You know times are tough for retail when even a retail analyst says most of the sector's stocks aren't worth buying.

BMO Capital Markets analyst Kelly Crago initiated coverage of more than a dozen specialty retailers this week, but she says only four are worth investing in right now.

Retailers overall had a tricky earnings season. Walmart set a cautious tone with its report, as investors largely looked past tariff refunds in favor of signs that inflation-strapped consumers were still spending. The State Street SPDR S&P Retail exchange-traded fund is off nearly 7% over the past month.

But even before the latest round of financial results, the sector has been dealing with the effects of inflation-raising retailers' costs while also leaving less money in shoppers' budgets.

Given that difficult backdrop, Crago's handful of favorite stocks are all those "with a story to tell in 2027," as she puts it. In other words, she likes the companies that can overcome mounting consumer headwinds with strong sales or margins. As seen this earnings season, sector winners are riding high on their own individual narratives, along with-or despite-broader themes.

Crago's two favorite stocks are Amer Sports and Steven Madden. Amer, which owns high-end specialty names including Arc'teryx and Wilson, can benefit from expanding distribution of its Salomon brand in the U.S., while Steven Madden is the only pure-play fashion footwear stock that seems well-positioned to benefit from the next fashion cycle. She has an Outperform rating on both, with price targets of $38 and $60, respectively.

Carter's and Abercrombie & Fitch are the two other buys she sees. Carter's turnaround is finally taking hold with the help of a new leadership team, she says. Her price target for that stock is $40. She has a $170 price target on Abercrombie, whose merchandise is benefiting from the current fashion cycle, and its brands are once again seeing comparable sales growth.

But the rest of the sector is much less appealing right now for the analyst. Retail stock multiples have come down, with the group Crago covers seeing its forward price-to-earnings multiple compressing by 13%. By contrast, she notes that fiscal 2027 earnings estimates are up 5%. That mismatch signals more negative earnings revisions to come as negative sentiment catches up with consensus, she says.

Moreover, the group is having trouble attracting investors: Generalists are selling retail stocks in favor of artificial intelligence trades, growth investors appear uninterested, and value investors are waiting for another shoe to drop.

That seems unlikely to change until retailers can provide more clarity about their outlooks for 2027 and beyond, Crago notes. Retailers do have some control over their own fates, like the success (or failure) of the back-to-school and holiday shopping season, and how deeply they discount. But many of the issues weighing on the sector are out of their control, like the trade war with Canada and possibility of more future tariffs.

At the same time, with energy prices still high and years of cumulative inflation taking their toll, shoppers are still looking for value above all else.

Her four least favorite stocks-all rated Underperform-are all in the athletic category: Dick's Sporting Goods, Deckers Outdoor, Lululemon Athletica, and Nike.

"We are most negative on the athletic sector, even on the recent selloff, as we believe the market does not fully appreciate the negative impact on brands that are off-sides when a cycle moves against them," Crago writes.

She suggests there's more pain to come for the group, keeping a lid on earnings estimates and multiples throughout 2027.

"We believe 2026 is the first year in over a decade where demand for fashion footwear is outpacing athletic," Crago writes. "A decade of share gains is not unwound in a quarter."

Looks like boots, instead of sneakers, are made for walking.