The Zacks Textile – Apparel industry comprises companies and lifestyle brands which produce, design, distribute and market basic and fashion apparel, footwear and accessories. The industry also includes providers of athleticwear and related equipment and fitness accessories. Most of the textile apparel players operate through stores and digital networks in the United States and overseas.
Notably, some of the prominent industry players are V.F. Corporation (VFC - Free Report) , Hanesbrands (HBI - Free Report) and PVH Corp. (PVH - Free Report) , to name a few.
Let’s take a look at the industry’s three major themes:
- The industry’s prospects are directly linked with consumers’ purchasing power. However, consumer spending, which is one of the pivotal factors driving the economy, has largely slowed down due to the COVID-19 outbreak. More pain is anticipated in the near term as Americans are restricting their purchases to essential products amid the pandemic. Incidentally, U.S. consumer confidence in March 2020 fell to the lowest level since June 2017. We note that coronavirus jitters have led to major supply-chain hiccups, slowdown in production activities and reduced demand for several commodities. Soft traffic and efforts to ensure safety measures have caused many companies like Ralph Lauren (RL - Free Report) , Columbia Sportswear and Guess? to temporarily close their brick-and-mortar retail stores. This will not only hurt sales and productivity but will also escalate cost burden for companies that are willing to give full payments and benefits to their employees during the temporary closure.
- Textile-apparel companies should benefit from digital endeavors like upgraded payment systems, online purchases and pick-up facility at stores, improved e-commerce sites, and effective mobile apps. In fact, many players are still running their online sites, which should compensate to some extent for the lost store sales. Escalated costs related to digital investments along with competition, however, may hurt margins. Apart from this, adverse currency rates due to a strong U.S. dollar are a threat to profits from overseas operations.
- Efforts to enhance brands via marketing strategies, licensing deals, buyouts, innovation and alliances are likely to keep supporting players in the space. Also, focus on keeping pace with changing consumer preferences is a major driver. In this regard, rising inclination toward health and fitness is working in favor of activewear and sporting equipment providers. Also, many companies offer fitness gadgets and adopt other tracking platforms to make the most of consumers’ evolving tastes.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Textile – Apparel industry is housed within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #240, which places it in the bottom 5% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates drab 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 bottom 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 becoming less confident about this group’s earnings growth potential. Since the end of August 2019, the industry’s consensus earnings estimate for the current year has slumped 40.4%%.
Despite the gloomy prospects, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Underperforms Sector and S&P 500
The Zacks Textile – Apparel industry has underperformed the broader Zacks Consumer Discretionary sector as well as the S&P 500 composite over the past year.
The industry has declined 34% over this period, compared with the S&P 500’s drop of 1.7%. Meanwhile, the broader sector has declined 16.5%.
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 consumer discretionary stocks, the industry is currently trading at 16.94X compared with the S&P 500’s 19.54X and the sector’s 20.8X.
Over the last five years, the industry has traded as high as 23.06X, as low as 12.9X, and at the median of 17.85X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
The near-term prospects of the Textile-Apparel industry are shadowed by disrupted supply chains, lesser production activities, store closures and lower demand for discretionary items, stemming from the coronavirus outbreak. Nonetheless, digital operations and efficient brand management bode well for players in the textile-apparel space. Moreover, stringent cost-cutting and restructuring activities should help companies offset margin woes.
That said, we are presenting four stocks from the Textile – Apparel universe, which are well positioned to capitalize on opportunities.
Jerash Holdings (US), Inc. (JRSH - Free Report) : The consensus earnings estimate for this sports and outerwear provider’s current fiscal year has remained stable over the last 30 days. Also, the Zacks Rank #2 (Buy) company has delivered back-to-back positive earnings surprises in the last two quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: JRSH
Under Armour, Inc. (UAA - Free Report) : The Zacks Consensus Estimate for this athletic footwear, apparel, and accessories provider’s current-year earnings has risen in the past seven days. The Zacks Rank #3 (Hold) company has an estimated long-term earnings growth rate of 18.9%. Further, the company has a trailing four-quarter positive earnings surprise of 15.9%, on average.
Price and Consensus: UAA
Lululemon Athletica Inc. (LULU - Free Report) : This athletic apparel and accessories provider has an estimated long-term earnings growth rate of 16.6%. Further, the Zacks Rank #3 company has delivered positive earnings surprise of 4.2%, on average, in the trailing four quarters.
Price and Consensus: LULU