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Retail-Apparel & Shoes Outlook: Consumer Spending Holds the Key

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

Let’s take a look at the industry’s three major themes:

  • The industry’s prospects are closely tied with the purchasing power of consumers. Certainly, a buoyant consumer environment, courtesy of a robust job market and higher disposable income, is working in favor of the industry participants. No wonder, a significant number of companies in the industry have been on a tear on the aforementioned strengths. While apparel is the core segment of the industry, increasing indulgence in fitness activities has driven penetration of footwear.
     
  • Players in the industry are playing dual in-store and online role with the evolving consumers’ shopping pattern. Apart from upgrading digitally, companies are coming up with unique products and better bargains to draw customers. Initiatives such as building omni-channel, coming up with loyalty and marketing programs, enhancing supply chain and providing fast delivery options are also worth a mention. These efforts should boost revenues of the industry constituents.
     
  • The industry is quite fragmented with companies vying for a bigger slice of the share on attributes such as price, products and speed to market. The space has turned highly competitive since Amazon (AMZN - Free Report) started dominating all possible business arenas and altering the way consumers shop. A significant number of players have been making heavy investments to strengthen their digital ecosystem and accelerating shipping and delivery capabilities. While these endeavors could boost sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses might also compress margins. Nevertheless, companies are working on cost containment.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Retail - Apparel And Shoes industry is a 36-stock group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #48, which places it in the top 19% 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 bright 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.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry vs. Broader Market

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

While the stocks in this industry have collectively lost 22%, the Zacks S&P 500 Composite and Zacks Retail – Wholesale Sector have fallen 6.5% and 4%, respectively.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month Price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 12.59X compared with the S&P 500’s 14.84X and the sector’s 20.00X.

Over the last five years, the industry has traded as high as 19.61X, as low as 12.16X and at the median of 15.96X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)



Bottom Line

Increased digital penetration, store openings, merchandising improvement and international expansion bode well for the industry. Participants in the industry 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 generate higher revenues. However, rise in SG&A expenses as well as stiff competition remain deterrents.

That said, we are presenting four stocks from the Retail - Apparel And Shoes industry which sport a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Fossil Group, Inc. (FOSL - Free Report) : For this designer, developer and distributor of consumer fashion accessories, the consensus EPS estimate for the current fiscal year has surged 32.1% over the last 60 days. This Zacks Rank #1 stock has more than doubled over the past year. The company’s bottom line has outperformed the Zacks Consensus Estimate by a wide margin in the trailing four quarters.

Price and Consensus: FOSL

 

Shoe Carnival, Inc. (SCVL - Free Report) : This Zacks Rank #1 stock has gained roughly 21% in a year. The consensus EPS estimate for this company has increased 10.2% over the last 60 days. This footwear retailer has an average positive earnings surprise of 31.4% for the last four quarters.
 
Price and Consensus: SCVL

 

Canada Goose Holdings Inc. (GOOS - Free Report) : Shares of this designer, manufacturer and seller of premium outdoor apparel have gained 55% in a year. The Zacks Consensus Estimate for the company’s current fiscal EPS has risen 10.5% in the last 60 days. The company has an estimated long-term earnings growth rate of 31.3%. This Zacks Rank #2 company delivered an average positive earnings surprise of 83.2% in the trailing four quarters.

Price and Consensus: GOOS

DSW Inc. (DSW - Free Report) : Shares of this branded footwear and accessories retailer have increased about 12% so far in the year. The Zacks Consensus Estimate for the company’s current fiscal EPS has jumped 3.5% in the last 30 days. The company has an estimated long-term earnings growth rate of 9%. This Zacks Rank #2 company delivered an average positive earnings surprise of 28.8% in the trailing four quarters.

Price and Consensus: DSW

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