Retail Gloom Builds on Weaker Consumer Demand, Inflation Worries

(Bloomberg) -- Wall Street is growing increasingly cautious on apparel and footwear companies ahead of their next earnings reports amid rising concerns that consumer demand will flag and inflation will remain high.

Wells Fargo Securities cut its 2022 earnings per share estimates across the industry on Tuesday, while Barclays Plc downgraded the retail sector to a hold-equivalent rating last week. Both were concerned that consumer demand may weaken as prices jump, and Barclays also cited higher input costs for companies.

“There is building concern of a potential slowdown in the consumer — as geopolitical events, rising inflation and rising [interest] rates are already impacting consumer sentiment,” Wells Fargo analyst Ike Boruchow wrote in a note. He said annual guidance from the group looks “increasingly unrealistic” and questioned how long consumers can withstand mounting macroeconomic headwinds.

The dismal performance of apparel and footwear stocks this year reflects Wall Street's increasingly negative outlook. The S&P Supercomposite Apparel and Accessories Index is down 19%, versus a 5.1% year-to-date drop in the S&P 500 Index.

Pessimism around retail stocks is building just one week before the corporate earnings season starts in earnest. Investors will be closely watching corporate America's financials to assess how companies have fared amid rising rates and inflationary pressures, Russia's war in Ukraine and the omicron coronavirus variant.

Both Wells Fargo and Barclays downgraded several stocks in conjunction with their broader calls. Wells Fargo cut its recommendations on VF Corp., the owner of Vans sneakers and North Face apparel, TJX Cos. and Ralph Lauren Corp. VF shares slumped 2.1% on Tuesday, while TJX fell 0.6% and Ralph Lauren dropped 3.9%.

Barclays last week downgraded Gap Inc., American Eagle Outfitters Inc. and Urban Outfitters Inc., as well as online furniture retailer Wayfair Inc.

“As macroeconomic conditions continue to weaken, we see the end of the ‘buy everything rally,'” CFRA analyst Zachary Warring wrote in a note last week, referring to a period in 2020 and 2021 that saw stimulus and pent-up demand send retail shares broadly higher.

Warring recommends investors become more selective and seek out strong brands with proven management teams and consistent growth. He sees opportunities in off-price retailers as consumers return to shopping for deals, and luxury brands, which he expects will continue to have pricing power.