Positive news flow about strengthening of the U.S. economy has been driving the outperformance of the retail industry on the whole. The tightening of the U.S. labor market with unemployment rate for May declining to the lowest level since 2000 has given further boost to consumers’ spending appetite. Consumers’ willingness to spend and improved job prospects also boosted retail sales that climbed 5.9% year over year in May.
These reports alongside Fed’s commentary on improved economic activity and its second interest rate hike this year indicated that the economy is on growth trajectory. While this clearly shows that economic factors will continue to provide the needed momentum for the retail industry in the short run, we note that the recent growth for the Shoes and Retail Apparel industry, in particular, is mostly driven by the 2018 FIFA World Cup in Russia.
The industry is among the prime beneficiaries of the hype created by this massive sporting event as some the key industry players are the top sponsors of the event. Notably, NIKE (NKE - Free Report) and Adidas (ADDYY - Free Report) have lucrative shares of sponsorship deals related to the FIFA World Cup.
While apparel is the fundamental segment in the fashion industry, improved penetration of athletic footwear industry in the United States can be attributed to increasing awareness and indulgence in fitness activities like running, hiking, trailing, aerobics, and training. Other trends ruling the industry include focus on eco-friendly products, innovation, improving omni-channel presence and growing demand for customization. However, any sluggishness in global economy could dampen the industry’s prospects as higher consumer spending appetite is the main driver of the overall health of the industry.
Industry Outperforms Shareholder Returns
Looking at shareholder returns over the past year, it appears that the game play for the industry has been positive with border economic recovery and the FIFA World Cup doing its part to enhance investors’ confidence. Moreover, the stocks in the industry are getting much support from strategies including building omni-channel platform, product innovation, cost curtailment and more.
The Zacks Shoes and Retail Apparel Industry within the broader Zacks Consumer Discretionary Sector has outperformed both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively gained 41.5%, the Zacks S&P 500 Composite and Zacks Consumer Discretionary Sector have rallied 13.6% and 12.4%, respectively.
One-Year Price Performance
However, it’s worth noting that there was a significant lack of synchronization in the performance of individual stocks within the group. While some Shoes and Apparel stocks are suffering from strained margins due to increased costs to catch up with the changing industry trends, others with solid financial backing and effective execution of strategic plans are outperforming.
Shoes & Retail Apparel Stocks Look Expensive
Driven by the outperformance of the industry over the past year, the valuation looks really expensive now. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is the most appropriate multiple for valuing Consumer Discretionary stocks because of their earnings are effective in gauging performance.
This ratio essentially measures a stock’s current market value relative to its earnings performance. Investors believe that the lower the P/E, the higher will be the value of the stock.
Generally, the price of a stock rallies on a rise in earnings. As forecasts for expected earnings move higher, demand for the stock should drive its price. If the P/E of a stock is rising steadily, it means that investors are pinning their hopes on the company’s inherent strength.
The industry currently has a trailing 12-month P/E ratio of 28.9, which is in sync with the high level over the past year and above the median level of 24.9. Clearly, there is limited upside potential.
The space also looks quite expensive when compared with the market at large, as the trailing 12-month P/E ratio for the S&P 500 is 20.5 and the median level is 20.2.
Price-to-Earnings Ratio (TTM)
Outperformance May Continue Due to Robust Earnings Outlook
Efforts to enhance omni-channel capabilities, introduce innovative line of products, expand brand assortments and effective cost management initiatives are likely to help Shoe and Retail Apparel stocks generate positive shareholder returns in the near future.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. The above ratio analysis shows that there is little upside left. However, one should look for good entry points based on solid fundamentals and other near-term factors.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance is the earnings outlook for its member companies. Empirical research shows that a company’s earnings outlook significantly influences the performance of its stock.
One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with the last year’s reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.
The consensus earnings estimate for the Zacks Shoes and Retail Apparel industry is pegged at a loss $2.45 per share but reflects decent improvement in three months. Moreover, the trend in earnings estimate revisions depicts a positive graph.
Price and Consensus: Zacks Shoes and Retail Apparel industry
Looking at the aggregate estimate revisions, it appears that analysts are hopeful of this group’s earnings potential.
The consensus EPS estimate for the current fiscal year has been revised positively (by a penny) since Mar 31, 2018.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.
The Zacks Shoes and Retail Apparel industry currently carries a Zacks Industry Rank #32, which places it at the top 13% of more than 250 Zacks industries. 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.
Our proprietary Heat Map shows that the industry’s rank has improved considerably over the past eight weeks.
Shoes and Retail Apparel Promise Long-Term Growth
The near-term prospects for the industry are luring investors. When compared with the broader Zacks S&P 500 composite, the long-term (3-5 years) EPS growth estimate for the Zacks Shoes and Retail Apparel industry appears promising. Though the group’s mean estimate of long-term EPS growth rate has declined since May 2018 to reach the current level of 10%, it compares favorably with 9.8% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-terms EPS growth could be a steady top line that Zacks Shoes and Retail Apparel have been showing since 2012.
Another important indication of solid long-term prospect is the improvement in the group’s return on equity (ROE), which is a key metric for evaluating Consumer Discretionary stocks.
The improving economic backdrop with a tightened job market presents a favorable scenario for the growth of the Shoe and Apparel industry. Moreover, the companies’ persistent efforts to adapt to changing consumer preferences enable them to boost their performance. Further, the near-term prospects of industry players are favored by the business gained from the 2018 FIFA World Cup.
Another long-term opportunity for stocks in this group is North America (including the United States, Canada and Mexico) winning the joint bid to host the 2026 World Cup. North America is projected to generate revenues of $14 billion, while FIFA’s profits are estimated to be around $11 billion.
The massive amount of business that is tied to this extravagant event makes it a big opportunity for sports footwear and apparel companies, which make huge revenues from sponsoring teams and players during such events.
Though the valuation looks a little pricey at this time, keeping the long-term expectations in mind, investors may look for some good entry points in the stocks that will help them to make the most of the momentum in the industry.
While we have only one stock in our Shoes and Retail Apparel industry currently sporting a Zacks Rank #1 (Strong Buy), there are three other stocks that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #2 (Buy).
(You can see the complete list of today’s Zacks #1 Rank stocks here.)
Rocky Brands Inc. (RCKY - Free Report) : This Nelsonville, OH-based footwear and apparel company has gained 116.4% in the past year. The Zacks Consensus Estimate for the current-year EPS was revised 7.1% upward in the last 60 days.
Price and Consensus: RCKY
Deckers Outdoor Corportaion (DECK - Free Report) : The consensus EPS estimate for this Goleta, CA-based company moved 9.7% higher for the current fiscal year in the last 30 days. The stock has rallied 74.5% over the past year.
Price and Consensus: DECK
Iconix Brand Group Inc. (ICON - Free Report) : The stock of this New York-based company rallied 18.7% in the past month. The consensus EPS estimate for the current year was revised 14.3% upward in the last 60 days.
Price and Consensus: ICON
Wolverine World Wide, Inc. (WWW - Free Report) : The stock of this Rockford, MI-based company has gained 37.5% in the past year. The Zacks Consensus Estimate for current-year EPS was revised nearly 1% upward in the last 30 days.
Price and Consensus: WWW
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