Shares of retailers Macy's (M), L Brands (LB) and Gap (GPS) were under pressure on Friday morning after the trio received a downgrade at Credit Suisse. In a research note to investors, the firm's analyst said he sees a "tougher" road ahead for the softlines space.

'TOUGHER' ROAD AHEAD FOR SOFTLINES: Credit Suisse analyst Michael Binetti, in a note to investors out Friday, said the U.S. softlines retailer group, which includes Macy's, Gap and L Brands, as well as Nordstrom (JWN), Kohl's (KSS) and J.C. Penney (JCP), among others, is now trading at a 3% discount to its five-year average EV/EBITDA, adding some margin of safety for softlines stocks. However, the analyst said that negative near-term industry data points are "adding up," and that he sees the most risk of negative revisions to 2020 Street estimates for Macy's, Gap and L Brands. Binetti said he thinks low valuation alone will not be enough to protect further stock downside.

Binetti said his firm's checks, along with recent commentary from Levi Strauss (LEVI) and Hugo Boss, suggest industry trends in the U.S. remained "sluggish" in Q3 and he expects these pressured trends to continue into the fall/holiday season, with macro pressures weighing on already-weak recent trends like a shorter holiday shopping calendar, tough weather comparisons and ongoing uncertainty surrounding tariffs and tourism. He thinks structural challenges are poised to accelerate in 2020 and thinks consensus estimates for 2020 are likely to be revised significantly lower.

Looking ahead, the Credit Suisse analyst said that if better holiday trends in 2019 don't materialize, he thinks it will be increasingly tough for softline retailers to avoid even more and bigger store closures in 2020. Binetti said his real estate contacts are actually bracing for another round of large scale store closure announcements after the holiday.

Specifically, Binetti downgraded:

• MACY'S: Binetti downgraded Macy's to Underperform from Neutral with a price target of $12, down from $19, saying that that same-store sales trends for Q3 are likely running below Street estimates and guidance to a big Q4 SSS inflection is "tough to embrace" without downside gross margin risk.
  
• L BRANDS: Binetti also downgraded L Brands to Underperform from Neutral with a price target of $14, down from $22. Amid a tougher U.S. backdrop, Binetti said he sees risk to L Brands' 2H guidance that assumes a fairly quick turn in Victoria's Secret trends. 
• GAP: Gap was also cut to Underperform from Neutral with a price target of $14, down from $20, with Binetti saying he believes the pending spinoff of Old Navy will ultimately prove to have been destructive to equity value. He has low confidence that the company will be able to achieve the offsets to dis-synergy costs laid out in its recent presentation.

Credit Suisse's Binetti also commented on other softline retailers, saying his top picks in the current "volatile" macro environment are VF Corp (VFC), Ross Stores (ROST), Burlington Stores (BURL) and Nike (NKE) given a more conservative view for the second half of 2019 and 2020.

• VF CORP: Binetti raised his price target for Outperform-rated VF Corp to $116 from $104, saying he sees a "high probability" of positive revisions to guidance and Street estimates in the near-term. Binetti says he sees "multiple" sources of upside to recently issued five-year targets.
• ROSS STORES: Binetti raised his price target for Outperform-rated Ross Stores to $130 from $120, saying he sees near-term sources of same-store sales upside from improving ladies' apparel and better inventory availability, plus increasing visibility in an EPS acceleration back to its double digit EPS growth algorithm in 2020.
• BURLINGTON STORES: He also raised his price target for Outperform-rated Burlington Stores to $245 from $235, saying conservative Q4 guidance plus emerging same-store sales and margin drivers should support a best-in-class EPS algorithm, even if investments step up slightly under the new CEO.
• NIKE: Outperform-rated Nike's price target was raised to $112 from $105, with Binetti saying accelerating global revenue trends and better SG&A leverage should translate to accelerating EPS upside through FY20 and into FY21. Binetti called Nike's innovation pipeline "the strongest we've seen in years."

PRICE ACTION: In morning trading, shares of Macy's are down 4.5% to $15.07, L Brands has fallen 9% to $16.48 and Gap has declined about 6% to $16.52.