Two Undervalued Retailers To Ride Out The 2021 Rebound

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The Consumer Discretionary Sector has rebound as strongly as any other in the market. Up nearly 100% from its low, the Consumer Discretionary SPDR (NYSEARCA:XLY) is a tale of two markets. On the one hand, were those discretionary sectors well-positioned for stay-at-home-play-at-home trends on the other those that weren’t.

Among the winners are home furnishings, outdoor recreational equipment, and, believe it or not, the used and preowned car industry. Among the losers were names like Tapestry (NYSE:TPR) and Capri Holdings (NYSE:CPRI) but now the tides are turning. After better than expected results in the second quarter both are expected to be leaders in what is shaping up to be a strong rebound in the luxury goods sector. With winter coming on and the holiday season at hand demand is expected to be strong.

Painting in broad strokes, the Consumer Discretionary Sector is expected to 1) post the 3rd worst earnings decline in 2020 and 2) the 3rd best earnings rebound in 2020. On a quarter to quarter basis, the biggest decline in earnings occurred in the past quarter and things are already returning to a more “normalized” level. The 3rd quarter should see earnings flat or even positive by the end of the reporting cycle and the 4th quarter should be even better. The bottom-line? Consumer Discretionary stocks negatively impacted by the virus have bottomed and likely to move higher over the long-term.

Tapestry Is Riding A Wave Of Bullish Sentiment

Tapestry, the parent company of brand Coach, is riding a wave of bullish sentiment. The company has received at least four major analysts’ calls since it reported calendar 2Q results and they all amount to the same thing. This stock is an undervalued retailer with a compelling long-term outlook for profit growth. At these levels, it is a buy and well-positioned to ride out the next year. What makes the stock even more attractive is the chance of dividends. The company suspended its payment in April and is on track to bring it back within the next 12 months.

Needham’s Rick Patel thinks Tapestry's guidance for FY21 is likely on the conservative side with June sales improving to 30%. He expects bottom-line growth for Tapestry in FY21, FY22, and FY23. Piper Jaffray issued the most recent upgrade, a double upgrade from Neutral to Overweight, calling it a “value recovery play” with long-term potential. Trading at only 9X earnings, the company is a value and with fully half the analyst’s community (16 total) still sitting on the fence this stock could see significant upside

Capri Holdings Global Recovery Accelerates

Capri Holdings, parent company of Michael Kors, also got a double-upgrade that points to long-term gains for shareholders. The stock was upped to Overweight from Equal-Weight at Morgan Stanley who cited the company’s quicker than expected global recovery.

The upgrade comes just days after the company issued favorable guidance so I will not be surprised if more will follow. Capri Holdings says that trends seen in Q1 and Q2 have carried through August painting a brighter picture for fiscal year EPS. Fiscal 2021results are still expected to be weak but much better than previously predicted and the outlook for 2022 is also rising. The company now expects to see revenue top $7 billion in 2022 or up 95% from 2021 and 25% from 2020.

The average analysts’ rating is bullish but once again more than half are still on the fence. With results steadily improving and the outlook for next year so bright we can expect to see more analysts get bullish on this stock. In the technical sense, the price action is poised to make a run up to retest resistance at the post-COVID high. If price action can break above that level this stock is a buy. Regardless, it is a well-positioned brand rebounding in the post-pandemic world and trading at a deep value.