Retailers Stare Into the Darkness, But It Keeps Getting Darker

  • Credit Suisse cuts the group as outlook gets increasingly bad
  • Risks of border adjustment tax are weighing on retail sector

It’s hard out there for retailers -- and it doesn’t look like they’ll be catching a break anytime soon.

Researchers from Credit Suisse Group AG downgraded the retail sector Tuesday, saying the outlook’s become bleaker than they’d thought it would in large part because of what’s been happening in Washington.

In particular, the team headed by Chief U.S. Equity Strategist Lori Calvasina wrote that it’s been questioning whether “the risks of the border adjustment provision in the House corporate tax reform proposal are fully reflected in apparel and retailing stocks.” The researchers cut their view on retailers to market-weight from overweight.

Other firms have issued similar words of caution, with Wells Fargo & Co. analyst Ike Boruchow writing that it’s “increasingly clear that retail is under significant pressure” and that the companies are “running out of time” to hit their first quarter numbers.

Meanwhile, Wedbush Securities Inc. analyst Morry Brown pointed out that trends during the first three weeks of March “only minimally improved from February.” He noted that promotions were broad-based at malls and that conversion rates were low. 

That said, some options traders are betting that a bottom may be nearing for retail stocks. Investors sold puts expiring next month in six companies, including Gap Inc. and Kohl’s Corp.

To reverse their call, the Credit Suisse team is looking at four variables. First, whether valuations in the space fall to levels seen during the financial crisis. Second, whether earnings are revised upwards. Third, internet retail stocks become less crowded and pricey. And fourth, if Congress takes the border adjustment tax off of the table.

“We think there is a long-term value opportunity in this space,” the Credit Suisse researchers wrote, “it is not clear to us that valuations are truly washed out just yet.”

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