Retail-Apparel & Shoes Industry Outlook: Prospects Bright

Sumit Singh January 24, 2020

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The Zacks Retail - Apparel And Shoes industry comprises companies that offer apparel, activewear, footwear, accessories as well as fitness and lifestyle products under various brand names in domestic and international markets. These companies showcase products through their own outlets and websites. However, some of the industry participants distribute products via other specialty retail outlets, department stores, franchise stores and catalogs. Some of the prominent names in the industry are Capri Holdings Limited (CPRI - Free Report) , Foot Locker, Inc. (FL - Free Report) , L Brands, Inc. (LB - Free Report) , The Gap, Inc. and Urban Outfitters, Inc. (URBN - Free Report) .

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

The industry’s prospects are closely tied to the purchasing power of consumers, who look pretty confident now. A sturdy labor market and rising income levels are paving the way for higher spending. While apparel is the core segment of the industry, increasing popularity of fitness activities is driving the need for suitable footwear. Quick product innovation plays a crucial role in bolstering sales. Companies’ constant endeavors toward bringing new styles enable them to resort to full price, instead of markdowns, which in turn help drive revenues. Notably, sales at both clothing & clothing accessories stores have increased 1.6% on a sequential basis during the month of December 2019.
Industry participants are playing dual in-store and online roles with evolving consumer shopping pattern. Apart from upgrading digitally, companies are coming up with unique products and better deals. Some of the companies are even trying their hand at subscription or rental services for its offerings. Again, the growing popularity of second-hand clothes and accessories are persuading fashion retailers to change business model. Initiatives such as building omni-channel, coming up with loyalty and marketing programs, enhancing supply chain and providing faster delivery options are also worth mentioning. Simultaneously, companies are investing in renovation and improved checkouts and mobile point-of-sale capabilities to keep stores relevant. These should boost revenues of the industry players as well.
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. Players in this space are battling competition from online retailers, particularly Amazon (AMZN) and private-label brands and fashion-fast names like H&M and Zara. Addressing these, a significant number of players in the industry have been making investments to strengthen their digital ecosystem and accelerating shipping and delivery capabilities. While these endeavors might boost sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses, and adverse currency rates thanks to a strong U.S. dollar might also compress margins. Nevertheless, companies are trying all means to contain costs.

Zacks Industry Rank Indicates Solid 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 #103, which places it in the top 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 encouraging 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence on this group’s earnings growth potential. Since the beginning of December, the industry’s earnings estimate for the current year has increased approximately 5.3%.

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 Versus 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 25.1%, the Zacks S&P 500 Composite and Zacks Retail – Wholesale Sector have gained 23.8% and 17.9%, respectively.

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 11.67X compared with the S&P 500’s 19.13X and the sector’s 25.54X.

Over the last five years, the industry has traded as high as 18.38X and as low as 10.23X, with the median being at 14.26X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Players in the industry are gaining from a conducive consumer environment. Endeavors such as ramped-up digital penetration, store openings, merchandising improvement and international expansion bode well. The industry participants are making every effort to enhance brand offerings through store refurbishment and bringing in more compelling assortments. These factors are likely to help the industry players in generating higher revenues. However, SG&A expenses are on the rise and competition is intense. Even though retailers have undertaken e-commerce initiatives and are seeing sales growth in the channel, online sales usually generate lower margins owing to factors like shipping charges, and costs related to deliveries and returns, among others.

That said, we are presenting four stocks from the Retail - Apparel And Shoes space that are well positioned to capitalize on the opportunities. Of these, the first two stocks sport a Zacks Rank #1 (Strong Buy) while the remaining two carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Buckle, Inc. (BKE - Free Report) : Shares of this retailer of casual apparel, footwear, and accessories have rallied 25.5% in the past six months. The Zacks Consensus Estimate for its current-fiscal EPS has climbed 2% in the past 30 days. The company has a trailing four-quarter positive earnings surprise of 2.5%, on average.

Price and Consensus: BKE

Zumiez Inc. (ZUMZ - Free Report) : Shares of this specialty retailer of apparel, footwear, accessories, and hardgoods have gained 25.5% in the past six months. The Zacks Consensus Estimate for its current-fiscal EPS has moved up 2.5% in the past 30 days. The company has an estimated long-term earnings growth rate of 12%. The company has a trailing four-quarter positive earnings surprise of 64.1%, on average.

Price and Consensus: ZUMZ

Nordstrom, Inc. (JWN - Free Report) : Shares of this fashion retailer of apparel, shoes, cosmetics, and accessories have gained 29.8% in the past six months. The Zacks Consensus Estimate for the company’s current-fiscal EPS has risen by a couple of cents in the past 30 days. The company has an estimated long-term earnings growth rate of 6%. This Zacks Rank #2 company has registered positive earnings surprises in the last two reported quarters.

Price and Consensus: JWN

Boot Barn Holdings, Inc. (BOOT - Free Report) : Shares of this lifestyle retailer of western and work-related footwear, apparel and accessories have rallied 33.4% in the past six months. The Zacks Consensus Estimate for its current-fiscal EPS has increased 3.4% in the past 30 days. The company has an estimated long-term earnings growth rate of 17%. The company has a trailing four-quarter positive earnings surprise of 22.7%, on average.

Price and Consensus: BOOT