L Brands and Abercrombie Upgraded to Buy on Growth Prospects

L Brands, Abercrombie, Gildan and Kontoor have 'strong long-term growth prospects, a UBS analyst says.
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Victoria's Secret parent L Brands  (LB) - Get Report and Abercrombie & Fitch  (ANF) - Get Report were among the retailers upgraded by a UBS analyst to buy as he favors stocks with strong and under-appreciated post-pandemic growth prospects.

In addition to L Brands, which is also the parent company of Bath & Body Works, and Abercrombie, analyst Jay Sole also upgraded Gildan Activewear  (GIL) - Get Report and Kontoor Brands  (KTB) - Get Report in a report on so-called softlines retail.

All four stocks were climbing on Wednesday.

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"These stocks have strong long-term growth prospects which we believe are not priced in," Sole said in a research note. "We now realize these four companies have made bigger adaptations than previously thought, due to learnings from the past earnings season and our UBS Global Consumer Conference."

Sole said that softline stock prices could increase 7% to 13% into September, "driven by strong upward revisions to sell-side consensus EPS estimates." 

"However, we think the rally ends in September and stock performances could diverge from there," Sole said. "This causes us to increasingly favor stocks with strong and under-appreciated post-pandemic growth prospects over those without them."

Lastly, the analyst said he was increasingly bullish on denim and this had a positive impact on his view of Kontoor, Abercrombie, Levi Strauss  (LEVI) - Get Report and American Eagle Outfitters  (AEO) - Get Report.

Many retailers were forced to shut down or severely curtail their business because of the COVID-19 pandemic. 

Sole said that while the market does not the magnitude of the rebound, by September, U.S. COVID-19 cases should be more contained with likely widely distributed vaccines; and consumers' mobility and store traffic should rebound.

In addition, the analyst said pent-up demand will likely dissipate from peak levels, and fiscal stimulus should be a smaller factor.

Key rebound drivers should have hit their peaks by September, allowing investors to sense the peak of the sales growth rate momentum, Sole said

"We estimate that by September, most US consumers would feel COVID-19 is less of an issue," he said. "While a recovery in the rest of the world likely takes longer, we think that issue will primarily affect those stocks with big leverage to countries where COVID-19 takes a longer time to get under control."

Last month, Abercrombie & Fitch reported fourth-quarter results that topped analysts' estimates. L Brands raised its fiscal first-quarter guidance, citing stimulus checks and easing COVID-19 restrictions.

Abercrombie & Fitch also beat Wall Street's fourth-quarter expectations last month.