US Softlines Retail Industry Outlook: Still Bullish, but Less So M/M

Research evidence excerpt

US Softlines Retail Industry Outlook: Still Bullish, but Less So M/M

spending philosophy is "Live for today because tomorrow is uncertain," up almost

1500 bps vs. the pre-great financial crisis average (Fig. 22). Together, these factors

create a potent pro-spending force, in our view.

2. The Back-to-School read is reasonably positive. The survey data suggests Back-to-

School/Back-to-College spending on clothing, shoes and accessories will increase

2.3% y/y (Fig. 26), with the Back-to-College shoppers showing more strength vs.

Back-to-School shoppers. At the same time, 23.1% of consumers have completed

more than 50% of their Back-to-School/Back-to-College shopping, based on our

analysis of the data. This is 130 bps above last year's level (Fig. 31).

...and sentiment is weak, in our view:

Softlines typically trade at an 8% FY1 P/E premium to the S&P 500. Today, the stocks are

trading at a 26% discount (Figs. 56-57). Plus, the Softlines group P/E is 13% below its

historical average (Fig. 58). Our conversations with investors corroborate the valuation

data indicating sentiment is weak:

Generalist investors prefer stocks with more direct AI exposure. This makes

Softlines a natural underweight or short for these investors. While some generalist

investors are worried they have too much AI exposure and are looking to diversify,

they aren't finding suitable ideas in Softlines. We believe the reason for this is the

AI-linked investment opportunities continue to look very compelling to generalist

investors.

The bar is low for shorting stocks. Our observation recently is if a theme emerges

which is incremental and negative, it makes almost any stock exposed to that

theme a short, even if the magnitude of the theme is minimal. We believe the