A resilient consumer and product "newness" are driving up retail stocks. Dana Telsey, founder of Telsey Advisory Group, shares her favorite names. By Teresa Rivas
What does a retailing expert who has followed the industry for more than three decades buy for fun? Socks from Bloomingdale's, if you're Dana Telsey, founder of Telsey Advisory Group, a research, banking, and consulting brokerage firm focused on the consumer sector.
There are exciting developments afoot in retailing today, says Telsey, who has covered the industry since 1994 and hung out her shingle in 2006. Promising trends include the revival of old fashion stalwarts and the introduction of artificial-intelligence-powered shopping assistants.
Telsey, the firm's chief executive and chief research officer, spoke with Barron's last month about consumer spending, back-to-school shopping, and some of her favorite stocks, including Tapestry, Ralph Lauren, and several off-price chains. An edited version of the conversation follows.
Barron's: How would you assess the consumer's financial health?
Dana Telsey: Consumer resilience has been better than expected. Sales trends were better than expected in the first half of the year, even with economic volatility and volatile energy prices. We see some warning signs, whether elevated inflation, a falling savings rate, or continued softness in housing. But consumers are responding to newness and events.
The World Cup brought a lot of innovation in product marketing. We saw different types of companies use marketing effectively in connection with the games. We have seen new wholesale relationships, as well, such as Hollister partnering with Target. Bath & Body Works is selling on Amazon.com. In the fall, beauty will be rolled out at Gap's Old Navy stores. Gap is launching accessories and remodeling 30 stores this year.
So, a lot of newness is driving interest in both consumer brands and retailers. I'm also seeing it in real estate, where investment in shopping centers is driving traffic, which benefits landlords and retailers. There are more store openings than closings occurring in retailing, and more demand for space than supply. And there is strength in certain categories, such as juniors apparel, where new concepts such as Edikted, Subdued, and Brandy Melville are attracting the Gen Z shopper.
What is driving shoppers' financial resilience?
Consumers are drawing from savings. We have seen the savings rate come down. Unemployment is still low, and the labor market is pretty stable. And demand by Gen Z customers is filtering out to their parents and even younger people, too.
What are your expectations for the back-to-school shopping season?
Value remains top of mind as consumers continue to navigate elevated prices and some have pressured budgets. But newness and innovation command full prices, particularly for on-trend brands.
AI will be leveraged for shopping assistance, whether to find deals or identify trends. We will continue to see consumers, especially Gen Z, shop in-store, but also via TikTok and Instagram.
Consumer companies are expected to grow sales by 5.5% in the second half of the year compared with the first half, when sales grew by 5.3%. Inventory levels remain carefully managed for the second half, given the focus on consumer behavior. Also, companies are planning for higher fuel costs.
How will AI help companies in the retail sector?
First, we are still in the learning phase. But over time, we will hear two things: how it's a revenue enhancer and how it's an expense reducer.
On the revenue enhancement front, it provides the ability to curate product assortments and glean insights from data as to what you should produce -- or produce more or less of.
The impact on expense reduction should be interesting. Will AI allow for more consumer-facing events or interactions to take place between employees and customers? Will it help speed up the writing of product descriptions? Or identify which fabrics should be used to produce goods?
Let's turn to some retail stocks you like: American luxury brands such as Tapestry, the owner of Coach, and Ralph Lauren. What lies ahead for these companies?
Coach has seen strong growth in average unit revenue [or AUR] for the past several years. Gen Z customers have been buying at full price, not through discounting. Gen Z consumers have higher retention rates than the balance of other cohorts.
Coach is investing in marketing to help drive growth. Its overseas opportunity is in the early innings. It is more insulated from fashion risk than most other brands due to its robust handbag offering. Leather goods account for around 80% of sales. This is a high-margin, less-seasonal category.
Tapestry's stock is up more than 20% this year, to about $155, and trades for about 20 times earnings. What is the outlook?
Our price target is $160.
Ralph Lauren also is seeing AUR growth, due to four drivers. The product mix has been elevated in style, quality, and value.
The company is also benefiting from its exposure to Asia, its margin-enhancing direct-to-consumer channel, and a pullback in discounting or promotional activity, which has led to more full-price selling. It is looking for normalized growth in average unit retail selling prices in the mid-single digits.
The core Ralph Lauren customer has remained resilient. The company has raised its investment in marketing, which could total 8% of sales this year. It has added around 6.5 million new customers to its direct-to-consumer channel. New customers are coming to the brand through full-price purchases. They are skewing younger, they're less price sensitive, and more are female.
Business in China is also growing. It is expected to grow at a midteens rate this year, and that is encouraging
The women's business, which accounts for about 30% of sales, is a big opportunity for Ralph Lauren. The company has only a 1% market share in women's apparel and accessories.
What does all this mean for earnings, and the stock?
Ralph Lauren could earn around $16.60 a share this year, rising to $18.21 next year. Total sales could easily grow by low-double digits this year. The stock could trade up to around $460 a share from a recent $388, which would imply a multiple of 15 times earnings. That isn't egregious for a company with such a compelling growth profile.
Turning to the other end of the price spectrum, you're a fan of Ross Stores and TJX Cos., parent of TJ Maxx. What is the bullish case for these stocks?
Ross Stores named a new CEO, Jim Conroy, in 2024. He has unleashed a lot of enhancements to the business model, including increased marketing, increased investment in inventories that is driving higher sales, and more investment in the stores. This is helping drive increases in customer counts across income levels, age groups, and ethnicities.
Ross' second-quarter guidance came in way ahead of expectations, with a solid margin profile. The momentum in the business is encouraging to see.
The off-price retailers have opportunities to grow. Ross and TJX are each opening at least about 100 new stores. Ross doesn't have a lot of stores in the Northeast, so that is a particular opportunity to grow.
We expect Ross to earn $7.74 a share this year, up from $6.61 last year. Our stock-price target is $265, compared with a recent $238.
TJX has a great long-term record, but the stock is roughly flat this year. What could lift the shares from here?
With a premium multiple of 29 times the next 12 months' earnings versus a five-year historical average of 24 times, the stock can move higher with continued upside earnings potential. TJX is a best-in-class operator. The company has a history of being conservative in its guidance and has demonstrated durable growth.
TJX is gaining profitable market share given its value focus, a favorable off-price buying landscape, steady comparable-store sales growth, and strategic new-store openings in existing and new markets. The company stands to benefit and capture upside demand from consumers' heightened focus on value across income levels.
TJX raised its 2026 revenue and profit outlook, even though management is anticipating higher fuel costs. We expect the company to earn $5.20 a share, up from $4.73 last year, and the stock to trade up to $185 a share from a recent $155.
Which mall staples are coming back?
One theme I like is legacy becoming modern. That includes Gap and Victoria's Secret. Both have enhanced their product offerings and updated their marketing, and have become more relevant to today's consumer.
Gap has entered its "building momentum" phase, which includes growing the core apparel business with better product, marketing, storytelling, and in-store execution by layering on accelerant categories such as the rollout of beauty to the Old Navy fleet and expanding in beauty and accessories at the Gap brand. The company is also developing a "fashiontainment" platform.
Management is complementing these initiatives by leveraging the company's scale to enhance operational efficiency, while making targeted investments in technology. Not least, Gap is deepening its relationship with key partners, and engaging in new collaborations to foster the appropriate cultural presence for each brand.
We think Gap could trade up to $34 a share from a recent $20 or so. We expect Gap to earn $2.38 a share this year.
As for Victoria's Secret, we see improved momentum, including better performance at Pink and the core Victoria's Secret brand, with the most recent results showing low-double digit growth in the bra category, beauty, and Pink, driven by strength in core apparel and intimates, improved regular-price selling, and increased engagement from the 18- to 24-year-old demographic. Plus, the company has increased the frequency of its brand activations, highlighting product newness with media campaigns and events.
Our price target is $90 a share, and our 2026 earnings target is $4.60 a share.
Thanks, Dana.
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