Investing.com -- Wells Fargo forecast a stable consumer backdrop in 2025, supported by healthy U.S. demand, a strong holiday season, and stabilizing European trends, according to its retail sector outlook.

The brokerage upgraded Bath & Body Works (NYSE: BBWI ) Inc and Capri Holdings (NYSE: CPRI ) Ltd to "overweight," given their growth potential and valuation upside. Ross Stores Inc (NASDAQ: ROST ) was downgraded to "equal weight" due to a more balanced outlook.

“We believe ROST's current upside potential is limited given a slowing comp trajectory as ROST still works to adjust their mix shift, and margins coming under pressure from their mix shift initiative, a lack of notable comp leverage, and persistent payroll pressure,” analyst added.

Wells Fargo (NYSE: WFC ) highlighted inventory concerns and freight challenges as risks to already elevated margins, with gross margins about 400 basis points above 2019 levels.

Top long picks include Bath & Body Works Inc, Capri Holdings, RealReal (NASDAQ: REAL ) Inc, Signet Jewelers (NYSE: SIG ) Ltd, and Tapestry (NYSE: TPR ) Inc. Short ideas target Hanesbrands (NYSE: HBI ) Inc, Canada Goose Holdings Inc (NYSE: GOOS ), Ulta Beauty (NASDAQ: ULTA ) Inc, and VF Corp (NYSE: VFC ), citing valuation and company-specific challenges.