Mizuho Initiated Softlines Specialty Apparel Sector - Abercrombie & Fitch (NYSE:ANF), American Eagle Outfitters (NYSE:AEO)

Mizuho initiated on Softlines Specialty Apparel sector with a cautious near-term outlook. Overall Seasonal Analysis:

Predictions of a colder winter encourage an emerging sweater trend.
Expects aggressive promotions to continue during the Holiday season.
Anticipates cautious fourth quarter guidance due to one less selling week, traffic volatility, and carry over inventory.
According to a NRF survey, preference for discount stores increased and specialty stores decreased. In addition, consumers have a heightened desire to receive clothes this year (from 49 percent last year to 51 percent this year.)
Expects online sales to reach approximately 20 percent penetration from the current 10-12 percent average. Additional features aiding this progression include free shipping and returns, ship to store, reserve in-store, personalized promotions, and rewards for loyalty program members.

Attractive Growth Niche Markets:

U.S. women's intimates market retail sales reached $11.5 billion, according to IBIS. Mizuho commented, "We believe the bra segment is the largest and fastest growing category of the U.S. intimate apparel market, representing half of the intimates market followed by underwear at approximately one-third. The business is expected to post annual growth of 2 percent from 2012-2017. With the leading player in the industry accounting for ~22 percent of market share (Victoria's Secret), other retailers have established new concepts/businesses in recent years to capture this highly loyal client base.
According to NPD, the Unites States prestige beauty industry generated approximately $10.2 billion of total sales in 2012. Fragrance continues to rise 4 percent YOY to reach $1.1 billion.
Mizuho estimates that accessories represents 10-20 percent of overall sales for softlines retailers and expects retailers to focus on driving sales of accessories given profitability opportunity. The note states, "While productivity of footwear sales may prove unappealing to some retailers given the square footage demands, we believe sales of handbags, jewelry, belts, hats and scarves, among other accessory classifications, can dramatically lift sales productivity while assisting her to complete the entire outfitting experience."

Mizuho Initiated a Buy Rating on the Following:

ANN ANN with a $40 PT as the company has strong momentum from ATS and Loft and "is at the cup of reaching operational efficiencies.
Express EXPR with a $28 PT due to the expectation that shares will outperform the peer group.
The Gap GPS with a $46 PT as the analyst is confident in solid revenue games and that the company will achieve consensus forecasts.
The Children's Place PLCE with a $58 PT due to the "company's plethora of opportunities to drive revenue and margin expansion in upcoming years from (1) differentiated merchandising, (2) enhancement of Outlet merchandising margins to parity with retail, (3) entrance into wholesale business, (4) productivity gains from closure of underperforming stores and (5) ramping of higher-margin eCommerce segment."
Pacific Sunwear of California Inc. PSUN with a $3 PT noting an outperformance in differentiated junior's fashion, improving men's momentum, healthy inventories, and an overall attractive valuation.
Urban Outfitters URBN with a $45 PT since the company has demonstrated long-term growth potential, attractive portfolio brands, and "impressive omni-channel infrastructure."

Mizuho initiated a Neutral rating on:

American Eagle Outfitters AEO with a $17 PT as recent appreciation from earnings increased investor expectations.
Abercrombie & Fitch Co. ANF with a $36 PT as Mizuho is disappointed with lack of product improvement.
Aeropostale ARO with a $9 PT due to anticipation that the stock will weaken from slow merchandising evolution, heavy inventory levels, depleting cash position, and sever pricing discounts.
Bebe Stores BEBE with a $5.50 PT as a turnaround will take time and heavy inventory levels in a hard retail environment will contribute losses.
Chico's CHS with a $19 PT since current valuation reflects the company's square footage and potential.
Francesca's Holdings FRAN with a $20 PT given, "the company's issues with reassorting the gifting category and the promotional environment will linger as we enter the more critical Holiday timeframe."
Guess GES with a $30 PT due exposure to macro-challenged European companies, prolonged product turns in North America, margin pressure in new territories, and continuous management turnover.
L Brands LTD with a $65 PT given current valuation reflects the company's square footage rollout and productivity initiatives.
Lululemon Athletica LULU with a $70 PT with concerns regarding the company's ability to reaccelerate comps, meaningfully expand margins, the rising competition, CEO overhang, and international business investment.
Men's Wearhouse MW with a $47 PT since current stock action reflects a potential takeout.
Tilly's TLYS with a $15 PT given current valuation reflects investors' expectations.
Zumiez ZUMZ with a $27 PT as "domestic expansion, scale and growth of Blue Tomato in Europe, and increasing overall penetration of the omni-channel business could be partially offset by near-term sales and margin compression in the U.S. (including a highly promotional teen landscape) along with growing contribution from a lower margin Blue Tomato business that could dilute consolidated margins."

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