Back to top

Image: Bigstock

Revival in Retail-Apparel & Shoes Industry: 4 Stocks to Buy

Read MoreHide Full Article

In spite of lingering apprehensions associated with the coronavirus crisis, the Zacks Retail - Apparel And Shoes industry has been steadily making its way out of the woods. With the pandemic hitting employment and household income, consumers were left with no option but to curtail discretionary spending. But things started looking up following measures undertaken to support households coupled with resumption of economic activities. The passage of a $900-billion stimulus package and COVID-19 vaccines has instilled confidence in Americans.

Meanwhile, companies have been directing resources toward digital platforms, accelerating fleet optimization and augmenting supply chain. Retailers have been focusing on superior product strategy, advancement of omni-channel capabilities and prudent capital investments to resonate well with shifting consumer demand and behavior. Tapestry, Inc. (TPR - Free Report) , Stitch Fix, Inc. (SFIX - Free Report) , Boot Barn Holdings, Inc. (BOOT - Free Report) and The Children's Place, Inc. (PLCE - Free Report) are set to cash in on the opportunities.

About the Industry

The Zacks Retail - Apparel And Shoes industry comprises companies that offer apparel, activewear, footwear, accessories as well as fitness and lifestyle products under various brands in domestic and international markets. These companies showcase products through their own outlets and websites. However, some of the industry participants distribute products via other specialty retail outlets, department stores, franchise stores and catalogs.

4 Key Trends to Watch in the Retail - Apparel And Shoes Industry

Consumers’ Willingness to Spend: The industry’s prospects are correlated with the purchasing power of consumers. Undeniably, the gradual reopening of the economy and measures undertaken to support households through stimulus checks and enhanced unemployment benefits have been stimulating demand. Per the Commerce Department, sales at clothing & clothing accessories stores grew 2.4% sequentially during the month of December 2020. Players in the industry are leaving no stone unturned to expand customer base and improve top-line performance. Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products, and enhancing digital and data analytics capabilities. Clearly, launch of newer styles, customization options and refreshed store environments allow them to resort to full price, instead of markdowns, which in turn help boost revenues. Also, the growing consumer interest in a healthy lifestyle and rise in the athleisure clothing trend will continue to lend support.

Sustained Efforts to Maintain Capital Discipline: Prolonged store closures, supply-chain disruptions and lower store traffic trends in the wake of the coronavirus outbreak did hurt revenues for quite a few players. While retailers are trying all means to lure customers back to outlets, we believe that sales will take time to reach the pre-pandemic levels. Obviously, maintaining liquidity amid such a scenario is a herculean task. The industry players have been making strides to strengthen financial position and improve profitability. In fact, they have been taking every step from managing inventory and closing underperforming stores to optimizing capital expenditures and enhancing operational efficiency. Companies have been minimizing operating costs, which consist of travel, marketing and other non-essential items. We believe such efforts are likely to help companies emerge stronger amid coronavirus-induced challenges. L Brands, Inc. (LB - Free Report) is on track with its profit improvement plan and intends to generate approximately $400 million in annual savings. Markedly, as part of its fleet optimization efforts, The Gap, Inc. (GPS - Free Report) plans to close 350 Gap and Banana Republic stores in North America by the end of 2023.

Diversification & Digitization Key to Growth: With the change in consumer shopping pattern and behavior amid the pandemic, industry participants have been evolving to play dual in-store and online roles. In fact, the companies’ digital businesses have played a key role amid the lockdown. Apart from upgrading digitally, companies are coming up with unique products and better deals. Some of the companies are even trying their hand at subscription or rental services for their offerings. Again, the growing popularity of second-hand clothes and accessories are persuading fashion retailers to alter business models. Initiatives such as building omni-channel, coming up with loyalty and marketing programs, enhancing supply chain and providing faster delivery options, be it curbside pickup or delivery at home, are worth mentioning. Simultaneously, companies are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Markedly, the outbreak has rapidly changed the convenience of digitization into a necessity and companies have been taking every step to capitalize on that demand. Keeping consumers’ product preferences and growing inclination toward online shopping in mind, retailers need to replenish shelves with in-demand merchandise and ramp up investments in digitization. A report by Mastercard SpendingPulse indicates that online spending on apparel jumped 15.7% year over year during the holiday season.

Focus on Margins: The industry is quite fragmented with companies vying for a bigger slice of the pie on attributes such as price, products and speed-to-market. Players in this space are facing competition from online retailers and private-label brands. Addressing these, a significant number of players in the industry have been making investments to strengthen their digital ecosystem, and accelerating shipping and delivery capabilities. While these endeavors might boost sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses might compress margins. Meanwhile, the impact of additional employee payments and benefits along with investments undertaken to preserve safety and health of customers and team members amid the coronavirus crisis cannot be ruled out. That said, sustained cost-containment measures are needed for managing margins.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Retail - Apparel And Shoes industry is a group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #68, which places it in the top 27% 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 encouraging near-term prospects. 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 position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence on this group’s earnings growth potential. Since the beginning of August 2020, the industry’s bottom-line estimate for the current financial year has jumped almost 12.7%. Notably, earnings estimate for the next financial year have moved up 67% during the aforementioned period.

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 Versus Broader Market

The Zacks Retail - Apparel And Shoes industry has outperformed both the broader Zacks Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.

While the stocks in this industry have collectively gained 66.5%, the Zacks S&P 500 composite and the Zacks Retail – Wholesale sector have risen 20.6% and 35.7%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 29.85X compared with the S&P 500’s 22.94X and the sector’s 31.61X.

Over the last five years, the industry has traded as high as 89.35X and as low as 8.38X, with the median being at 14.47X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Apparel & Shoes Stocks to Keep a Close Eye On

Boot Barn Holdings, Inc.: This lifestyle retailer of western and work-related footwear, apparel and accessories has been successfully navigating through the challenging environment, courtesy of merchandising strategies, omni-channel capabilities and better expense management. Impressively, the company has a trailing four-quarter earnings surprise of 23.1%, on average. Also, the Zacks Consensus Estimate for its current-fiscal EPS has moved up 6% in the past 30 days. The company has an estimated long-term earnings growth rate of 20%. We also note that shares of this Zacks Rank #1 (Strong Buy) company have zoomed 137.1% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: BOOT

The Children's Place, Inc.: This children's specialty apparel retailer has been making investments to upgrade its omni-channel capabilities as part of its digital transformation strategy. The company’s $50-million digital transformation investment to enhance omni-channel capabilities in order to meet online demand is reaping benefits. The company has launched a completely redesigned responsive site and mobile app for The Children's Place and Gymboree brands. It has rolled out "BOPIS" (Buy Online, Pick Up in Store), Save the Sale and Ship from Store. Further, it launched SMS texting capabilities. It has also rolled out “BOSS” (Buy Online, Ship to Store), which has garnered encouraging response. The company is aiming mall-based brick-and-mortar portfolio to account for less than 25% of revenues entering fiscal 2022. Markedly, shares of this Zacks Rank #1 company have advanced 160.9% in the past six months. Also, the Zacks Consensus Estimate of loss for its current fiscal has narrowed to $2.41 from $2.49, 30 days ago. Notably, the company reported positive earnings surprise in the last-reported quarter. The company has an estimated long-term earnings growth rate of 8%.

Price and Consensus: PLCE

Stitch Fix, Inc.: The well-known online personal styling retailer has been gaining from sturdy growth in its active client base. The company’s prudent measures to boost consumers’ shopping experience and enhance assortments have been yielding results. The company started off fiscal 2021 on a solid note as evident from its first-quarter results, wherein both the top and the bottom line surpassed the Zacks Consensus Estimate as well as improved year over year. Rise in active clients primarily supported top-line growth. Markedly, active clients rose 10% year over year to 3.8 million in the first quarter. Sequentially, the company’s active clients went up by more than 240,000. We believe that the company is likely to keep witnessing sturdy growth in its active client base. Markedly, shares of this Zacks Rank #2 (Buy) company have shot up 248.8% in the past six months. The Zacks Consensus Estimate for its current-fiscal bottom line has been stable over the past 30 days. We note that the company reported positive earnings surprise in the last-reported quarter. The company has an estimated long-term earnings growth rate of 15%.

Price and Consensus: SFIX

Tapestry, Inc.: This provider of luxury accessories and branded lifestyle products is poised to benefit from its Acceleration Program aimed at transforming into a leaner and more responsive organization as well as building significant data and analytics capabilities with focus on enhancing digital and omnichannel capabilities. Notably, the company’s compelling pricing strategy, smaller format locations and cost-effective global sourcing model have been contributing to store productivity. These strategies should help drive sales and margins. Impressively, Tapestry reported positive earnings surprise in the last-reported quarter. Also, the Zacks Consensus Estimate for its current-fiscal EPS has moved up 11.5% in the past 30 days. The company has an estimated long-term earnings growth rate of 10%. We also note that shares of this Zacks Rank #2 company have soared 142% in the past six months.

Price and Consensus: TPR

The Hottest Tech Mega-Trend of All

Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>