5 Stocks To Tap Burgeoning Demand In Retail-Apparel & Shoes Industry

Image: Bigstock

While coronavirus-inflicted challenges persist, the Retail - Apparel And Shoes industry has been steadily making its way out of the woods. The pandemic severely impacted the industry as virus-wary shoppers remained confined at home, resulting in lower demand and consequently a huge blow to sales. However, things started looking up following the implementation of measures to support households coupled with the resumption of economic activities and return to active social lifestyle. The massive coronavirus stimulus package and COVID-19 vaccines have instilled confidence in Americans.

Meanwhile, companies have been directing resources toward digital platforms, accelerating fleet optimization and augmenting the supply chain. Retailers have been focusing on superior product strategy, advancement of omni-channel capabilities, and prudent capital investments to resonate well with shifting consumer demand and behavior. Tapestry, Inc. (TPR Quick Quote TPR - Free Report), Foot Locker, Inc. (FL Quick Quote FL - Free Report), Boot Barn Holdings, Inc. (BOOT Quick Quote BOOT - Free Report), The Buckle, Inc. (BKE Quick Quote BKE - Free Report) and The Children's Place, Inc. (PLCE Quick Quote PLCE - Free Report) are set to cash in on the opportunities.

About the Industry

The Zacks Retail - Apparel And Shoes industry comprises companies that offer apparel, footwear, accessories, intimates, and beauty products as well as fitness and lifestyle products for use in yoga, training, sports, and travel under various brands in domestic and international markets. Quite a few players in the industry offer bag collections, including business cases, computer bags, and backpacks; leather goods, such as wallets, card cases, travel organizers, and belts; and watches, sunglasses, fragrances, and ready-to-wear as well as cold-weather accessories. Markedly, companies showcase products to customers directly through their branded retail stores, mobile applications, catalogs, and websites. Again, some of the industry participants provide products via department stores, specialty retailers, third-party e-commerce sites, and franchisees who operate brand-dedicated stores.

4 Key Trends to Watch in the Retail - Apparel And Shoes Industry

Consumers’ Willingness to Spend: The industry’s prospects are correlated with the purchasing power of consumers. Undeniably, the gradual reopening of the economy and measures undertaken to support households through stimulus checks have been stimulating demand. Per the Commerce Department, sales at clothing & clothing accessories stores grew 3% sequentially during the month of May 2021. Well, the industry participants are now looking forward to the back-to-school season. Per Mastercard SpendingPulse, sales during the back-to-school period — Jul 15 through Sep 6 — are anticipated to increase 5.5% from the last year and 6.7% from 2019. Markedly, players in the industry are leaving no stone unturned to tap any surge in demand. Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products, and enhancing digital and data analytics capabilities. Clearly, the launch of newer styles, customization options, and refreshed store environments allow them to resort to full price, instead of markdowns, which in turn help boost revenues. Also, the growing consumer interest in a healthy lifestyle and rise in the athleisure clothing trend will continue to lend support.

Sustained Efforts to Maintain Capital Discipline: The industry players have been making strides to strengthen financial position and improve profitability. In fact, they have been taking every step, from managing inventory and closing underperforming stores to optimizing capital expenditures and enhancing operational efficiency. L Brands, Inc.’s (LB Quick Quote LB - Free Report) sustained focus on cost containment, inventory management, and speed-to-market initiatives has kept it afloat in a competitive environment. In fact, the company is advancing with its plan to separate Bath & Body Works and Victoria’s Secret businesses, which will help simplify the organizational structure. Markedly, as part of its fleet optimization efforts, The Gap, Inc. (GPS Quick Quote GPS - Free Report) plans to close 350 Gap and Banana Republic stores in North America by the end of 2023. Also, companies have been minimizing operating costs, which consist of travel, marketing, and other non-essential items. We believe such efforts will help companies emerge stronger from the coronavirus-induced challenges.

Diversification & Digitization Key to Growth: With the change in consumer shopping patterns and behavior amid the pandemic, industry participants have been evolving to play dual in-store and online roles. 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 their offerings. Again, the growing popularity of second-hand clothes and accessories are persuading fashion retailers to alter business models. Initiatives such as building omni-channel, coming up with loyalty and marketing programs, enhancing supply chain, and providing faster delivery options, be it curbside pickup or delivery at home, are worth mentioning. Simultaneously, companies are investing in renovation, improved checkouts, and mobile point-of-sale capabilities to keep stores relevant. Markedly, the outbreak has rapidly changed the convenience of digitization into a necessity and companies have been taking every step to capitalize on that demand. Keeping consumers’ product preferences and growing inclination toward online shopping in mind, retailers need to replenish shelves with in-demand merchandise and ramp up investments in digitization.

Focus on Margins: 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 facing competition from online retailers and private-label brands. 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 might compress margins. Meanwhile, the impact of additional employee payments and benefits along with investments undertaken to preserve the safety and health of customers and team members amid the coronavirus crisis cannot be ruled out. That said, sustained cost-containment measures are needed for managing margins.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Retail - Apparel And Shoe industry is a group within the broader Zacks Retail-Wholesale sector. The industry currently carries a Zacks Industry Rank #41, which places it in the top 16% 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 gradually gaining confidence on this group’s earnings growth potential. Since the beginning of 2021, the industry’s bottom-line estimate for the current financial year has jumped almost 34.4%. Notably, earnings estimates for the next financial year have moved up 16% during the aforementioned period.

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 Versus Broader Market

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

While the stocks in this industry have collectively gained 175.7%, the Zacks S&P 500 composite and the Zacks Retail-Wholesale sector have risen 42.8% and 19.6%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of forwarding 12-month price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 19.72X compared with the S&P 500’s 21.61X and the sector’s 27.87X.

Over the last five years, the industry has traded as high as 89.35X and as low as 8.38X, with the median being at 14.61X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

5 Apparel & Shoes Stocks to Keep a Close Eye On

Foot Locker: The company has been witnessing strong demand for athleisure and fitness products. It plans to continue investing in store fleet, including revamping and remodeling of the same. Markedly, it will be converting nearly one-third of its Footaction stores to other existing banner concepts. Such initiatives will help the company focus on its iconic banners. Further, it has been actively investing toward reinforcing its digital presence. Impressively, this retailer of athletic footwear and apparel has a trailing four-quarter earnings surprise of 47.6%, on average. Shares of this Zacks Rank #1 (Strong Buy) company have shot up 51.3% in the past six months. Also, the Zacks Consensus Estimate for its current-fiscal EPS has risen 7.4% in the past 30 days. The company has an estimated long-term earnings growth rate of 4%. 

Price and Consensus: FL

The Buckle: The company has been expanding its assortment offerings to meet consumers’ altering preferences. We note that its women’s and men’s merchandise categories have been doing well. Also, it has been benefiting from robust accessory and footwear sales. Markedly, the company’s online business has continued to grow amid the crisis. It has been undertaking measures like boosting assortment availability as well as improving search and navigation to boost online sales. Markedly, shares of this retailer of casual apparel, footwear, and accessories for young men and women have advanced 43.7% in the past six months. Notably, this Zacks Rank #1 company’s bottom line outperformed the Zacks Consensus Estimate by a wide margin in the last reported quarter. Meanwhile, the Zacks Consensus Estimate for its current fiscal EPS has been stable over the past 30 days.

Price and Consensus: BKE

Boot Barn Holdings: This lifestyle retailer of western and work-related footwear, apparel, and accessories has been successfully navigating through the challenging environment, courtesy of merchandising strategies, omni-channel capabilities, and better expense management as well as marketing. Impressively, the company has a trailing four-quarter earnings surprise of 51.7%, on average. Also, the Zacks Consensus Estimate for its current fiscal EPS has moved up 12.4% in the past 30 days. We also note that shares of this Zacks Rank #1 company have zoomed 100.5% in the past six months.

Price and Consensus: BOOT

The Children's Place: This children's specialty apparel retailer has been making investments to upgrade its omni-channel capabilities as part of its digital transformation strategy. The company’s $50-million digital transformation investment to enhance omni-channel capabilities in order to meet online demand is reaping benefits. The company has launched a completely redesigned responsive site and mobile app for The Children's Place and Gymboree brands. It has rolled out "BOPIS" (Buy Online, Pick Up in Store), Save the Sale, and Ship from Store. Further, it launched SMS texting capabilities. It has also rolled out “BOSS” (Buy Online, Ship to Store), which has garnered an encouraging response. The company is aiming for the mall-based brick-and-mortar portfolio to account for less than 25% of revenues entering fiscal 2022. Markedly, shares of this Zacks Rank #1 company have advanced 83.4% in the past six months. Notably, the company reported a positive earnings surprise in the last reported quarter. Also, the Zacks Consensus Estimate for its current fiscal EPS has moved up 11.2% in the past 30 days. The company has an estimated long-term earnings growth rate of 8%.

Price and Consensus: PLCE

Tapestry: This provider of luxury accessories and branded lifestyle products is poised to benefit from its Acceleration Program aimed at transforming into a leaner and more responsive organization as well as building significant data and analytics capabilities with a focus on enhancing digital and omnichannel capabilities. Notably, the company’s compelling pricing strategy, smaller-format locations, and cost-effective global sourcing model have been contributing to store productivity. These strategies should help drive sales and margins. Impressively, Tapestry has a trailing four-quarter earnings surprise of 74.1%, on average. Also, the Zacks Consensus Estimate for its current-fiscal EPS has moved up by a couple of cents in the past 30 days. The company has an estimated long-term earnings growth rate of 10%. We also note that shares of this Zacks Rank #2 (Buy) company have soared 37.1% in the past six months.

Price and Consensus: TPR

Disclaimer: Neither Zacks Investment Research, Inc. nor its Information Providers can guarantee the accuracy, completeness, timeliness, or correct sequencing of any of the Information on the Web ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.