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Mixed Shoes & Apparel Industry Outlook: Costs to Mar Growth

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The Zacks Shoes and Retail Apparel industry comprises companies that design, source and market clothing, footwear and accessories for men, women and children, under various brand names. The product offerings of these companies mostly include athletic and casual footwear, fashion apparel and active-wear, sports equipment, bags, balls, as well as other sports and fashion accessories.

These companies showcase their products through their own branded outlets and websites. However, some companies also distribute products via other retail stores, such as national chains, online retailers, sporting goods stores, department stores, mass merchandisers, independent retailers and catalogs.

Here are the industry's three major themes:

  • These companies are witnessing a steady rise in revenues given the ongoing endeavors to bring new styles to market. This allows companies to grab more of full price sales and reduce markdowns. Quick product innovation plays a key role in bolstering the sales graph of shoes and apparel makers, as participants create a niche in the market by keeping pace with changing fashions. Further, the athletic wear section of the industry is benefiting from increasing health awareness and indulgence in fitness activities, which has given rise to the athleisure trend. This has led to a boom in footwear sales, with sneakers gaining the spotlight. Apart from growing interest in fitness across the globe, we expect footwear sales to continue benefiting from customization options provided by biggies like NIKE NKE and Adidas ADDYY.
  • Most industry participants are aggressively bolstering their digital and e-commerce capacities, though investments in differentiated retail concepts, mobile apps, dotcom and digital partners, to stay put in a fiercely competitive environment. Additionally, efforts to speed up deliveries through investments in supply chain and order fulfillment avenues provide an edge in the market. Simultaneously, the companies are investing in renovations and improved checkouts as well as mobile point-of-sale capabilities to make stores attractive. These efforts to enhance guests’ experience through multiple channels have been contributing significantly to improve traffic and transactions both in stores and online. Moreover, a steady U.S. economy with a tightened labor market, rising disposable income and an upbeat consumer environment, provide the right background for the growth of this customer-focused industry through this year.
  • Though these endeavors are providing the needed boost to the top line of companies in this industry, we continue to be concerned about the bottom-line performance due to escalated costs, mainly reflecting higher SG&A expenses, as well as increased production costs and supply-chain investments. Notably, these companies attract higher demand creation expenses due to increased involvement in global brand campaigns and key sports events, which are crucial strategies to gain market share. Moreover, the participants’ continued investments in innovation, data and analytics, and new capabilities to speed up the aforementioned digital transformation results in higher operating costs, causing SG&A expense to rise. These apart, adverse currency rates due to a strong U.S. dollar are hindering the earnings potential of overseas operations. Altogether, these headwinds will continue to be a key threat to margins and bottom-line performance of the industry participants.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Shoes & Retail Apparel Industry is a 13-stock group within the broader Zacks Consumer Discretionary Sector. The industry currently carries a Zacks Industry Rank #153, which places it at the bottom 40% 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 gloomy 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 positioning in the top 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has decreased approximately 3.5%.

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 Outperforms Shareholder Returns

The Zacks Shoes and Retail Apparel industry has outperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively gained 9.3%, the Zacks S&P 500 Composite and Zacks Consumer Discretionary Sector have rallied 4.3% and 0.5%, respectively.

One-Year Price Performance

Shoes and Retail Apparel Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Discretionary stocks, the industry is currently trading at 25.29X compared with the S&P 500’s 17.34X and the sector’s 18.82X.

Over the last five years, the industry has traded as high as 26.48X, as low as 18.63X and at the median of 22.84X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Stocks in the Shoes and Retail Apparel industry should continue to witness robust revenues due to growing consumer interest in a healthy lifestyle and the rise in athleisure clothing trend. Increased innovation to launch newer styles, customization options, digital expansion and refreshed store environments are among the few traits likely to poise the industry for robust sales graphs. However, adverse currency rates and costs related to supply-chain investments, sponsorships, innovation and digital transformation might be nagging headwinds to margins and bottom-line growth.

Despite the odds, we have three stocks in the Zacks Shoes & Retail Apparel universe currently sporting a Zacks Rank #1 (Strong Buy). Additionally, we suggest one more stock with Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at them.

Adidas AG: The stock of this Germany-based athletic and sports lifestyle products maker has rallied 44.3% in the past year. The Zacks Consensus Estimate for the current year EPS has been revised upward in the last 30 days. It carries a Zacks Rank #1.

Price and Consensus: ADDYY

Deckers Outdoor Corporation DECK: The stock of this Goleta, CA-based provider of footwear, apparel and accessories for casual lifestyle and high performance activities, has climbed 50.2% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 0.3% upward in the last 30 days. The company currently carries a Zacks Rank #1.

Price and Consensus: DECK

Skechers U.S.A. Inc. (SKX - Free Report) : The stock of this Manhattan Beach, CA -based company has gained 42.9% in the past year. The Zacks Consensus Estimate for the current-year EPS has moved up 8.7% in the last seven days. The company holds a Zacks Rank #1, at present.

Price and Consensus: SKX

Rocky Brands, Inc. RCKY: The stock of this Nelsonville, OH-based company has surged 6.1% in the past year. The consensus EPS estimate for the current year remained unrevised over the last 30 days. Currently, the company carries a Zacks Rank #3.

Price and Consensus: RCKY


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