This is ‘one of the biggest back-to-school and back-to-work seasons in our lifetime’: Cowen’s Oliver Chen

Cowen Senior Research Analyst Oliver Chen joins Yahoo Finance to discuss the state of the luxury market, supply chain shortages, and the companies that could gain the most from this back-to-school season.

Video transcript

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JULIE HYMAN: Well, fashion had a big night last night of course, with the Met Gala. A lot of very fanciful concoctions were on offer. But for us here at Yahoo Finance, it reminded us of some comments that we got from Rebecca Minkoff, the fashion designer last week. She was speaking to us from New York Fashion Week. And she said, excess is really how people are feeling from a fashion perspective coming out of the pandemic.

Let's find out how Oliver Chen is feeling. He's Cowen's Senior Research Analyst. He covers retail, as well as luxury brands. And Oliver, before we get to some of your other calls, I just wanted to kick it off by asking how you're viewing luxury in this environment. Do you think that we're going to see a big lift to fashion, to luxury coming out of the pandemic? In your view, are people-- it may be one thing to say designers are feeling excess. Are consumers feeling excess?

OLIVER CHEN: Julie, yes. The answer is yes. We're very constructive. We're bullish on luxury goods globally. The US is experiencing very strong robust trends, and so is China. Consumption has changed in China, where it's more inside China, versus traveling. Tourism is an issue.

But overall, the luxury market is very robust, as wealthy people have benefited from stock market appreciation, real estate appreciation. That helps a lot. Also, a resumption and a reopening to travel, experiential events, those are all positive for fashion. And we are restocking our closets. It's one of the biggest back to schools and back to work seasons we'll ever see in our lifetimes.

So that's happenings as well and. There are major fashion changes too. That's working in apparels favor. Supply chain has been an issue. But that's been an issue because there just isn't even enough supply, and timing, and inflation, is because demand trends have been so strong. So we're quite optimistic. Body positivity, gender fluidity, thinking about self-expression, those are all major trends as well.

BRIAN SOZZI: Oliver, just going back, or just locking in on China for a second. They have taken a harder line, I think it's safe to say on wealth, and wealth creation. How does that impact luxury companies in the region, whether it's a Tapestry with the Coach brand, or even something like a Louis Vuitton.

OLIVER CHEN: Yeah, Brian, it's something we're definitely watching. And it's a trend. And it's an interesting question. What's great about Coach and Tapestry is those bags are aspirational. They are really targeted towards a middle area, and a middle class. And so we see a lot of momentum there continuing, given the modest price points of $300 to $500.

Louis Vuitton has an outstanding presence in China. And it has for many, many years. It has a great physical presence. And it's a large brand that can spend a lot on advertising and promotion. It's also doing a lot of great product innovation. But I do think that thinking about luxury goods, particularly extremely expensive luxury goods, that could be something to watch as a risk factor as we think about this motto of common prosperity, and the egalitarian nature in China.

JULIE HYMAN: Interesting, really interesting stuff. I want to switch on over to some of your top picks, because given this backdrop that we're talking about, strong back to school season, customers wanting to come out and spend. I know one of your top picks I believe, is Target. So talk to us about why you think that they might be uniquely situated to benefit from some of these trends.

OLIVER CHEN: Yeah, Target has done a really comprehensive and great job with drive up, or curbside pickup. So has Walmart. That's been a big modality, where you drive up, and it's extremely convenient, and very important. Target also has a very durable, diversified assortment, home, apparel, food. And there's a major home cycle, as well as apparel cycle. So executing in that way has been quite positive.

Target is also famous for private brands. So as we think about Target's merchandising ability, that's a huge positive too. So as a back-to-school destination, we like both American Eagle for denim, Target for apparel, and we think the momentum should continue. It's been a pandemic winner. And we expect that to continue as well.

Keep in mind the consumer backdrop in the US is very attractive, unemployment around 5.4%, and consumer confidence at s levels, and also, a savings rate that's about 9.6%. Those s key positives, partially offset by some negatives, including inflation running at 4% to 5%.

BRIAN SOZZI: So Oliver, alongside Target, you recently upgraded Macy's. Take us through that call. Yeah, we like Macy's. The valuation in particular is very attractive. It's trading at six times PE, which is versus Kohl's at 11, and Nordstrom at 12 to 13 times PE. Also, there's real estate value, about $2 billion or six to $7 per share.

They're making a lot of changes. It's becoming a digital organization as well as much more agile. For example, digital will reach about 40% of sales. So transformation of this organization, closure of stores, valuation, as well as inventory, pricing, and planning management, those are all key positives. And don't forget product. Thinking about denim, the trends happening in denim, a movement away from skinny. That's a positive too in gifting.

This will be a big gift giving season, as people really look to s and give each other gifts, and celebrate, and resume behavior as best we can in this volatile environment as well.

JULIE HYMAN: Yeah, as best we can indeed. Oliver, a lot of positivity that you're expressing, which I love. But I am curious if there are any retailers here that you think are getting left behind, while we are seeing these various strength, areas of strength.

OLIVER CHEN: Well, we have to continue to watch the mall traffic, and the mall, the physical traffic has been volatile. And as we do experience closures, unfortunately, that will lead to more traffic pressure inside physical malls. So specialty retailers in the mall, they're rapidly transforming. But there will be weaker players there.

Also, the stock outs. You know, we're going to monitor that closely. Apparel and footwear, those will be categories that will be very difficult to replenish. So supply chains could be constrained. And as we look ahead to the spring, prices will likely have to go up in response to the transportation inflation. Those will be risk factors as well.

But overall, we're very bullish on the discretionary sector, just given the consumer backdrop, given the product trends, and selectively on some stocks like Macy's on valuation. As we think about luxury goods, our top ideas are LVMH, Farfetch, and we also like Mytheresa. The digitization of luxury, and luxury going online, that's a major structural trend that's happening globally as well.

JULIE HYMAN: Oliver, it's always really great to get your perspective. I know you've been watching retail for a long time Cowen Senior Research Analyst, Oliver Chen there. Thanks a lot. And also perhaps, a good preview of retail sales numbers later this week.