The lifestyle stocks to own in 2024, according to Piper Sandler

Discussing the 2024 outlook for global lifestyle brands, retail and digital disruptors, Piper Sandler said it believes the most important swing factor will be whether there will be a shift back to discretionary goods. Both Walmart (WMT) and Target (TGT) have been clear that a shift to more discretionary items would drive a favorable margin mix. The firm is inclined to be constructive on this point — assuming that consumer spending remains stable — arguing that disinflation and deflation and more moderate experiential spend could drive a wallet share shift to discretionary purchases. Piper Sandler remains Overweight on both big box retailers, and upgrades Revolve Group (RVLV) and Burlington Stores (BURL). Within its coverage, the firm’s favorite 2024 ideas are Target, Revolve, and Warby Parker (WRBY).

2024 OUTLOOK: Piper Sandler believes inventory/sales spreads are finally largely under control. While 2024 does not present the same easy margin comparisons as 2023, the firm does think that gross margins should show modest improvement in 2024, and believes shipping cost tailwinds have largely abated.

Piper thinks that Target, Burlington, and Revolve are the most actionable ideas in the group within the next 12 months as all three have visible gross margin expansion opportunities. It also believes that all three are well positioned should discretionary trends improve. From a longer-term perspective, the firm says Walmart and TJX (TJX) should be two of the biggest market share gainers in retail, and both will continue to justifiably maintain premium valuations. Finally, within its SMID cap coverage, Piper continues to like Warby and Birkenstock (BIRK).

REORDERING RATINGS: The firm has upgraded Revolve Group to Overweight from Neutral with a price target of $21, up from $16, as it believes more controlled inventory and likely improvements in return rates will help drive gross margin expansion. Piper also thinks a “rapidly consolidating/collapsing” luxury online space will offer significant long-term opportunity for Revolve’s FWRD segment.

Additionally, the firm upgraded Burlington Stores to Overweight from Neutral with a price target of $240, up from $155. Piper is increasingly confident in the company’s 30-0-plus basis point margin expansion opportunity and believes that its market share gains are likely to continue. Department stores have remained highly conservative for the first half of 2024 inventory buys, which creates a favorable environment for off-price to take continued share, the firm told investors.

On the flip side, Piper Sandler downgraded Rent The Runway (RENT) to Neutral from Overweight with a price target of 75c, down from $2. The equity value represents a “mere” 20% of total enterprise value, and meaningful reduction in leverage will be necessary over the medium-term, the firm notes. Piper further says that while Rent The Runway’s recent cost initiatives should help drive better financial performance near-term, both marketing and inventory investments may be needed to drive the necessary long-term growth.