Back to top

Image: Bigstock

4 Solid Bets in the Promising Retail-Apparel & Shoes Industry

Read MoreHide Full Article

The outlook of the Retail - Apparel And Shoes industry is nothing short of promising, driven by a convergence of factors reshaping the landscape. The surge in the millennial population, accompanied by rising disposable income and increased internet accessibility, has created a fertile ground for the industry's expansion. This growth is further bolstered by the continuous release of affordable fashion lines, supported by aggressive branding efforts, catering to the evolving tastes of consumers. The synergy between brand awareness, personalized product offerings and the expanding realm of digitization ensures that consumers have access to an ever-expanding array of fashion choices.

Retailers have been focusing on the superior product strategy, the advancement of omnichannel capabilities, prudent capital investments and greater customer reach. Backed by these initiatives, companies like Urban Outfitters, Inc. (URBN - Free Report) , American Eagle Outfitters, Inc. (AEO - Free Report) , Abercrombie & Fitch Co. (ANF - Free Report) and Boot Barn Holdings, Inc. (BOOT - Free Report) are better placed.

About the Industry

The Retail - Apparel and Shoes industry encompasses the manufacturing, distribution and retailing of clothing, footwear and accessories. The industry is influenced by various factors, including fashion trends, consumer spending habits, economic dynamics and seasonal variations. Companies within the industry range from global apparel giants to domestic brands, each targeting specific market segments. The industry presents both opportunities and challenges. On one hand, it demands continuous product innovation, brand distinctiveness and effective marketing to attract customers. On the other hand, fierce competition and price sensitivity pose hurdles. Technological advancements and the rise of online retail have revolutionized the industry, with consumers increasingly seeking convenience and personalized shopping experiences.

4 Key Trends to Watch in the Industry

Consumers’ Willingness to Spend: The performance of the industry is closely tied to consumers’ purchasing power. Consumer spending, a key catalyst for the economy, has shown resilience despite a tough economic environment. August marked the fifth consecutive month of gains in retail sales. Retail sales in August rose 0.6% sequentially and 2.5% year over year. Clothing & clothing accessories outlets saw a robust increase of 0.9% last month. Per Mastercard SpendingPulse, apparel sales are projected to increase 1% during the holiday season compared with the prior year. The period marks a crucial juncture, often accounting for a substantial portion of annual sales.

Brand Enhancement, Capital Discipline: Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products and enhancing digital and data analytics capabilities. The launch of newer styles, customization options and refreshed store environments enables them to woo shoppers. Efforts to enhance the brand portfolio via marketing strategies, buyouts, innovations and alliances are likely to keep supporting players in the space. The companies have been taking steps to strengthen their financial position. They have been making every move, from managing the inventory and closing underperforming stores to optimizing capital expenditures and enhancing operational efficiency.

Diversification & Digitization Key to Growth: With the change in consumer shopping patterns and behavior, industry participants have been playing dual in-store and online roles. They are building an omnichannel, coming up with loyalty and marketing programs, enhancing the supply chain and providing faster delivery options, be it doorstep delivery, curbside pickup or buy online and pick up at a store, which are worth mentioning. Simultaneously, companies are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Keeping in mind consumers’ product preferences and growing inclination toward online shopping, companies have been replenishing shelves with in-demand merchandise and ramping up investments in digitization.

Pressure on Margins to Linger: 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. To address these, a significant number of players in the industry have been investing in strengthening their digital ecosystem and delivery capabilities. While these endeavors bolster sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses might compress margins. Of late, the industry participants have been dealing with product cost inflation. Nonetheless, companies have been focusing on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and adopting effective pricing policies.

Zacks Industry Rank Indicates Bright 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 #103, which places it in the top 42% 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 outperform 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 a positive earnings outlook for the constituent companies in aggregate.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since the beginning of July 2023, the industry’s earnings estimate has risen 5%.

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 vs. Broader Market

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

The industry has advanced 10.7% over this period compared with the S&P 500’s increase of 18.7%. Meanwhile, the broader sector has risen 12.5%.

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 14.05X compared with the S&P 500’s 19.08X and the sector’s 21.16X.

Over the last five years, the industry has traded as high as 76.88X and as low as 9.13X, with the median being at 14.9X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Stocks Worth Considering

Urban Outfitters: This leading lifestyle product and services company seems a promising bet due to its solid business strategies and sound fundamentals. Management has been strengthening its direct-to-consumer business, enhancing productivity across existing channels and optimizing inventory levels. URBN’s strategic growth initiative, FP Movement and store-growth endeavors are also impressive.

The Zacks Consensus Estimate for Urban Outfitters’ current fiscal sales and earnings per share (EPS) suggests growth of 9% and 84.6%, respectively, from the year-ago reported figure. URBN has a trailing four-quarter earnings surprise of 19.2%, on average. Shares of this Zacks Rank #1 (Strong Buy) company have risen 50.2% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: URBN

American Eagle Outfitters: The company’s efforts to rationalize inventory and contain costs are paying off. The strong performance of key brands like American Eagle and Aerie, coupled with expansions into premium and activewear segments, indicates potential for growth. The introduction of new store designs and online enhancements demonstrates a commitment to improving the customer experience.

The Zacks Consensus Estimate for American Eagle Outfitters’ current fiscal sales and EPS suggests growth of 1.5% and 29.9%, respectively, from the year-ago reported figure. AEO has a trailing four-quarter earnings surprise of 43.2%, on average. Shares of this Zacks Rank #1 company have surged 37.4% in the past year.

Price and Consensus: AEO

Abercrombie & Fitch: The company's ability to adapt, innovate and connect with customers positions it for a prosperous future. The company's regional operating model, with a focus on the Americas, the EMEA and the APAC, provides a solid foundation for global expansion. Its strong brand portfolio, operational efficiency and regional strategy make it an attractive investment opportunity as it continues to navigate and thrive in the evolving retail landscape.

This leading, global, omnichannel specialty retailer of apparel and accessories for men, women and kids delivered a trailing four-quarter earnings surprise of 724.8%, on average. The Zacks Consensus Estimate for Abercrombie & Fitch’s current financial-year sales suggests growth of 10.4% from the year-ago period. Shares of this Zacks Rank #1 company have surged 221.9% in the past year.

Price and Consensus: ANF

Boot Barn Holdings: This lifestyle retailer of western and work-related footwear, apparel and accessories has been successfully navigating through the challenging environment with merchandising strategies, omnichannel capabilities and better expense management, as well as marketing. These, combined with the expansion of the store base, have helped Boot Barn Holdings gain market share and strengthen its position in the industry.

Impressively, the Zacks Consensus Estimate for Boot Barn Holdings’ current-fiscal sales calls for growth of 7.8% from the year-ago reported figure. BOOT has a trailing four-quarter earnings surprise of 13.5%, on average. We note that shares of this Zacks Rank #1 company have advanced 44.9% in the past year.

Price and Consensus: BOOT

Published in