Analysts’ Upgrades: Retailers ANF, TJX and ROST up on earnings

Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS), Ross Stores (NASDAQ:ROST) and TJX (NYSE:TJX) all had their targets pushed to higher levels on the back of earnings. With most retailers posting strong same-store sales for the month of July, analysts expected good results from the Q2 earnings calls. The second quarter results are partly influenced by the ‘back-to-school’ season as consumers prepare for schools starting. Usually the month of July shows strong signs of increased consumer spending as school start draws closer. This year analysts expect the season to stretch into the month of August too. Therefore we might see next quarter earnings benefitting from this increased spending.

Earlier this month, Abercrombie & Fitch warned of a difficult second quarter as macroeconomic conditions affected sales, mainly within Europe. The Q2 results were in line with a previous statement from the company as profits were down 52 percent from the previous year. As the company faces declining demand, it plans to close 180 stores worldwide over the next few years in a bid to boost its margins. Furthermore, ANF will increase its share buyback by 10 million shares. Despite the poor earnings in the second quarter analysts increased their target price on the stock by 10.4 percent on average for the last week. The consensus rating remains at overweight, but the coming quarters are likely to be challenging for the company. Nevertheless, analysts seem to believe ANF has some potential and expect cumulative annual EPS growth of roughly 30 percent for the next three years. 

Gap, Ross Stores and TJX all reported earnings and sales in line with analysts’ expectations, and saw their targets increased by 7.1, 2.9 and 2.7 percent respectively. This is the second time this month that analysts have significantly increased Gap’s targets and the stock currently trades close to its consensus level and at its 52 week high. The consensus FY1 P/E for the three retailers trades at similar levels, in the range of 17.2 to 20.3.

Target (NYSE:TGT), the second largest retailer in the US (after Wal-Mart (NYSE:WMT)), reported a flat second quarter. With overall revenues increasing by 3.5 percent, and same-store sales rising 3.1 percent, Target has been successful in luring customers during uncertain economic climate. Target hasn’t been sitting back though economic conditions remain tough, and it has now announced its plan to expand in urban areas as well as over the border in Canada. Despite a relatively flat quarter compared to the previous year, Target has raised its guidance and expects to deliver profits of USD 4.65 to 4.85 per share, compared to analysts’ estimates of USD 4.3 per share. Therefore, analysts have increased its target price on the stock to by 7.2 percent and raised their EPS guidance. 

Last week the UK transport firm FirstGroup (LON:FGP) was officially awarded a contract to run Britain’s West Coast rail franchise connecting London and Scotland. This contract is in addition to FirstGroup’s current rail routes to Wales and southwest England. The contract is seen as a massive boost to the company’s top line as it is expected to deliver 10.4 percent growth in sales, and margins of roughly 5 percent. FirstGroup expects to invest about GBP 2 bn over the 13 year lifetime of this new franchise in delivering increased capacity on this route. The contract was positively received by the market and analysts increased their consensus target price by 7.1 percent following the news. Despite the positive news, analysts maintain their ‘Hold’ rating on this stock for now.

All in all, US stocks were on average upgraded more than European stocks last week where the Retail trade was this weeks’ winner. As you can see in the table below, only two European stocks made it to the top 10 list of last weeks’ upgrades.

For additional details about these stocks, take a look at Saxo Bank’s Equity Research offering here.  

You can read about the past week's analyst downgrades in my collegue Matt Bolduc's post.

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