It seems retail consumers are undeterred by the rising inflation as indicated by retail sales in February. According to a press release from the U.S. Census Bureau, the advance estimates for retail and food service sales in the U.S. for the month of February showed an increase of 0.3% from January – a slowing monthly pace.
However, on a year-over-year basis, sales in February rose 17.6%. This prompted National Retail Federation (NRF) President and CEO Matthew Shay to comment, “Despite all that’s been thrown at them including inflation, supply chain constraints, market volatility, and significant geopolitical events, consumers remain able and willing to spend.”
Indeed, the NRF anticipates retail sales this year to grow in the range between 6% and 8%. With retail sales expected to grow amid inflation, should investors consider retail sector stocks? Yes, seems to be the answer from Wall Street analysts.
Using the TipRanks database, we looked at some top-rated analysts’ stocks in the consumer goods sector, and specifically retail. For the purpose of this article, we have ignored the giants of the retail sector like Amazon (AMZN) and picked smaller stocks that offer significant upside potential and carry with them heavy bullish sentiments.
Here are the top three picks.
Tapestry (NYSE: TPR)
New York-based Tapestry, Inc. is a house of luxury accessories and lifestyle brands including Coach, Kate Spade, and Stuart Weitzman. Shares of Tapestry have dropped 8% year-to-date. However, for Wells Fargo analyst Ike Boruchow, the stock remains a “top pick at a bargain.”
Late in February, the analyst came away bullish on the stock following a meeting with the company’s management. His key takeaway was that the momentum in Tapestry’s business continues to remain strong, despite macroeconomic headwinds.
Elaborating further, Boruchow pointed out that the outlook for TPR’s handbag category is “favourable” as “management expects growth in the category to return to the historic +MSD [mid single digit] to +HSD [high single digit] rate as COVID headwinds subside.”
Another positive for the stock is that the company’s enhanced data and analytics capabilities are leading to higher average unit retail (AURs), “increased full price selling [and] improving inventory turns.”
Boruchow is also upbeat about TPR’s digital business which saw revenues grow 30% year-over-year in Q2 of FY22. The analyst believes that rising digital penetration will create a “long-term margin tailwind that we believe is underappreciated by investors.”
Moreover, according to the analyst, Tapestry has a competitive advantage in China with its Coach brand that has existed in the country for decades. Coach has an “extremely high brand awareness” and is at an affordable price point in China, giving it access to a growing and massive middle class addressable market.
Boruchow assigned a price target of $58 on the stock, implying an upside potential of 54.4% to pre-market trading levels on Thursday.
Other analysts on the Street echo Boruchow, with a consensus rating of Strong Buy based on 10 Buys and two Holds. The average TPR price forecast of $56.17 implies approximately 49.5% upside potential to pre-market trading levels on Thursday.
Kontoor Brands (NYSE: KTB)
Kontoor Brands, Inc. is a lifestyle apparel company that has a portfolio which includes the iconic consumer brands, Wrangler and Lee. While shares of KTB have tanked 16% year-to-date, Guggenheim analyst Robert Drbul sees four potential growth catalysts for the stock, as outlined by the company’s management.
Kontoor is focusing on enhancing its core wholesale business in the U.S. and expects this business to grow in high single-digit to low double-digit percentages in 2021, followed by low single-digit percentage growth in FY22 and FY23. Moreover, KTB is also focused on extending its retail categories to outdoor, tees, and work apparel.
Drbul expects the growth from “the outdoor, work, and T-shirt categories to amass over $200 million in revenue for KTB over the next 3 years.”
China is proving to be an important market for KTB, and the company is focused on expanding its business in that space. The analyst expects KTB’s Chinese market to grow at a Compounded Annual Growth Rate (CAGR) of 25% over the next three years, and comprise 10% of the company’s sales in 2023.
Drbul also anticipates that the digital business will increase at a “ ~40% CAGR over the next 3 years.”
The analyst is positive about KTB’s $1 billion of cumulative cash from operations, and believes that it gives the company “significant optionality as it relates to capital allocation.” As a result, Drbul has rated the stock a Buy and set a price target of $75, indicating an upside potential of 72.6% to early morning trading levels on Thursday.
Other analysts on the Street are also upbeat about the stock, with a consensus rating of Strong Buy based on four Buys and one Hold. The average KTB price forecast of $63.20 implies approximately 45.5% upside potential to early morning trading levels on Thursday.
Turtle Beach Corp. (NASDAQ: HEAR)
Turtle Beach is a gaming accessory provider, and its products include keyboards, mice, headsets, mousepads, and other PC accessories.
On March 22, the company gave a mid-quarter update and stated that it delivered an EBITDA margin of 10% in a “challenging year” and remains on track to deliver around $100 million in non-console headsets revenue this year.
HEAR added that over the past five years, the company has delivered five-year total shareholder returns of more than 350%.
The company also released a statement regarding the Donerail Group and the SCW Capital Management’s efforts to take control of the company. Donerail intends to nominate six candidates to stand for election to the company’s Board of Directors.
Turtle Beach stated in its press release that this attempt by Donerail to gain control of the company is an attempt to achieve its objective “without paying a control premium to all Turtle Beach shareholders.”
As a result, HEAR’s Board is “not supportive of Donerail’s attempt to take control of the Company after failing to provide adequate proof of financing with respect to its prior proposals to acquire the Company.”
These takeover rumblings have also led to an erosion in the company’s stock price, which has dropped 12.8% year-to-date.
While Wedbush analyst Michael Pachter is sidelined on the stock with a Hold rating and a price target of $24, the analyst remains “positive on Turtle Beach long-term” as it has “repeatedly proved that it can maintain or build market share in various environments.”
The analyst’s Hold rating on the stock stems from the fact that Pachter thinks that the stock has “limited upside over the next two quarters based on various headwinds” which is likely to drag down the stock price over the near term.
However, Turtle Beach has a consensus rating of a Strong Buy from other analysts on the Street based on five Buys and one Hold. The average HEAR price forecast of $30.83 implies approximately 52.6% upside potential to early morning trading levels on Thursday.
Bottom Line
Except for Turtle Beach, the other two stocks seem to be targeting or expanding into new markets, like China, and are also focusing on their digital channels. For Turtle Beach, the company seems to be progressing well when it comes to its gaming accessories business.
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