Barclays Downgrades Ralph Lauren, Starts L Brands With Equal Weight, Gap With Underweight

• While shares of Ralph Lauren Corp RL and Gap Inc GPS have lost more than 30 percent year-to-date, L Brands Inc LB shares are up 11 percent.
• Barclays’ Joan Payson downgraded the rating on Ralph Lauren, while initiating coverage of L Brands and Gap.
• The apparel & accessories space may see consolidation. Certain companies are reinvesting in their existing brands, while some monobrands are considering a multi-brand model, Payson stated.

Time Is Ripe For Consolidation

With continued slowdown in growth at retail brands over the last three years, the apparel & accessories space appears to have become “more ripe for consolidation,” analyst Joan Payson said.

Payson believes that there are “prime opportunities” for using M&A to reignite the growth momentum, as well as drive strategic advantages and profits. This is especially so in more fragmented categories.

The analyst commented, “We now prefer portfolio companies to monobrands: We see more earnings power for less concentrated portfolios that can capitalize upon consolidation, internal or external, for growth, and leverage this diversity and scale for share and margin gains.”

Companies Reinvesting In Existing Brands

On the other hand, there are certain portfolios that are focusing on reinvesting in their existing brands. In this segment, L Brands has risk of short-term downside. Payson initiated coverage of L Brands with an Equal-Weight rating and a price target of $85.

Barclays also initiated coverage of Gap with an Underweight rating and a price target of $22, citing “ongoing uncertainty around the Gap brand turnaround, which will likely take time.”

These companies are witnessing pressure on margins, with “a wide series of headwinds” having an impact at a time when comps are negative. This suggests increased EPS declines ahead.

Companies Considering A Change In Model

Certain monobrands have starting considering a shift to the multi-brand model. In this category, Payson downgraded Ralph Lauren from Overweight to Equal-Weight, while reducing the price target from $150 to $130. While saying that the efforts underway were encouraging, Payson noted that “restructuring takes time.”