Amid fervent spending from the back-to-school season and a bounceback in hiring, consumer discretionary sector is poised to boom. According to Cowen COWN Senior Research Analyst Oliver Chen, there are several stocks to keep an eye on.
It's one of the biggest back-to-school and back-to-work seasons in our lifetimes, Chen told Yahoo Finance Live.
Chen joined Yahoo Finance Live to discuss the companies that might gain the most from this back-to-school season, the state of the luxury market and supply chain disruptions plaguing the consumer discretionary sector.
First, Chen believes that Target TGT is uniquely positioned to benefit from the uptick in spending.
Target did a really good job with curbside pickup or drive-up pickup. So has Walmart WMT Chen said. That's a big modality — where you drive up — and it's extremely convenient and very important. In addition to the progress that Target has made in its curbside pickup business model, Chen cited its diverse product offerings — including home goods, apparel and food – as one of the primary factors enabling the company to capitalize upon the Back-to-School spending season. He also mentioned Target's private brands and merchandising as strengths.
However, Target believes that among all the products available target carries is apparel which will stand at the top of consumer shopping lists this back-to-school season. He also noted that the American Eagle AEO is positioned to ride this momentum in apparel spending in terms of its denim product line.
As for department stores, Chen named Macy's M as being particularly attractive due to its valuation. Compared to competitors Nordstrom JWN and Kohl s KSS which have stock ratios of around 11 and 13 respectively, he believes Macy s sits undervalued at around six.
According to Chen, Macy s is also making strides in the e-commerce space.
What are the changes they're making? It's becoming agile, but much more agile, said Chen. For example, digital will increase about 40% of sales. In order to transform this organization, closing of stores, valuation of the inventory, pricing, and planning manager — those are all key positives. Chen, however, cited the volatility of foot traffic in malls as well as closures as being headwinds to department stores and specialty retailers. All of this, combined with persistent supply chain disruptions and inflated transportation costs going into the holiday season, will likely cause prices for products like apparel and footwear to rise by next spring, Chen said.
In our humble opinion, however, we're selectively bullish on the discretionary sector given the consumer backdrop, given the product trends, and considered selectively on some stocks like Macy's on valuation.