The fear of the U.S. slipping into a recession continues to loom as the Federal Reserve tightens its monetary policies. As inflation continues to soar unabated, industries across different sectors are feeling the pressure. Add to this, supply chain bottlenecks and labor shortages have compounded the woes, particularly, for the retail sector.
These troubles are leading to a pile-up of inventories. Data from Bloomberg indicates that major retailers listed on the S&P consumer index with a market value of more than $1 billion, like Walmart (WMT) and Gap (GPS), have seen their inventories grow 26% year-over-year to $44.8 billion.
This is even backed up by data from the U.S. Census Bureau, which indicates that manufacturers’ and trade inventories for the month of March, adjusted seasonally, went up 2% from the month of February and were worth $2,324.2 billion. This was an increase of 14.1% year-over-year.
The only silver lining to this cloud so far is that consumer spending is holding up. According to the National Retail Federation (NRF), citing data from the U.S. Census Bureau, retail sales in April were up 0.9% from March, on an adjusted basis, and increased 6.4% year-over-year, unadjusted.
In this scenario, is the consumer goods sector still worth investing in? We turned to the TipRanks Top Analyst Stocks tool to answer that question. This tool looks at the top-rated stocks across eight sectors. Currently, this tool indicates that top-ranked analysts are covering around 383 stocks in the Consumer Goods sector.
Out of this, while analysts are cautiously optimistic about around half of these stocks, they remain overwhelmingly bullish about 25% of stocks in this sector, even in the current volatile scenario. Let us look at two such top-rated stocks in this sector.
Levi Strauss & Co. (NYSE: LEVI)
Levi Strauss & Co. is a jeanswear giant whose products are sold in around 110 countries. The company is involved in the design and marketing of jeans, casual wear, and accessories. Its portfolio of brands includes Levi’s, Dockers, Denizen, Beyond Yoga, and Signature by Levi Strauss & Co.
The jeanswear company operates through a combination of retailers, department stores, and online retailing.
Shares of the retailer have tanked 22.8% this year, even as the company delivered upbeat Q1 results. Will the stock continue to struggle for the rest of the year? Judging from LEVI’s long-term plans, it doesn’t appear so.
Last week, Guggenheim analyst Robert Drbul came away bullish on the stock following Levi’s Investor Day presentation.
The analyst was encouraged by the company’s five-year growth plan where it aims to achieve revenues ranging between $9 billion and $10 billion, an annual growth ranging from 6% to 8%, and an adjusted operating margin of 15% by 2027.
Drbul noted that LEVI intends to achieve this target through five key pillars of growth. This includes strengthening its brands by “more effectively integrating product, design, marketing and consumer in-store experiences.”
LEVI is also looking at increasing its investment in “stores, online platforms, and other digital capabilities, further fueling its omni-channel experience.” The analyst estimates that LEVI’s direct-to-consumer channel (DTC) will likely make up 55% of its revenues by 2027 and its e-commerce business is also likely to triple.
Moreover, Drbul is of the view that “significant opportunities” exist for the company when it comes to Women’s wear, Tops, International, and Other Brands categories and expects the contribution of these categories to revenues to rise further by 2027.
As a result, the analyst reiterated a Buy rating and a price target of $33 on the stock, implying an upside potential of 56.4% at current levels.
Other analysts on the Street agree with Drbul and remain bullish about LEVI with a Strong Buy consensus rating based on a unanimous eight Buys. The average LEVI price target of $29.75 implies an upside potential of 56.4% at current levels.
Allbirds (NASDAQ: BIRD)
Allbirds is a lifestyle brand, founded in 2015, that aims to design footwear and apparel using eco-friendly materials. The company debuted on the NASDAQ (NDX) last year and is not doing well. The stock has cratered 63.8% this year and is currently hovering near its 52-week low of $3.71 with a closing price of $5.86 on June 3.
The company currently operates through a combination of retail stores and its e-commerce platform and is serving customers across 35 countries.
In Q1, BIRD delivered mixed results with revenues of $62.76 million, surpassing analysts’ estimates by $793,000. However, the company’s GAAP earnings came in at a loss of $0.15 per share, while analysts were expecting a loss of $0.12 per share.
Joey Zwillinger, Co-Founder and Co-CEO, Allbirds commented, “While we are adopting a more conservative near-term outlook in light of the transitory external headwinds affecting our international business, we expect to deliver strong full year revenue growth of 21% to 24% in 2022.”
Mike Bufano, CFO of Allbirds also referenced the macroeconomic headwinds when it comes to the company’s outlook for the rest of the year and pointed out that BIRDS anticipates “that external headwinds will continue to impact our international business and as such, we are reflecting a more cautious outlook in our updated 2022 guidance targets.”
However, Bufano expects that “these external headwinds are transitory, coupled with the underlying strength of our model and strong execution by our teams, makes us confident in our ability to achieve our medium-term financial targets, including 20% to 30% net revenue growth, gross margin of 60%+ and mid- to high-teens adjusted EBITDA margin.”
In this volatile macroeconomic scenario, will this BIRD fly? Baird analyst Mark Altschwager thinks yes.
The analyst came away upbeat about the stock following a meeting with Allbirds CFO Mike Bufano. Altschwager views the brand as a “high-growth” consumer brand.
Altschwager pointed out that ” with just 11% aided brand awareness, the brand has significant runway to grow revenue simply by reaching more people.” The analyst views the company’s initial public offer (IPO) last year and its store expansion strategy as “catalysts to do just that.”
The analyst views Allbirds’ product innovation and its strategy of using natural sustainable materials such as tree fiber, crab shells, sugarcane, and more as a competitive moat for the company.
As a result, Altschwager is optimistic about the stock with a Buy rating with a price target of $10, which is almost twice the closing price of the stock as of June 3. The analyst’s price target implies an upside potential of 70.6% at current levels.
The rest of the analysts on the Street agree with Altschwager and rate BIRDS a Strong Buy based on nine Buys and three Holds. The average BIRDS price target of $8.83 implies an upside potential of 50.7% at current levels.
Bottom Line
From this list, it is obvious that even with the current macroeconomic volatility, there are stocks in the consumer goods sector, ranging from well-established to nascent brands, that still have the potential to ride out the external negative macro environment.
TipRanks Top Analyst Stocks tool provides just the right answer to investors looking to invest in such stocks, from the technology sector to the healthcare sector.
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