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HomeMarketHow to Invest in Retail in 2023, According to Goldman Sachs

How to Invest in Retail in 2023, According to Goldman Sachs

Goldman Sachs upgraded Best Buy stock to Neutral from Sell.

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With consumer spending poised to slow down in 2023, investors may be struggling to find ways to position their portfolios of retail stocks.
Goldman Sachs
Group has a few ideas.

Shoppers are becoming more discerning, selective, and reliant on discounts as they look to stretch their budgets, Goldman says. Investors should take a similar approach when thinking about buying retail stocks.

Analyst Kate McShane, who covers so-called hard-line companies—those selling goods such as tools, toys, or appliances as opposed to clothing—favors retail stocks with attractive valuations that have the ability to gain market share. She is also bullish on companies whose performances in 2022 will be relatively easy to beat in 2023, and she likes those that can hold on to higher prices as inflation declines—boosting their margins—and are able to translate a strong cash position into improved shareholder returns.

She upgraded
Best Buy
(ticker:
BBY
) to Neutral from Sell and raised her target for the stock prices to $83 from $59. She believes the electronics retailer can improve margins through fiscal 2025 while maintaining market share. In addition, the company will benefit because the recent decline in demand for consumer electronics hit its 2022 results, making it easier to show growth in 2023, she said.

That said, McShane’s favorite idea for 2023 is
Bath & Body Works
(
BBWI
), given a higher level of new products in stores, increased digital interest, and sales driven by a new loyalty program. She also has Buy ratings on
Walmart
(
WMT
),
Target
(
TGT
),
Home Depot
(
HD
),
Lowe’s
(
LOW
),
Tractor Supply Co
(
TSCO
), and
Dollar General
(
DG
).

On the flip side, companies in the discretionary durable goods business, such as furniture company
RH
(
RH
), will have a tougher time operating in the current environment, Goldman Sachs believes. McShane downgraded the stock to Sell from Neutral and cut her price target to $215 from $227, arguing that sales will “likely remain pressured” in the near term. Most of RH’s products are highly discretionary, big-ticket items, a sector that will continue to slow down as consumers pare back their spending, she added.

Goldman analyst Brooke Roach, who covers companies that make soft goods such as apparel, also expects a choppy environment. When it comes to apparel companies, she likes those with strong brand momentum and opportunities to expand their margins.

Roach upgraded
Tapestry
(
TPR
) and
Gap
(
GPS
) to Buy from Neutral, with respective stock-price targets of $44 and $18. Her previous price target for
Tapestry
was $37, while her call on Gap was $10.

Tapestry’s brands—Coach, Stuart Weitzman, and Kate Spade—have momentum among consumers, and a variety of factors, including the reopening of the Chinese market, have the potential to aid the stock over the coming year, she said.

While Gap has struggled more than Tapestry has this year, it has improved over the last two quarters, Roach said. Its shaky performance earlier this year will set a low bar that should help the company to outperform expectations next year, she said.

“While preference between defensive market share winners and playing offense with discretionary names may shift throughout the year based on positioning/market factors, we see opportunity for idiosyncratic outperformance across many discretionary brands in 2023,” she wrote.

Roach’s other Buy ratings include
Lululemon Athletica
(
LULU
),
Capri Holdings
(
CPRI
),
Burlington Stores
(
BURL
), and
Ross Stores
(
ROST
).

In the same note, Roach downgraded
Levi Strauss
(
LEVI
) to Neutral from Buy and trimmed her target for the stock price to $17 from $18. She believes Levi’s wholesale sales will take a hit as retailers reduce their order sizes. That could weigh on margins, which are already under strain because inventories are high and production costs have increased, Roach said.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

Credit: marketwatch.com

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