Shopping platform Shein poised to take major U.S. market share. UBS thinks these companies will be hurt most

Published Mon, Jun 26 202312:26 PM EDTUpdated Mon, Jun 26 20232:26 PM EDT

Some big-name U.S. retailers could struggle as Chinese e-commerce company Shein gains ground in the country, UBS warned. Shein's latest fundraising push put the company at a $66 billion valuation, according to a Wall Street Journal report. The Journal also reported that the Chinese fast-fashion company saw $23 billion in revenue last year with plans to grow that figure 40% this year. Last year's net profit came in at $800 million. "Investors are asking if SHEIN's momentum can continue and what impact it will have on the US Softlines industry," UBS analyst Jay Sole said in a note to clients. "We believe SHEIN's momentum to continue, and the company could take major market share from US Softlines companies. SHEIN's rise over the last 4 years is another reason we have a bearish view on Softlines stocks." The retailer is privately owned, though some news outlets have reported potential timelines for an initial public offering. Regardless, the company's rise to prominence among American consumers can spell bad news for publicly traded U.S. retailers who stand to forfeit market share. Shein's ascent Some investors thought Shein gained popularity solely because it offered products at lower prices than competitors, Sole said. But also of note was the connection with consumers through in-person marketing events in the U.S., which he said has helped build a "community" around the e-commerce brand. One piece of evidence showing that community is social media. Shein has the most followers on TikTok of any apparel retail company. It also has the third-highest number of followers on Instagram within this group and had the most likes on the platform in May. Monthly UBS data also shows its growing momentum among U.S. women, Sole said. Just 0.6% of the approximately 4,000 women surveyed in June 2020 said they shop at Shein for most female clothing. That percentage rose to 2.5% by June 2022 and came in at 4%, a new high, this month. Sole noted that growth is taking place even as the economy reopened, showing little effect from the return to in-person shopping on the all-digital company. Elsewhere, UBS data showed Shein was the second most-downloaded shopping app in the U.S. over the past month behind Temu.com. It was the top download in four of 10 other nations tracked. Shein was also the most-searched retailer in the U.S., with searches up 29% in May when looking at annualized increases on a two-year basis. That typical Shein customer is an important one, Sole said. The customer spends $100 per month on women's clothing, 60% more than the average female consumer spends on women's clothing. They are generally considered more frequent shoppers for both online and in-person channels, though Shein customers tend to spend a larger share online. Another driving force behind the demand for Shein is its fashion focus. At Shein, 44% of shoppers agree new trends and styles are important to them, while just 22% of all U.S. adults say that. Shein shoppers are also more likely to care about brand than the average U.S. consumer. Nearly a quarter of those Shein shoppers said sales are not important to them, which is higher than average. That can signal factors such as product assortment, marketing and supply chain — and not just price — also affect sentiment. Still, Sole noted the Shein shopper tends to be younger and slightly below average income versus the average U.S. adult consumer. Those customers have primary focuses other than the values of a retailer, which is especially relevant when looking at Shein given criticisms of its business practices. A House report released last week said Shein and Temu violated U.S. tariff law and evaded human rights reviews. UBS' survey of 8,000 shoppers found the top three reasons why women buy clothes at preferred retailers were price, selection and quality. By comparison, the options for "environmentally responsible business," "socially responsible business" and "ethical business practices" ranked 29th, 30th and 32nd, respectively. Retail reverberations Shein's growth in the U.S. could bite into sales for other retailers, Sole said. Though he did not make any official stock picks, he did point to UBS research showing which companies have the most overlap with Shein. Of typical clothing retailers, shoppers of Shein in the last three months were most likely to also shop at TJX Companies ' TJ Maxx during that period. In all, three out of every 10 shoppers who said they used Shein also said they went to TJ Maxx, which is known for discounted prices. A few public retailers had overlap between 20% and 30%: Victoria's Secret , Macy's , Gap Inc. 's Old Navy, Kohl's , Ross and American Eagle . H & M and Goodwill also made the list. All seven stocks on this list have underperformed the broader market this year, with just TJX Companies up on a year-to-date basis. But all are expected to rally by analysts over the next 12 months. There's also high overlap with other retail companies that don't specialize in clothing, including Amazon , Walmart and Target . On the other hand, Express and Nordstrom 's discount chain called Rack had the lowest overlap with Shein customers on Sole's list at 10%. Gap's namesake brand and Banana Republic, which it also owns, closely followed with each at 11%. — CNBC's Michael Bloom contributed to this report.