By Tonya Garcia, MarketWatch
Analysts upgraded Ulta Beauty and Dick's Sporting Goods, and downgraded off-price retailer TJX Cos.
Wells Fargo's 2018 top picks in retail are PVH Corp., whose portfolio of brands includes Calvin Klein and Tommy Hilfiger, Coach parent Tapestry Inc., Ulta Beauty Inc. and Adidas AG.
On PVH (PVH) , analysts think a mix of global momentum and inflection in the U.S. retail business bode well in the new year.
Improvement at the Coach brand, as well as the potential from Kate Spade, make (TPR) attractive to the analysts.
Ulta Beauty's (ULTA) earnings per share can be expected to get a $2-plus benefit from the tax-change upside, the analysts said, which will be combined with "stabilizing fundamentals and an inflection in their infrastructure."
And Adidas (ADS.XE) has a "strong" assortment that can capitalize on current trends along with the upcoming 2018 World Cup to look forward to.
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In the note outlining their thoughts on the year ahead, Wells Fargo upgraded Ulta Beauty and Dick's Sporting Goods Inc. (DKS) to outperform from market perform, but downgraded off-price retailer TJX Cos. (TJX) to market perform from outperform.
Analysts think Dick's Sporting Goods will continue to snap up market share after a series of athletic-sector bankruptcies including Sports Authority and Gander Mountain.
"So while the company's earnings are being pressured in the near term due to long-term growth investments, this should be well-understood by investors at this point (skewing risk/reward favorably) and the long-term outlook appears to be brightening," Wells Fargo wrote.
Ulta Beauty's price target was raised to $275 from $220, Dick's Sporting Goods was moved to $35 from $26, and TJX's price target was reduced to $72 from $76.
Read: Your Amazon Echo could be making you spend more money (http://www.marketwatch.com/story/your-amazon-echo-could-be-making-you-spend-more-money-2018-01-03)
The TJX downgrade is largely based on concerns about the Marmaxx business, which the analysts said has become too large to generate the share gains the company has seen in the past. Analysts estimate that Marmaxx's apparel business is nearly $3 billion larger than Macy's Inc. (M) , making it the second largest apparel retailer in the country. Wal-Mart Stores Inc. (WMT) is the biggest.
Marmaxx has also started to show signs of trouble with margin declines for six consecutive quarters and "relatively weak" same-store sales performance.
"It's difficult to see that trajectory inflecting given that the buying environment should not be getting better from here (apparel inventory is the cleanest we have seen in five years) while our conversation with brands leads us to believe that we should see reduced off-price selling in Q4 and 2018," analysts wrote.
Still, Wells Fargo maintains its outperform ratings on fellow off-price retailers Ross Stores Inc. (ROST) and Burlington Stores Inc. (BURL)
Overall, Wells Fargo thinks retail gained momentum heading into the holiday season, which is when investors began to see opportunity in the new tax reform measures.
Don't miss: Prime helps Amazon capture nearly half of all holiday e-commerce sales (http://www.marketwatch.com/story/prime-helps-amazon-capture-nearly-half-of-all-holiday-e-commerce-sales-2017-12-27)
And:Here's what all 30 companies that make up the Dow industrials think about the tax cuts (http://www.marketwatch.com/story/heres-what-the-companies-that-make-up-the-dow-industrials-think-about-the-tax-bill-2017-12-21)
"Importantly, when looking ahead to 2018, the group faces easy compares in the first half of the year, and with short interest declining (but still elevated relative to historic levels), the path of least resistance for the group still seems to be higher," the note said.
PVH shares are up 10.1% for the last three months, Tapestry shares are up nearly 14% for the period, Ulta Beauty shares have risen 8.3%, and Adidas stock is down 14.3% for the period.
The S&P 500 index is up 7% for the last three months.
-Tonya Garcia; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires