The coronavirus has thrown a wrench in this year’s back-to-school season, but these 2 stocks could still see a boost as students prep for a new school year.
September is looming and with it will come the scent of freshly sharpened pencils.
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This year’s back-to-school season is fraught with debate over how to welcome students back amid the coronavirus pandemic.
Whether schools open for in-person or online classes, or a combination of both, the back-to-school season will look far different than it has in years past, and Cowen analyst Oliver Chen expects to see lower demand this year for apparel, footwear, and home items.
“Cowen analysis indicates [back-to-school] could be an incremental -5-10% headwind to 3Q as shoppers pull back on apparel & seek promotions,” Chen wrote in a note to clients this week.
While the back-to-school season is typically a boon for some retailers, the coronavirus crisis has upended the nation, causing unprecedented financial and societal disruption from economic shutdowns and restrictive reopening guidelines. When it comes to school, resuming in-person classes for students remains a complicated decision and retailers will be vulnerable to softer sales given all the uncertainty.
Chen believes shoppers will buy less clothing and seek out sales. Moreover, Chen says consumers won’t simply redirect what they would have spent on clothes, electronics, and then some, but instead, shopping will be down across the board and expectations for third quarter results “will need to be revised lower accordingly.”
Still, Chen says some retailers will fare better than others. Chen reiterated an Outperform rating on Ulta (NASDAQ: ULTA) and issued a $280 price target on the stock – 37% higher than the price as of this writing.
Chen says some of the money that would have been spent on clothing could be redirected to beauty, and Ulta boasts impressive online sales during the pandemic, and the analyst says its off-mall locations are a benefit and its valuation is “modest.”
The Cowen analyst is also bullish on Target (NYSE: TGT). Chen rates the big box retailer an Outperform with a $150 price target – indicating 16% upside from current levels.
Target will benefit from momentum in categories outside of clothing, including home decor, food, and essentials. Chen also likes Target’s online order store pickup capabilities, which has recently been expanded to include some grocery items.
“We acknowledge some weakness in the back-to-school portion of Home, but believe shoppers noting at home will be a key category driver over the coming quarters,” Chen said.
But while Ulta and Target could see a boost from this year’s unique back-to-school season, Chen says names like American Eagle (NYSE: AEO), Gap (NYSE: GPS), and Kohl’s (NYSE: KSS) will take a hit from reduced back-to-school apparel shopping.
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