Barclays downgrades a string of retail stocks as its hopes for a V-shaped recovery fade

Published Tue, May 2 20232:13 PM EDT

Christina Cheddar Berk @in/christina-cheddar-berk-b864404/

Consumers across all income levels are pulling back on spending, according to a Barclays Capital promotions tracker, prompting analyst Adrienne Yih to downgrade a host of retail stocks. "Our bottom-up approach to analyze promotions across the retail landscape, regardless of category and target income bracket, suggests that retailers are struggling to drive traffic, conversion, and sales, despite markedly cleaner inventory levels," Yih wrote in a research note Tuesday. Many retailers had expected weak sales in the first half of this yea, followed by a pickup in the second half. However, Yih said, the pace of sales and discounting suggests that this scenario — a V-shaped recovery — is now less likely. FIGS 6M mountain Barclays downgraded Figs shares to underweight from equal weight. Yih said investors should structure their holdings to protect against a "product recession." In other words, they should limit their exposure to consumer discretionary names. When investing in retail, pick "best-in-class" stocks, she said. With that in mind, Barclays slashed its investment ratings on the following stocks to equal weight from overweight: Capri , National Vision , Canada Goose , Under Armour and Victoria's Secret . Figs was downgraded to underweight from equal weight. The cut in Figs' target price to $4 from $6 implies 45% potential downside from Monday's close. Yih said that not only will the company face the same economic pressure as other retailers, it's also facing new competition from Fabletics, which recently entered the scrubs market. While National Vision shares were slightly positive in trading Tuesday afternoon, the other downgraded stocks were all lower. Figs shares shed 6%, Canada Goose fell more than 5% and Victoria's Secret was down more than 3%. Which names are well-positioned in retail? "Taking a look back at the 2008/2009 recession, we have found that no company was immune to the broader pullback in spending," Yih said. However, she expects that consumers are more likely to seek out value by buying the items they need at off-price retailers such as TJX Cos ., Ross Stores and Burlington Stores. Also, some companies have "structural moats" or "company-specific drivers" that will help their performance. Among those are Lululemon and Nike , she said. Lululemon shares have risen 19% year to date, while Nike is almost 9% higher. Exposure to China's economic reopening can benefit some companies, but not enough to help Michael Kors-owner Capri, according to the analyst. Higher income households are feeling the pressure of inflation and rising interest rates, and that will hurt Capri, she said, noting an increased pace of promotions in its fiscal third quarter. Capri shares were down nearly 5% on Tuesday. The stock has fallen 31% year to date. CPRI YTD mountain Capri shares have fall 31% since the year started.