(Reuters) - Specialty retailers are much better equipped for a downturn than three years ago and would see meaningfully less volatility, if fears of another recession turn into reality, UBS said, resuming coverage of the sector.
UBS analyst Roxanne Meyer favors companies with a strong product line-ups and the least exposure to sourcing cost pressures. Off-price retailer TJX Companies Inc (TJX.N) and women’s clothes retailer Ann Inc ANN.N are Meyer’s top picks in the space.
“Consumers have showed and we believe will continue to show a willingness to spend if the product is right,” Meyer said.
Limited Brands Inc LTD.N, which operates the Victoria’s Secret and Bath & Body Works chains, and off-price store chain Ross Stores Inc (ROST.O) are also among Meyer’s “buy”-rated stocks.
Many companies in the sector have increased prices to counter rising costs.
“(However,) the pain that retailers could feel if price increases don’t stick could be underestimated,” Meyer said.
“When the product isn’t right, margins will suffer from markdowns as well as the added kicker of the inability to mitigate sourcing cost pressure.”
The analyst gave apparel retailers Aeropostale Inc ARO.N, Urban Outfitters (URBN.O) and Talbots Inc TLB.N a “neutral” rating on the potential risk to their margins.
For the winter holidays, Meyer expects same-store sales in the sector to grow 1 percent, compared with a 2.5 percent rise, last year.
Reporting by Ranjita Ganesan; Editing by Viraj Nair