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A Recession Will Be 'Healthy' for Economy: Carta CEO
A Recession Will Be 'Healthy' for Economy: Carta CEO

Gap Makes Morningstar List of Undervalued Retail Stocks

Consumers will likely shell out $1,455 per person for the holidays, according to a study from consulting firm Deloitte.
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Soaring inflation may restrain holiday spending but apparently won’t hurt it too badly.

U.S. consumers will likely shell out $1,455 per person for the holidays, unchanged from 2021, according to a study from consulting firm Deloitte.

Meanwhile, Morningstar predicts modified retail sales will rise 3.2% in the fourth quarter from a year earlier, less than the 14.1% increase of a year earlier.

Modified retail sales represents Morningstar’s measure of goods that are subject to holiday sales. This metric excludes automobiles, fuel, building materials and groceries.

Given this scenario, you might wonder which retail stocks are attractive. Morningstar lists several that it sees as undervalued, including:

Gap: Morningstar analyst David Swartz assigns no moat (competitive advantage) to the company and puts fair value for the stock at $25. That indicated 85% upside from recent trades at $13.55.

“Gap reported a dose of positive news in an otherwise trying year, as its third-quarter results were better than expected,” he wrote in a commentary.

“Much work needs to be done, though, as the company remains without a permanent CEO and high discounting is expected in the holiday period due to elevated inventories and slowing consumer spending.”

Gap predicted sales will fall by a mid-single-digit percentage in the fourth quarter, worse than Swartz’s negative 1% estimate. But he still thinks Gap’s shares are undervalued.

Bath & Body Works: Morningstar analyst Jaime Katz gives the company a narrow moat and puts fair value for the stock at $82. That's more than twice recent trades at $38.51.

“Like numerous other retailers, Bath & Body is not immune to economic headwinds. The firm is set up for further sales declines in the fourth quarter,” she wrote in a commentary.

But, “higher costs are likely to be transitory …, leading to the return of operating expense leverage,” she said.

“Furthermore, the firm should experience lower costs from logistics and inflation, as the supply chain unfurls, returning gross margins to around 45%.”

The company’s strong innovations also contribute to Katz’s forecast for 4% average sales growth over the next decade, she said.

Farfetch: Morningstar analyst Jelena Sokolova assigns no moat to the company and puts fair value for the stock at $18.70. That's more than twice the recent trade at $7.83.

Farfetch reported that growth in gross merchandise value slowed in the third quarter from the second quarter. And it lowered its full-year guidance for the third time this year, she said in a commentary.

But “we continue to believe that the current slowdown is temporary, hit by a difficult comparison base from prior years, due to coronavirus lockdowns, suspension of operations in Russia (6% of revenue in 2021) and recent lockdowns in China, leading to double-digit declines this year,” Sokolova said.

“We still see structural growth behind increasing online penetration of the luxury industry, of which Farfetch should be a beneficiary.”

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