not only at specific names, but also the industry at large.

And Melody Hahm, I read this note from UBS, and I thought a lot about an area that you've covered over the last couple of years, which is DTC. And I mean, I think because we are steeped in it here on the media side, and it's-- we're like business tech hybrid media, right, so all we hear DTC, DTC, DTC. Well, I don't think every investor necessarily thinks about it like that. And UBS here is essentially telling everybody the store is just an accessory at this point. The only thing really that matters for the success of a retailer is having an online relationship with your consumer.

MELODY HAHM: And we started talking about this concept of showrooming in the tech sphere, whether it's the Best Buys of the world, years ago, right, Myles, on our own programming. I think this whole concept that UBS lays out of "go it alone," now is the time to GI-- GIA. GIA is going to be the new strategy going forward.

To your point, that's what DDC had been-- DTC had been doing from the early aughts. The whole concept of DTC is that you cut out the middleman. We've seen several designers, retailers across the income spectrum in terms of target demographic really figuring out not only for overhead costs, but just in general, the best way to actually access the modern customer, the younger customer is to not just be buried in some shelf that you paid a premium to have some offering.

I think one area where that trend has actually been bucked is in makeup, is in beauty brands. Because Sephora, there is a direct correlation with the success of a brand and the amount or the sort of promotion that Sephora does give the brand. Of course, that's a higher premium that you're going to pay for a specific storefront offering.

I think specifically with this note, with Macy's and Kohl's, they're both considered-- Macy's, at one point in time, was considered perhaps more of a premium brand. We have seen, over the last couple of years, that they had been struggling in their kind of discount brand Backstage, I think as it's called, had been performing better, along with the likes of TJ Maxx, Nordstrom Rack, Last Call Neiman Marcus, and the sorts. But I think this note rightfully points out that it has to be a premium offering.

There has to be something differentiated about the product. Because all of the kinds of brands that we see at Macy's, Nordstrom, and the like, they're a dime a dozen. So you cannot rely on the department store ecosystem or infrastructure, which has been shouted from the rooftop by retail analysts, I think, for the last couple of years. But this period of time has shown no mercy for that sort of opportunity to even exist.

DAN ROBERTS: Yeah, guys, I just wanted to chime in on what Melody said, that this note, to me, is sort of the nexus of so many of the things that we often discuss in this hour, right? Not only brands needing to prioritize DTC, but even now the shift from maybe two years ago if you were prioritizing it, you were smart and you were ahead of the game, or at least in line with the game. Now, it's analysts coming out and saying, we don't believe that this brand or this chain can actually do it and pull it off, which boy, it's a real indictment on Macy's and Kohl's, isn't it?

I mean, the idea isn't just a downgrade because we think DTC [AUDIO OUT] going, but the implication is these companies haven't figured it out and won't. And that's a shame. I mean, it's go it alone, and Melody mentioned that GIA is now kind of the name of the game.

And interestingly, this note mention some of the brands that they think can go it alone. Nike, which, of course, how many days have we talked about Nike prioritizing its DTC? Levi's, interesting. We remember the buzz around that IPO. Skechers, American Eagle, and then they also mention Canada Goose and Deckers.

But man, Macy's and Kohl's. I mean, for a while a few years back, we used to say that Walmart hadn't figured out its e-commerce strategy, right? But Walmart really has now. And these brands, Macy's and Kohl's, there just isn't that much of a feeling that they can. And then, also, the second prong of this go it alone future is are you a premium brand, and Macy's and Kohl's just not seen that way, which, again, an indictment on Macy's, especially.

MELODY HAHM: I mean, there is such a fascinating concept that we had seen with the Warby Parker's of the world, with the Caspers of the world, where for so long they said that they were only e-commerce, right? And then we saw their storefronts pop up left and right. And we're like, why are there five Warby Parkers in this, you know, 10-block radius in Manhattan?

And then we started to see the next wave, where those stores were then closing, which kind of reiterates the original conceit of these brands, that you do not actually need a storefront. Sure, glasses, it would be nice to try on, but I thought the whole [? premise ?] of retail was that technically you don't need that. And I think during this period of time it's proven that you don't need that.

Sure, returns are easier. It facilitates probably easier buying so that you can return things without actually paying a penalty, and I think that's actually made the e-commerce process a lot better for the consumer. And then just looking at the broader retail landscape, I think for so long we talked about the barbell economy when it comes to malls, that the high-end malls, the bougie malls in Short Hills-- Myles, shout out-- and Garden State Plaza, and all those sorts of malls, they would still continue to get foot traffic.

I know in LA, Century City Mall, the flagship of Westfield, is actually gorgeous, and it's a great place to hang out, not just for teenagers. But during this period of time, people are not willing to be going to the mall to hang out at all. And I do wonder if that's going to be a behavior shift that we see pop back, because people have been so deprived of that sort of foot traffic, and they want to be able to aimlessly roaming around. Or if, in reality, that's going to be a change that never come-- that that is actually permanent.

DAN ROBERTS: Yeah, just quickly. I'm so glad you mentioned the Warby Parker thing. There are countless other examples, right? Casper did it. Away did it. Rent the Runway had showrooms. These companies that came out and at first said, the future is no brick and mortar, we're just online.

And then it turned out, actually, once we've established ourselves well online, we do want to have a couple stores. And I remember when that trend was at its peak, people were saying, see, the answer is omnichannel. For a time that became the new buzzword, omnichannel.

Now, maybe the pandemic has accelerated this, but now I feel like the reality is to [AUDIO OUT] actually, we don't need stores. Let's do online only. And it's funny. They-- they had no stores. Then they overbuilt. Then they closed. The ebb and flow of the brick and mortar versus digital equation.

SEANA SMITH: Yeah, and also just going off of that, I mean, it's very interesting, Melody, you mentioned some of the brands that have stood out here. I mean, I don't know how many of our viewers, but Melody I'm sure you know about this, Something Navy. I mean, she came out with a brand new line, and she is somebody that has a massive social media following.

And we talk about the fact that these brands need to be more premium. They need to connect with their consumers. They need to stick out here amongst which is what is a very crowded field. And that's one name that might not be a household name yet, but she's doing something that I think is resonating here with her followers, with maybe people who didn't initially know who she was.

She has been able to sell out-- sell out her line time and time again, and I think that's what a lot of these retailers are going to have to do in order to succeed in this type of environment. Because yes, it is very competitive. There are a lot of offerings. And especially right now, you are going to need to do whatever you can to get the buyer into your store or to get them to your website, because they need to figure out that your product is the best when there's so many other offerings there that's basically exactly like yours.

MELODY HAHM: Seana, that's an excellent point. And let's remember that Something Navy, Arielle Charnas actually launched a Nordstrom first. That was the big splashy announcement. As of a month ago, that relationship has ended. Apparently, it was because of her comments around coronavirus.

Let's remember, she got isolated in the Hamptons, but then was flaunting how amazing her life was, and she got a lot of heat, right? But in reality, to your point, maybe it's now her decision because her consumer base was so strong that she didn't need Nordstrom anymore, that she could actually be her own channel. I think we're seeing a lot more of this during this period of time, and we don't know if the real trigger was coronavirus, or if it just is the way in which we're shopping. You don't need Nordstrom anymore to be a legit brand.

MYLES UDLAND: The Mall at Short Hills, please. The Mall at Short Hills.

MELODY HAHM: I see-- I see the steam coming out, Myles. I feel you, man.

DAN ROBERTS: Yes. I remember when they changed the Natick Mall in my neighborhood to the Natick Collection.

MYLES UDLAND: Yeah, right. One of the last great malls in America, folks. You got all the grandparents of Essex County walking around in circles all day. Truly, a grand experience.