The Retail – Apparel & Shoes Industry has a direct correlation with the purchasing power of consumers, who look way more confident now courtesy of a robust job market and higher disposable income. We expect this positive sentiment to translate into higher consumer spending, which accounts for more than two-thirds of U.S. economic activity. An uptick in spending is always welcome news for retailers. Notably, consumer spending picked up 4% during the April-June quarter.
No wonder, a significant number of companies in the industry have been on a tear buoyed by the aforementioned underlying strengths. Moreover, quite a number of industry players are likely to benefit from the back-to-school and college shopping season, which is now in full swing. Such favorable factors shape a rosy near-term outlook for the industry.
Certainly, the industry has undergone sea changes to cope with the altering retail landscape shaped by changing consumer spending habits, lower traffic in brick-and-mortar stores due to rise in online shopping and stiff competition from off-price retailers. Not to forget, companies in the Retail – Apparel & Shoes space have to keep up with the fast-changing fashion trends and offer a better bargain.
In line with this, Retail – Apparel & Shoes companies have adopted transformation initiatives revolving around products, stores and marketing. Companies are also focusing on upgrade of core technology platforms and enhancement of supply chain. They are investing extensively, focusing on cost-saving and regularly coming up with loyalty and marketing programs.
While apparel is the core segment of the fashion industry, increasing indulgence in fitness activities like running, hiking, aerobics and training has driven penetration of footwear into the industry. However, sluggish economic conditions have a direct bearing on the industry as it massively curtails consumer spending. Meanwhile, the latest trade war developments raising chances of further tariff imposition on a range of merchandise might impact companies with exposure to China.
Industry Performance Eclipses S&P 500
The Zacks Retail - Apparel And Shoes Industry, within the broader Zacks Retail & Wholesale Sector, has outperformed the Zacks S&P 500 Composite but underperformed its own sector over the past year. While stocks in this industry have collectively gained 20%, the Zacks S&P 500 Composite advanced 15.3% and the Zacks Retail & Wholesale Sector rose 25.1%.
Looking at shareholder returns over the past year, it is quite apparent that investors are quite confident about the industry’s prospects. Definitely, steps such as store openings, increased digital penetration, merchandising improvement and international expansion have put the industry on a growth trajectory. However, headwinds such as increased operating expenses on account of higher digital marketing investments cannot be ignored. This may strain margins in the short run.
One-Year Price Performance
Retail – Apparel & Shoes Stocks Gleaming Bright
In spite of outperforming the broader market over the past year, the industry's valuation picture is pretty attractive. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is an appropriate multiple for valuing Retail – Apparel & Shoes stocks because their earnings are effective in gauging performance.
Generally, a stock rallies on an increase in earnings. As forecasts for earnings move higher, rising demand for the stock should drive its price. If the P/E of a stock is rising steadily, it means that investors are pinning hopes on the company’s inherent strength.
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.
The industry currently has a trailing 12-month P/E ratio of 17.7, which is marginally above the median level of 17.0 but below the high level of 18.1. This clearly indicates that there is room for further upside.
The space also looks attractive when compared to the market at large, as the trailing 12-month P/E ratio for the S&P 500 is 19.6 and the median level is 20.1.
Price-to-Earnings Ratio (TTM)
Comparing the group’s P/E ratio with that of its broader sector also shows that the group is trading at a discount. The Zacks Retail & Wholesale sector’s trailing 12-month P/E ratio of 28.8 is above the industry's ratio.
Price-to-Earnings Ratio (TTM)
Outperformance May Continue on Solid Earnings Outlook
Increased digital penetration, new store openings, merchandising improvement and international expansion bode well for the industry. Retail – Apparel & Shoes companies are making all possible efforts to enhance brand offerings through store refurbishment and bringing in a more compelling assortment. These factors are likely to help stocks in the industry to generate positive shareholder returns in the near future. However, rise in SG&A expenses on account of digital marketing investments and incentive-based compensation as well as stiff competition remain deterrents.
Nevertheless, 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 a solid value-oriented path ahead. However, one should look for good entry points based on sound fundamentals and other constructive factors.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry and its aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.
Price and Consensus: Zacks Retail – Apparel & Shoes Industry
This becomes clearer when we look at the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the earnings per share estimate of $1.81 for the industry for 2018 is not the actual bottom-up dollar estimate for every company in the Zacks Retail – Apparel & Shoes industry, but rather an illustrative aggregate created by our proprietary analytics model. The key factor to keep in mind is not earnings of $1.81 per share of the industry for 2018, but how this estimate has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the 2018 earnings per share estimates have been stable of late, however, it is up from $1.78 at the end of May. The current EPS estimate also shows a significant improvement from the year-ago estimate. Looking at the aggregate estimate revisions, it appears that sell-side analysts are hopeful of this group’s earnings potential.
Zacks Industry Rank Indicates Robust 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 Retail – Apparel & Shoes industry currently carries a Zacks Industry Rank #68, which places it in the top 27% 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 kept to a relatively wide range over the past eight weeks. In the said period, the industry’s rank rose to 40 before slipping to 68 last week but is still in the top 50% of the Zacks-ranked industries.
Retail – Apparel & Shoes Industry Promises Long-Term Growth
The long-term prospects for the industry indicate steady growth. When compared with the broader Zacks S&P 500 composite, the long-term (3-5 years) EPS growth estimate for the Zacks Retail – Apparel & Shoes industry of 10.4% appears promising. The corresponding figure for the Zacks S&P 500 composite is 9.8%.
Mean Estimate of Long-Term Growth
It goes without saying that the Retail – Apparel & Shoes industry remains quite competitive and fragmented, and companies are vying to take a bigger slice of the market on attributes such as price, products and speed-to-market.
Thanks to the shifting preference of consumers, who now prefer to shop online rather than visiting stores, the industry as a whole is faced with two challenges. First, companies need to upgrade themselves digitally to take on e-retailers. Second, they need to come up with innovative ways to draw customers to brick-&-mortar outlets. To be more precise, players in the industry have to play dual in-store and online role.
Definitely, the favorable economic environment is a major plus. However, technological and digital advancements, store expansion and remodeling, brand assortment, improvement in supply-chain network and a check on margins are few aspects where companies have to revisit constantly.
Given the abundant opportunities, the Retail – Apparel & Shoes industry’s long-term earnings growth rate looks promising. Though the industry’s valuation looks cheap for the one-year horizon (as discussed above), solid run of the stocks in the past few months might have made some stocks pricey. So, it is appropriate that investors closely evaluate the long-term expectations and look for some good entry points in the stocks that will help them to make the most of the momentum in the industry.
Here we have picked four stocks from the Retail – Apparel & Shoes industry carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
American Eagle Outfitters, Inc. (AEO - Free Report) : The consensus EPS estimate for this Pittsburgh, PA-based company — a specialty retailer of clothing, accessories, and personal care products — has moved up nearly 1.3% for the current fiscal in the last 60 days. Moreover, this Zacks Rank #2 stock has more than doubled over the past year.
Price and Consensus: AEO
Boot Barn Holdings, Inc. (BOOT - Free Report) : This Irvine, CA-based operator of lifestyle retail chain carries a Zacks Rank #2 and risen more than two-fold in the past year. The Zacks Consensus Estimate for the company’s current fiscal EPS has been stable in the last 30 days.
Price and Consensus: BOOT
Urban Outfitters, Inc. (URBN - Free Report) : This Philadelphia, PA-based company carries a Zacks Rank #2 and has more than doubled in the past year. The Zacks Consensus Estimate for this lifestyle specialty retailer’s current fiscal EPS was revised 1.6% upward in the last 60 days.
Price and Consensus: URBN
The Buckle, Inc. (BKE - Free Report) : This Kearney, NE-based retailer of casual apparel, footwear, and accessories carries a Zacks Rank #2 and has surged 47.6% in the past year. The Zacks Consensus Estimate for the company’s current fiscal EPS has jumped 2.7% in the last 60 days.
Price and Consensus: BKE
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