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Textile-Apparel Stock Outlook: Long-Term Gains in Store

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The textile apparel industry is gaining from a significant number of stocks putting up a stellar show. The trend is likely to last as textile-apparel players will continue gaining from their robust brand management initiatives, solid international gains and constant efforts to keep pace with consumers’ evolving preferences.

To this end, focus on expanding digital capacities is likely to remain a major driver for the textile-apparel stocks that are also practicing stringent cost-containment to boost their performance. Apart from this, consumers’ rising inclination for sports and fitness activities bodes well for various players in this space.

While intense competition remains a headwind, the textile-apparel industry continues to be a bright spot, given the effective strategies, along with a favorable market scenario. Americans are way more confident now, thanks to a robust job market as evident from a fall in the number of people claiming unemployment benefits and jobless rate hovering at an 18-year low. These are likely to propel consumer spending.

Together these factors are likely to keep the textile-apparel stocks on the growth trajectory. Moreover, encouraging views by various players in the space point to a bright future and add to the optimism surrounding it.

Industry Outperforms Shareholder Returns

Constant efforts to enrich consumers’ experiences and optimize costs have been driving the better-than-expected performance of a sizeable number of stocks in the space. This clearly seems to be a treat to investors as evident from shareholder returns in the past year.

The Zacks Textile – Apparel Industry within the broader Zacks Consumer Discretionary Sector has outperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively gained 40.7%, the Zacks S&P 500 Composite and Zacks Consumer Discretionary Sector have rallied 15.2% and 13.3%, respectively.

                                     One-Year Price Performance

However, it’s worth noting that there was a significant lack of synchronization in the performance of individual stocks within the group. While some textile – apparel stocks are bearing the brunt of strained gross margins and increased costs to support store and international expansion, others with solid financial backing and effective strategic plans are outperforming.

Textile - Apparel Stocks Look Expensive

Owing to the outperformance of the industry over the past year, the valuation looks really expensive now. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is the most appropriate multiple for valuing Consumer Discretionary stocks because their earnings are effective in gauging performance.    

Generally, the price of a stock rallies on a rise in earnings. As forecasts for expected earnings move higher, demand for the stock should drive its price. If the P/E of a stock is rising steadily, it means that investors are pinning their 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 28.3, which is in sync with the high level over the past year and above the median level of 21.1. Clearly, there is limited upside potential.

The space also looks quite expensive when compared with the market at large, as the trailing 12-month P/E ratio for the S&P 500 is 20.0 and the median level is 20.2.

                                      Price-to-Earnings Ratio (TTM)

Outperformance May Continue Due to Robust Earnings Outlook

Robust brand enhancing and licensing initiatives, strategic cost-containment initiatives and continued international strength have encouraged many companies to raise their outlook for the current fiscal year. This optimism is likely to help Textile - Apparel stocks generate positive shareholder returns in the near future.

But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. While the earlier valuation analysis reflects that there is little upside left, there are enough reasons for investors to continue looking for a good entry point.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward 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 Textile - Apparel industry

This becomes even clearer when we focus on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Please note that the $2.50 EPS estimate for the industry for 2018 is not the actual bottom-up dollar EPS estimate for every company in the Zacks Textile - Apparel industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not earnings of $2.50 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 $2.50 EPS estimate for 2018 is up from $2.46 at the end of April and $2.43 at the end of the month prior to that and $2.31 this time, last year. In other words, the sell-side analysts covering the companies in the Zacks Textile - Apparel industry have been steadily raising their estimates.

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 Textile - Apparel industry currently carries a Zacks Industry Rank #57, which places it at the top 22% 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 improved considerably over the past eight weeks.

Textile - Apparel Space: Earnings & Revenue Trends

The past earnings trend of the textile-apparel space reveals that the group has been witnessing a declining trend since 2016, prior to which it was seen rising for about six years. The recent decline can be attributable to factors like rising operating costs, escalating commodity expenses and increased marketing investments that are weighing on margins of the textile-apparel stocks.

                                                    Textile - Apparel EPS

Nevertheless, the top-line performance of the Zacks Textile - Apparel has been showing growth since 2010, despite a short-term drop in 2016.

Bottom Line

A rosy economic environment courtesy of a strong labor market and rising consumer spending paints a bright picture for the Textile-Apparel industry. Further, the Fed’s recent rate hike and raised economic growth outlook for 2018 reflect an impressive step-up in economic activity. This clearly presents solid scope for the consumer-driven textile-apparel space, as consumer spending accounts for a significant part of U.S. economic activity.

Further, the space is likely to gain from companies’ consistent efforts to boost both online and store operations. While digital transformation has become the need of the hour, the importance of brick-and-mortar remains – keeping companies in the space focused on strengthening both. Thus, they are set to gain from technological and digital advancements, store expansions and remodeling, brand assortments to keep pace with changing trends, improvement in supply-chain network and a check on margins amid stiffer competition.

These efforts, along with a favorable economic backdrop, keep stocks in the textile-apparel universe well-placed to gain from the important selling periods including the back-to-school season and holiday season.  Markedly, these shopping periods present significant business opportunities to most players in the Textile-Apparel industry, which has long-term earnings growth rate of 12.6%.

Though the valuation looks a little pricey at this time, keeping long-term expectations in mind, investors may look for some good entry points in the stocks that will help them make the most of the momentum in the industry.

Notably, we have two stocks in our Textile - Apparel industry currently sporting a Zacks Rank #1 (Strong Buy), while we also have stocks that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

G-III Apparel Group, Ltd. GIII: This New York-based provider of women's and men's apparel sports a Zacks Rank #1 and has gained 84% in the past year. The Zacks Consensus Estimate for the current fiscal year EPS was revised 15.2% upward in the last 30 days.

                                          Price and Consensus: GIII

lululemon athletica inc. (LULU - Free Report) : The consensus EPS estimate for this Vancouver, Canada-based company moved nearly 4% higher for the current fiscal year in the last 60 days. The Zacks Rank #1 stock has rallied 125.7% over the past year.

                                     Price and Consensus: LULU

Ralph Lauren Corporation RL: The stock of this New York-based company has rallied 79.3% in the past year. The current fiscal year consensus EPS estimate of this Zacks Rank #2 stock was revised 2.6% upward in the last 60 days.

                                           Price and Consensus: RL

Perry Ellis International, Inc. PERY: The Miami-based company has gained 40% in the past year and carries a Zacks Rank #2. The Zacks Consensus Estimate for the current fiscal year EPS was revised nearly 4% upward in the last 30 days.
                                              Price and Consensus: PERY

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