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Tepid Near-Term Prospects for Shoes & Apparel Industry

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The Zacks Shoes and Retail Apparel industry comprises companies that design, source and market clothing, footwear and accessories for men, women and children, under various brand names. The product offerings of these companies mostly include athletic and casual footwear, fashion apparel and active-wear, sports equipment, bags, balls, as well as other sports and fashion accessories.

These companies showcase their products through their own branded outlets and websites. However, some companies also distribute products via other retail stores, such as national chains, online retailers, sporting goods stores, department stores, mass merchandisers, independent retailers and catalogs.

Here are the three major industry themes:

  • The prospects of this customer-focused industry are correlated with the purchasing power of consumers. We note that consumer spending activity, which is one of the pivotal factors driving the economy, has somewhat slowed down due to the coronavirus outbreak. Notably, Americans are restricting their purchases to essential products and avoiding spending on discretionary items amid the virus outbreak. U.S. consumer confidence index decreased in July 2020 to 92.6, after an increase in June to 98.3. Currently, some parts of the United States are witnessing a resurgence of COVID-19, which has led consumers turn less optimistic about the short term. Consumers are expecting slow economic recovery in the near term, which along with a stagnant labor market and lesser income levels are likely to impact consumer spending. Consequently, industry experts believe that consumer spending on discretionary items will continue to take a hit in the near term as financial fears prevail.
     
  • The pandemic caused supply-chain bottlenecks, slowdown in production activities and lower demand for several commodities. Industry players temporarily closed brick-and-mortar stores and permitted work from home to ensure safety of employees and consumers, which not only hurt sales and productivity but also escalated cost burden of companies through payments to furloughed staff during the period. On the flip side, the gradual reopening of the economy is likely to aid the companies and the industry. The companies, in general, expect sequential improvements in the quarters ahead, as retail stores reopen and markets return to normalized supply and demand. While retail traffic is gradually improving at reopened stores, market pundits believe that sales will take time to reach the pre-COVID levels.
     
  • Most industry participants are aggressively bolstering their digital and e-commerce capacities, though investments in differentiated retail concepts, mobile apps, dotcom and digital partners to stay put in a fiercely competitive environment. In fact, companies’ with strong digital ecosystem like NIKE Inc. (NKE - Free Report) stayed strong during the coronavirus outbreak. Notably, NIKE recorded digital sales growth 75% in the last reported quarter. Additionally, efforts to speed up deliveries through investments in supply chain and order fulfillment avenues provide an edge in the market. Even as stores reopen, the companies continue to witness strong digital trends, which demonstrate their robust investments to improve digital consumer experiences. Simultaneously, companies are investing in renovation and improved checkouts as well as mobile point-of-sale capabilities to make stores attractive. These efforts to enhance guests’ experience through multiple channels are likely to contribute significantly to improve traffic and transactions both in stores and online.

 

Zacks Industry Rank Indicates Dim Prospects

The Zacks Shoes and Retail Apparel Industry is an 11-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #209, which places it in the bottom 17% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined 36%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
 

Industry Outperforms Sector & S&P 500

The Zacks Shoes and Retail Apparel industry has outperformed both the S&P 500 and its own sector over the past year.

While stocks in this industry have collectively rallied 21.5%, the Zacks S&P 500 composite and the Zacks Consumer Discretionary sector have risen 16.4% and 5.3%, respectively.

One-Year Price Performance

 

Shoes and Retail Apparel Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing Consumer Discretionary stocks, the industry is currently trading at 34.83X compared with the S&P 500’s 22.75X and the sector’s 33.25X.

Over the last five years, the industry has traded as high as 35.03X, as low as 18.63X and at the median of 23.51X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

The COVID-19 crisis is a litmus test for all consumer-driven industries. The coronavirus pandemic has dealt a blow to the Shoes and Retail Apparel industry through lockdowns-related store closures, as well as disrupted supply-chains. Further, a decline in consumer spending due to slow economic recovery might hurt near-term prospects. However, the gradual reopening of the economy is likely to aid the companies and the industry. Moreover, strong digital growth and efforts to speed up deliveries through investments in supply chain, and order fulfillment avenues provide an edge in the market. While retail traffic is gradually improving at reopened stores, market pundits believe that sales will take time to reach the pre-COVID levels.  

We have two stocks in the Zacks Shoes & Retail Apparel universe currently sporting a Zacks Rank #1 (Strong Buy). Additionally, we suggest two more with a Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at them.

Rocky Brands, Inc. (RCKY - Free Report) : The stock of this Nelsonville, OH-based company has declined 17.5% in the past year. However, the consensus EPS estimate for the current year has moved up by 57.1% in the past 30 days. Currently, the company sports a Zacks Rank #1.

Price and Consensus: RCKY


Deckers Outdoor Corporation (DECK - Free Report) : The stock of this Goleta, CA-based provider of footwear, apparel and accessories for casual lifestyle and high performance activities has rallied 52.7% over the past year. The Zacks Consensus Estimate for its current-year EPS has improved 1.6% in the past seven days. The company has an expected long term EPS growth rate of 16.9%. The company carries a Zacks Rank #1.

Price and Consensus: DECK


Carter’s Inc. (CRI - Free Report) : The stock of this Atlanta, GA-based marketer of branded apparel and related products for babies, and young children in North America has declined 3.6% in the past year. The consensus EPS estimate for the current year has moved up 34.7% in the past 30 days. It has an expected long-term EPS growth rate of 1.2%.  Currently, the company carries a Zacks Rank #3.

Price and Consensus: CRI



Wolverine World Wide, Inc. (WWW - Free Report) : The stock of this Michigan-based designer, manufacturer and distributor of a wide variety of casual as well as active apparel and footwear, has dropped 2.7% in the past year. Moreover, the company has an expected long-term EPS growth rate of 10%. The company currently carries a Zacks Rank #3.

Price and Consensus: WWW

 

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