Citi Loves Lululemon, TJX; Is Selling JC Penney & Michael Kors

Paul Lejuez, Citi's Specialty Retail & Department Store analyst argued in a note that while macro headlines seem to "change by the hour," many of the industry dynamics that have been influencing the group remain in place. Accordingly, despite what some may describe as a "stormy sector," there are some positive stand-outs. Lejuez continued that there five industry factors that matter most and may even trump macro headlines: 1) ecommerce "changes everything" and not necessarily for the better, 2) store closures are not solving company specific problems, 3) consumers are "buying stuff," but not necessarily clothes, 4) turnarounds "ain't workin'," and 5) factory outlet economics are changing. "As for the macro, we believe the consumer is fine (not great, not weak) but importantly, there is enough uncertainty to play a role into how we think about certain subsectors and companies within our universe," Lejuez wrote. "Combined, the five industry factors within our retail universe and the overlying macro uncertainty form the umbrella under which we base our investment recommendations."

Lejeuz named Lululemon his top pick and initiated coverage of the stock with a Buy rating and $69 price target. The analyst offered five factors to support Lululemon being ranked highest: 1) the company has a "powerful brand" within the "great" athleisure sector, 2) the company's global expansion will provide the next leg of growth, 3) product innovation keeps the company ahead of its competitors, 4) margin upside potential, and 5) sales productivity levels are high but holding steady.

Lejeuz named TJX Companies as his second top pick and initiated coverage of the stock with a Buy rating and $88 price target. The analyst offered five factors to support his bullish thesis: 1) The company's off-price format is a "winning" model, 2) TJX is among the few retailers showing traffic increases, 3) HomeGoods is "on a tear, 4) global growth opportunities "seems endless," and 5) the company has a reputation of being consistent in comps, cash flow, and return of cash.

Lejeuz named JC Penney as his least favorite stock to own as he initiated coverage with a Sell rating and $7 price target. The analyst offered five factors to support his stance on why the retailer is the worst company in the group: 1) it's "tough" for any company to come back from "self-inflicted wounds," 2) the company has fallen behind the ecommerce curve, 3) free cash flow will likely be "elusive" for years to come as it spends to catch-up, 4) it has yet to be seen if the company can capitalize on the "significant" room available to improve sales productivity, and 5) while there are many theoretical paths for management to achieve its 2017 goals, they all "seem aggressive."

Finally, Michael Kors ranked as Lejeuz's second least favorite stock to own as he initiated coverage with a Sell rating and $38 price target. The analyst offered five factors to support the only other name that was initiated with a Sell: 1) the brand is "overdistributed," 2) productive stores "still have a long way to fall," 3) Europe and wholesale may be next to "deteriorate," 4) normalized EBIT margins are a "big question market" and could fall by half, and 5) new introductions for Spring 2016 is not enough to offset the "brand fatigue" and "competitive forces."