US softline retailers are expected to take advantage of an ongoing data center construction boom, with Abercrombie & Fitch (ANF), Urban Outfitters (URBN), and Macy's (M) among those likely to see "outsized" benefits, UBS Securities said in a note e-mailed Monday.
US commercial data center capacity has increased at a nearly 30% to 40% annual pace over the last two years, with installed capacity seen rising 20% to 30% annually in the near term, the brokerage said, citing industry experts.
The data center construction boom is expected to lift the economy and boost the consumer spending backdrop for apparel and footwear in the concerned regions. However, the data center buildout is not expected to be distributed evenly across the country, UBS analysts Jay Sole and Mauricio Serna said in the note to clients.
"We believe retailers with a high percentage of stores located in areas with strong data center growth will benefit more than retailers with less exposure to these areas will," the analysts wrote.
Abercrombie & Fitch, Urban Outfitters, Macy's, and Steven Madden (SHOO) are among the retailers poised to see "outsized" benefits, Sole and Serna said. On the other hand, Kohl's (KSS), Bath & Body Works (BBWI), Buckle (BKE), Boot Barn (BOOT), and American Eagle Outfitters (AEO) have "the most relevant low exposure," the duo wrote.
Among off-price retailers, Ross Stores (ROST) has the "most relevant high exposure," while TJX (TJX) is on the other side of the spectrum, according to the note.
"While some regions have embraced data centers, other localities have not," UBS said. "Some municipalities reject data center proposals because the long-term local economic payoff is perceived as limited. They also have concerns about resource and infrastructure strain."
The brokerage expects all softline stocks to benefit from their use of AI, as well as the technology's impact on the overall economy.
"Softline companies are taking AI very seriously and AI is likely already having a positive impact on the industry's financial performance," Sole and Serna said. "We believe the meaningful returns companies are already and will continue to achieve on their AI investments will drive upside (earnings-per-share) surprises."
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