Wells Fargo analyst: stay away from these two retail stocks

The VanEck Retail ETF has recovered close to 10% over the past two months, but a Wells Fargo analyst on Thursday picked two popular names in this sector that, he says, investors should continue to avoid.

Which retailers did he recently downgrade?

The two retail players Ike Boruchow downgraded recently are Ralph Lauren Corp (NYSE: RL) and VF Corp (NYSE: VFC). Explaining why he’s bearish on the two, he said on CNBC’s “Power Lunch”:

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We don’t really want to play apparel right now. It’s a little risky. It’s a category that’s overshot. The margin structure is overshot. We’ve forgotten that for eight years, this was a very deflationary, very competitive space to play in. So, I think there’s more risk there.

Outside of apparel is clear for bets, he added as he named Bath & Body Works as his “top idea” in the retail space. He sees great risk/reward in BBWI down 25% year-to-date.

The risk Boruchow sees for the retail space

Retailers, at present, are seeing pricing power like never before as demand continues to outstrip supply, resulting in record margins. Still, Ike Boruchow sees a risk for the retail space. He noted:

Everyone’s bought more than we normally do. So, inventory could start to build up. All of a sudden, retailers get a little too optimistic. You over order, and these record gross margins start coming down. That’s the risk and that’s why the stocks aren’t working.

Despite the recent surge, RTH is still down roughly 8.0% from its November high. Earlier this month, Jim Cramer said discount retailer Dollar General was a good pick for recession.