2 Retail Stocks to Avoid Amid Inflation Uncertainty, According to Barclays

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Inflation is a worry for retailers in an obvious way: If prices go up to protect margins, it could cause sticker shock for consumers, leading them to buy less.

Yet retailers face another threat as well, notes Barclays analyst Adrienne Yih. Companies are buying inventory now, “locking in peak inflationary costs well ahead of unknown demand,” Yih writes. Right now shortages may be keeping supply tight and in turn supporting prices. However, if that bottleneck were to ease, companies may have to offer steep discounts to move merchandise. That would hurt more than usual if they paid top dollar for those products.

Yih downgraded the retail sector to Neutral from positive on Friday, citing this and other concerns. She notes these companies have to walk a very fine line: “Demand is forecasted three to nine months out with pricing locked in, while retailers remain exposed to future demand volatility.” If demand does falter, she warns margins could be squeezed in the back half of the year.

That said, she’s more worried about some companies than others. She downgraded

Wayfair

(ticker: W) to Underweight from Equal Weight, and cut her price target to $103 from $123. Yih’s concerns include slowing growth after the pandemic boom—including a shift back toward more in-store purchases—rising costs associated with advertising and attracting new customers, and sourcing from areas in Asia that are seeing delays.

Although she believes that “the home furnishings segment is shifting online at a double-digit pace in the longer term and Wayfair is gaining the majority of that ecommerce share …the near-term may see a step back in the company’s path to profitability.”

She also took her rating on

Gap

(

GPS

) down to Underweight from Equal Weight, and lowered her target to $13 from $17. Yih is concerned about discounting at its flagship and Old Navy divisions, which don’t enjoy much in terms of brand loyalty, and the increasing need to spend on advertising. That said, the potential for activist investors to call for the company to split off fast-growing Athleta could provide a boost to the shares, she adds.

Apparel retailers

American Eagle Outfitters

(AEO) and

Urban Outfitters

(URBN) were also downgraded by Yih, but just to Equal Weight from Overweight. Citing inflation and inventory concerns, she cut American Eagle’s price target to $19 from $24, and lowered that of Urban Outfitters to $29 from $34.

Write to Teresa Rivas at [email protected]