JPMorgan downgraded shares of Bath & Body Works, Inc. (NYSE:BBWI) and Foot Locker (NYSE:FL) to underweight from Neutral in a note to clients on Tuesday.
In the memo assessing the third quarter for retail stocks, analysts told investors the firm remains more cautious on "'macrodependent' P/Ls with notable exposure to the low/middle-income consumer."
For FL, analysts wrote: "We model 3Q23 EPS of $0.24 (= Street) on comps -9.0% Y/Y (vs. Street -9.3%) more/less matching the August/QTD SSS trend of down high single digits. On margins, we model GPM down 520bps y/y to 26.8% (below the Street at -487bps) driven by increased markdowns with management citing expectations for 3Q to face the greatest markdown headwind in magnitude."
As a result of promotional activity to clear through units and drive sales volumes, JPMorgan estimates FL's underlying FY23 revenues are down low-double digits.
"We see the ~800bps unit liquidation/ promotional activity lap as an incremental headwind to topline performance in FY24, in addition to persistent macro pressures to FL's core low-to-middle-income consumer, driving potential further downside risk to Consensus estimates," the analysts added.
Meanwhile, for BBWI, analysts stated: "We model 3Q23 EPS of $0.34 (vs. Street $0.35 & mgmt's $0.30- $0.40 EPS guide) based on revenues -3.5% Y/Y (versus Street -2.9% & management's down 4% to down 2.5% revenue guidance) which equates to a 4-year revenue CAGR of +9% (= 2Q)."
The firm believes the unfavorable macro and micro setup in FY24 represents a continued constraint to the BBWI topline.
"Management cited consumer behavior continues to be pressured by the macro backdrop evidenced by lower basket sizes and conversion rates (despite positive traffic), while AURs remained Flat during 2Q," said analysts.
"In a scenario where the macro backdrop does not improve and AUR/Basket Size remains Flat with conversion rates offsetting positive traffic, we see downside risk to Consensus +2.2% same-store-sales," they concluded.