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5 Must-Buy Retail Stocks to Enhance Your Portfolio

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The U.S. economy remains resilient even though the interest rate is currently at its 22-year high. The Fed is yet to give any information on the date of its first rate cut. On the contrary, in its January FOMC meeting, the central bank gave a clear indication that a much-hyped interest rate cut in March is out of sight.

Despite a tough scenario, the labor market remains resilient, the services PMI (Purchasing Managers’ Index) is expanding gradually and the manufacturing PMI has shown signs of improvement. Moreover, personal consumption expenditure remains strong. Consequently, the retail sector has flourished over the past year.

The Zacks-defined Retail - Apparel and Shoes Industry is currently in the top 45% of the Zacks Industry Rank. In the past year, the industry has provided 10% returns, while its year-to-date return is 4.3%. Since it is ranked in the top half of Zacks Ranked Industries, we expect the consulting services industry to outperform the market over the next 3 to 6 months.

Positive Catalysts

Players in the industry have been benefiting from strong consumer demand for activewear/athleisure products and footwear, and the trend is expected to continue in 2024. Athletic goods and apparel companies offer products ranging from footwear, sweatshirts, leggings, pants, jackets and tops to yoga wear and running clothes for men and women. The increasing focus on fashion is boosting the demand for innovative clothes and footwear in the United States.

Industry participants have been focused on product innovations, active promotions, store expansion and enhancing e-commerce capabilities to gain market share. Favorable health and wellness trends have been the key to inspiring footwear manufacturers to expand their product portfolios.

The companies continue to innovate styles, materials and colors, and incorporate functional designs to grab a large share of the fast-growing market. Multi-functional shoes, which cater to casual and formal looks, have been gaining popularity.

E-commerce has been playing a crucial role in the athleisure market’s growth. The companies in the segment are looking to build a customer base through websites, social media and other digital channels.

As consumers continue to shop from home, the growth of athletic-inspired apparel and digital sales is likely to continue. Companies focused on expanding their athletic-based apparel lines and building on e-commerce capabilities are expected to witness growth in the long run.

Efforts to accelerate deliveries through investments in supply chains and order fulfillment avenues are likely to provide an edge to industry players. Simultaneously, companies are investing in renovations and improved checkouts, as well as mobile point-of-sale capabilities, to make stores attractive. Efforts to enhance experiences through multiple channels are likely to contribute significantly to improving traffic and transactions in stores and online.

Our Top Picks

We have narrowed our search to five retail – apparel and shoe industry stocks that have strong potential for 2024. These stocks have seen positive earnings estimate revisions within the last 30 days. Each of our picks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

Zacks Investment Research
Image Source: Zacks Investment Research

Abercrombie & Fitch Co. (ANF - Free Report) has benefitted from continued momentum across both brands, which bolstered its holiday sales. ANF witnessed strong sales growth during the holiday season for each of its brands, particularly the Abercrombie brand.

Driven by the strong holiday performance, ANF expects the Abercrombie brand’s women's business to attain the highest-ever Q4 sales, along with strong men's category growth. ANF’s Hollister brand should deliver robust sales growth in Q4, led by the women's business.

ANF has an expected revenue and earnings growth rate of 3.8% and 5.6%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 2.7% over the last seven days.

American Eagle Outfitters Inc. (AEO - Free Report) has been gaining from brand strength and solid demand driven by products that resonated with customers. AEO’s Aerie and American Eagle brands are witnessing substantial improvement. These factors led to solid third-quarter fiscal 2023 results, wherein earnings and sales beat the Zacks Consensus Estimate and grew year over year.

AEO’s Aerie brand exhibited momentum, with sales advancing 12%. Also, Real Power and Real Growth value-creation bode well. As a result, AEO expects fiscal 2023 revenues to be up mid-single digits, up from the prior view of low-single-digit growth.

American Eagle Outfitters has an expected revenue and earnings growth rate of 2.5% and 8.6%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 9.3% over the last 30 days.

Deckers Outdoor Corp. (DECK - Free Report) has been benefiting from its strength in the UGG and HOKA brands. Solid gains from the direct-to-consumer channels, brand growth, a strong balance sheet and a stable operating model favor DECK.

Solid momentum in DECK’s global wholesale business, driven by robust consumer demand in both domestic and international markets, appears encouraging as well. DECK envisions fiscal 2024 net sales to increase 11% from the prior year.

Deckers Outdoor has an expected revenue and earnings growth rate of 15.2% and 37.3%, respectively, for the current year (ending March 2024). The Zacks Consensus Estimate for current-year earnings has improved 11.1% over the last seven days.

Urban Outfitters Inc. (URBN - Free Report) has benefited from strength in its Anthropologie and Free People brands. Strategic growth initiatives, store-related efforts and impressive results from the Retail unit and FP Movement continue to support the firm.

With momentum continuing in the fourth quarter, we expect 4.8% growth in the top line. Moreover, URBN’s inventory management is anticipated to strengthen margins, notwithstanding the likelihood of increased investments that may result in expense deleverage.

Urban Outfitters has an expected revenue and earnings growth rate of 4.4% and 7.7%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 4.2% over the last 30 days.

Vera Bradley Inc. (VRA - Free Report) is a designer, producer, marketer and retailer of accessories for women. VRA’s products include handbags, accessories and travel and leisure items. VRA sells its products through two reportable segments Indirect and Direct.

VRA’s indirect business consists of the sale of Vera Bradley products to independent retailers in the United States as well as select national retailers and third-party e-commerce sites. VRA’s direct business consists of sales of Vera Bradley products through its full-price stores, its outlet stores, verabradley.com, and its annual outlet sale in Fort Wayne, IN.

Vera Bradley has an expected revenue and earnings growth rate of 3.5% and 50%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 4.4% over the last 60 days.

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