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Oppenheimer Analyst Upgrades Specialty Retail – Firm’s Investor Conference Next Week – Coincidence?

|Includes: AEO, Aeropostale, Inc. (ARO), JCG, PSUN, ROST, TJX, ZUMZ

While we’ve not seen the actual report (feel free to forward), today an analyst at Oppenheimer upgraded a laundry list of specialty retailers to outperform.  Why?  This analyst (we believe it to be Pam Quintiliano but are not 100% certain) suggests that “select chains with the strongest fundamentally driven price value equation” will replace the broad-based momentum the group has seen over the past year.   

24-Jun-10 06:52 ET

Oppenheimer changes their rating on select specialty retail stocks

Oppenheimer says following a steep rally in the Specialty Retail Sector which began last July and continued through May, the group has recently taken a breather. Given that much of the past year’s excitement was a function of abating doomsday fears rather than improving fundamentals, they look upon the recent pullback as understandable. Firm believes this pullback sets up for the next and potentially more sustainable change in the softlines recovery, wherein select chains with the strongest fundamentally driven price value equation replace broadbased momentum. Firm is upgrading Aeropostale (NYSE:ARO) to Outperform from Underperform; and J Crew (JCG), Pacific Sunwear (NASDAQ:PSUN), and Zumiez (NASDAQ:ZUMZ) to Outperform from Perform. The firm also upgrades Ross Stores (NASDAQ:ROST) and The TJX Co’s (NYSE:TJX) to Perform from Underperform. They downgrade American Eagle Outfitters (NYSE:AEO) to Perform from Outperform.

While we tend to agree with the above thesis (select chains will outperform weaker chains), Ms. Quintiliano has the audacity to include Pacific Sunwear (PSUN – $3.40) in her group of retailers that has a strong “fundamentally driven price value equation.” 

Say what?  PSUN?  This is a company that delivered a mind-boggling -5.16% EBIT margin (ex-items) in FY 2009 and appears poised to deliver even worse profitability performance in FY 2010 (click here to see our earnings model for PSUN).  Despite significantly reducing its inventory levels over the past year, the company has yet to materially improve its merchandise margins (not a good sign for the longer-term ability to return to profitability).   

Ms. Quintiliano starts out with a reasonable thesis, yet blows it completely by including PSUN in the list of chains with a “strong fundamentally driven price value equation.”  The fact is that PSUN may never make money again.

Then again, maybe Ms. Qunitiliano felt the need to upgrade all of these stocks ahead of her firm’s analyst conference next week in Boston?  Do you think it’s just a coincidence that she upgraded these stocks ahead of the Oppenheimer 10th Annual Consumer, Gaming, Lodging & Leisure Conference that will be held next week in Boston?  Probably not.

Disclosure: No positions