Fast-Fashion Stores Still Feeling the Heat Online
Europe’s fast-fashion retail stocks are back in the spotlight.
(Bloomberg) -- Europe’s fast-fashion retail stocks are back in the spotlight. After a disastrous 2018, hurt by the summer heatwave and increased discounting, the shares are beating the benchmark Stoxx 600 Index this year.
Yet, not all are doing well in equal measure. Inditex, owner of the Zara chain, has fallen out of favor with investors, according to Citigroup analyst Adam Cochrane, and Wednesday’s quarterly results will be a chance for the Spanish retailer to show whether its sales target for the year is on track. Swedish fashion giant H&M reports revenue next week and the strength of its recovery will be key. Shares for both companies, which have an extensive high-street presence, lag behind the performance of their online-only peers. Zalando shares, for instance, are up 61% this year, making them the third-best performer in the Stoxx 600.
Investors have been attracted to the growth profiles of online retailers as people increasingly shop via smartphones and tablets. In the U.S., online fashion retailer Revolve Group has been making a splash with investors after pricing shares in its initial public offering at the top end of a marketed range last week. The stock has nearly doubled since it began trading on Friday.
“Online retail is still relatively underpenetrated,” says Gavin Launder, a fund manager at Legal & General Investment Management. “Barriers to entry are pretty low -- it’s a bit of tech spending, really, and given the size of the market, there isn’t really any barrier to growing either.”
When investors support companies such as Asos, Boohoo or Zalando, they’re backing the management team’s ability to carry the right product, Launder says. The valuation ratios of the three are well above those of Inditex and H&M.
So just what would it take for the gap to narrow? Inditex needs to give more information about its online business, in terms of scale and profitability, according to Launder. Otherwise, there needs to be either a high-street recovery or doubts about growth for the online retailers.
But the one to watch is Amazon, according to Launder, which is already disrupting other sectors such as grocery and online food delivery. Amazon does sell apparel, but it’s typically a more standard assortment of products such as jeans, t-shirts and sneakers. “That’s not to say they couldn’t do it,” he says. “My suspicion is that if they did want to, they’d end up buying something. That’s a quick way to do it.”
In the meantime, Euro Stoxx 50 futures are trading up 0.2% ahead of the open.
- Watch miners after iron ore prices surged on bets Chinese stimulus measures targeting infrastructure projects will increase steel demand. Watch Rio Tinto, BHP, Anglo American and Ferrexpo in particular.
- Watch oil companies as crude closed down in New York for the first time in three days amid rising concerns about the likelihood of a global economic contraction and mounting supplies. Hedge funds have also slashed bets on a rally in West Texas Intermediate. Oil futures bounced overnight as Saudi Arabia maintains that it will work with Russia and other members of the OPEC+ coalition to prevent a further slump.
- Watch impact from Chinese Central Bank defending the yuan, as it set its reference rate for the yuan higher than forecast and said it plans to sell bills this month after the currency was hit in May as the trade war escalated and the economy slowed.
COMMENT:
- “U.S. equity valuations remain attractive relative to fixed income. There are opportunities in quality and growth, but these are very stock- or vertical (i.e., within a sector)-specific,” Amundi Chief Investment Officer Pascal Blanque writes in a note. “We see value in companies linked to infrastructure/ cloud/data centre spending (these stocks sit in three sectors), selective financials such as insurance brokers, and auto & home insurance. European equities could offer interesting entry points after the EU elections, should the economic outlook improve in 2H and domestic demand remain resilient, as we expect.”
COMPANY NEWS AND M&A:
- Nissan Extends Olive Branch to Renault as Relations Hit New Low
- Fiat Senior Adviser Met Mitsubishi Motors Heads in Japan: Asahi
- LafargeHolcim FY ’18 Scrip Dividend Issue Price CHF45.09
- Audi Recalls First Electric Vehicle in U.S. on Battery Fire Risk
- Oriflame Owners Should Accept Bid, Independent Committee Says
- Air France-KLM May Passenger Traffic Rises 4.8%
NOTES FROM THE SELL SIDE:
- Morgan Stanley upgraded Hugo Boss to equal-weight following recent de-rating, saying earnings risks are fully discounted and risk-reward appears more attractive. Stock loses its only negative rating among analysts tracked by Bloomberg.
- Knorr-Bremse is worthy of a premium valuation because of its strong market positions and a relatively defensive profile, but this is now reflected in valuation, Berenberg says in a note cutting to hold from buy.
- The E&P sector was downgraded to in-line from attractive by Morgan Stanley, given the limited upside for oil prices as demand growth falling amid broader economic slowdown. Bank downgrades Tullow Oil to equal-weight from overweight.
TECHNICAL OUTLOOK for Stoxx 600 index:
- Resistance at 382.3 (50-DMA); 385.7 (61.8% Fibo)
- Support at 374.5 (61.8% Fibo); 368.3 (200-DMA)
- RSI: 52
TECHNICAL OUTLOOK for Euro Stoxx 50 index:
- Resistance at 3,406 (50-DMA); 3,514 (May high)
- Support at 3,309 (50% Fibo); 3,267 (200-DMA)
- RSI: 53.2
MAIN RESEARCH AND RATING CHANGES:
UPGRADES:
- BH Global upgraded to hold at Jefferies
- Europris upgraded to hold at Handelsbanken; PT 25 Kroner
- Hugo Boss raised to equal-weight at Morgan Stanley; PT 55 Euros
- Legrand upgraded to buy at Kepler Cheuvreux; PT 70 Euros
- Maersk Drilling upgraded to overweight at Morgan Stanley
- Novo Nordisk upgraded to equal-weight at Barclays; PT 325 Kroner
- Ramirent upgraded to hold at Inderes; PT 9 Euros
- Zotefoams upgraded to buy at Peel Hunt
DOWNGRADES:
- Hapag-Lloyd cut to neutral at MainFirst; Price Target 35 Euros
- Knorr-Bremse downgraded to hold at Berenberg
- NEL downgraded to neutral at SpareBank; PT 7 Kroner
- Odfjell Drilling downgraded to equal-weight at Morgan Stanley
- SGS downgraded to equal-weight at Barclays; PT 2,700 Francs
- Tullow Cut to Equal-weight at Morgan Stanley; PT 2.52 Pounds
- Vivendi Downgraded to Sell at Redburn
INITIATIONS:
- None reported.
MARKETS:
- MSCI Asia Pacific up 1.1%, Nikkei 225 up 0.3%
- S&P 500 up 0.5%, Dow up 0.3%, Nasdaq up 1%
- Euro up 0.04% at $1.1316
- Dollar Index up 0.02% at 96.78
- Yen down 0.12% at 108.58
- Brent up 0.4% at $62.5/bbl, WTI up 0.7% to $53.6/bbl
- LME 3m Copper up 0.7% at $5915/MT
- Gold spot up 0.1% at $1329.6/oz
- US 10Yr yield little changed at 2.15%
ECONOMIC DATA (All times CET):
- 8:30am: (FR) May Bank of France Ind. Sentiment, est. 100, prior 99
- 10:30am: (UK) May Claimant Count Rate, prior 3.0%
- 10:30am: (UK) May Jobless Claims Change, prior 24,700
- 10:30am: (UK) April Average Weekly Earnings 3M/YoY, est. 3.0%, prior 3.2%
- 10:30am: (UK) April Weekly Earnings ex Bonus 3M/YoY, est. 3.2%, prior 3.3%
- 10:30am: (UK) April ILO Unemployment Rate 3Mths, est. 3.8%, prior 3.8%
- 10:30am: (UK) April Employment Change 3M/3M, est. 4,000, prior 99,000
- 10:30am: (EC) June Sentix Investor Confidence, est. 2.5, prior 5.3
--With assistance from Michael Msika.
To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net
To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon
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