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Cowen Analysts Say “Un-Amazon-Able” Brands Will Win at Retail

Retail isn’t having one of its better moments.

Sales slipped on weak traffic at department and specialty stores in the fourth and first quarters for many retailers, inventory levels were elevated thanks to leftover cold-weather gear and consumer interest in apparel is waning.

“Retail is in the midst of a transition,” Cowen and Company said in a department store expert call Thursday. “Apparel seems starved for a new trend, and consumers have more interest in experiences and health/wellness versus clothing.”

Cowen consultants said retailers have been posting results down in the mid-single digits compared to last year, and few have quite figured a solution to gain traction in the challenging market.

It will be “un-Amazon-able” brands for the win

One type of retailer that stands to succeed, however, is the retailer that Cowen calls “un-Amazon-able,” meaning that either their product inherently can’t be bought by Amazon (like Planet Fitness), the brand or category offers high emotional content (like L Brands or Sally Beauty Holdings), or the store experience is a unique destination with compelling service options (like Nordstrom or Restoration Hardware).

Consumers have increasingly opted for spending their dollars on experiences over apparel.

“This speaks to the fact that they are craving newness, and there isn’t enough in the market to compel her to shell out her discretionary dollars,” Cowen said.

Denim, however, may be one bright spot to lure those unspent bucks.

“When asked if there were any silver linings or product trends which could generate some excitement, our consultants highlighted denim for women and new fabrications for men,” Cowen said. “While a denim rebound is not yet reflecting a bottom line benefit, early indications are good with new silhouettes (anything showing the ankle), soft fabrics and shaping or fit solutions.”

Could denim’s rise be tempering athleisure’s growth?

Activewear seems to still be outperforming most of apparel, but growth in men’s and women’s, according to Cowen, has “cooled of somewhat” from recent peaks.

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Brands like Nike, Under Armour, VF Corp and Adidas still generate less than 5 percent of their revenues in U.S. department stores, Cowen said. Each, however, has a developing women’s business, which will be an opportunity for category expansion throughout the year.

“Ongoing global focus on health and wellness and all-season merchandise, however, remain key drivers in 2016 and beyond in expanding consumer demand for athletic footwear, apparel and wearable categories,” according to Cowen. “We think recent stock price weakness at Under Armour, Nike and Adidas represent attractive buying opportunities.”

Too-high inventories to hurt retail in the second half

Generally speaking, most retailers are over-inventoried. They were saddled with too much product in the first quarter because of weather-related weak sales in the fourth quarter before, and with weak traffic so far this year, many are having trouble unloading the goods.

“Going forward, it is likely that retailers will attempt to improve their situation and course correct their inventory builds by a combination of markdowns or making arrangements with suppliers to adjust orders and markdown allowances,” Cowen said.

Most retailers are adjusting their orders down for the second half, so significant improvements in the latter part of the year aren’t likely.

Off-price best positioned to pick up on retail traffic

Off-price apparel retailers are in place to benefit from wholesale channels that cut back or canceled orders, likely as a result of inventory glut, and Cowen consultants said the format is “best positioned” among apparel retailers.

“Since they are able to be very selective in their product curation and offer compelling values, they are likely more apt to win the traffic that is out in the market,” Cowen said. “The over-stored and over-inventoried U.S. retail industry continues to remain a positive catalyst for Burlington’s growth prospects.”

Analysts said Burlington will benefit from an improving branded assortment, rising minimum wages among its target income groups and its progressing store experience.