Attention investors: forget tech and advanced manufacturing stocks. Good old fashion retail apparel might be a better bet.
Over the past month, analysts note that global stocks have been through an intense “stress test” as investment models endure the fiscal crisis in Greece as well as a stock market meltdown in China.
Amid today’s market rally — where the Dow Jones Industrial Average is in the midst of another triple-digit points gain on top of last Friday’s as well — volatility remains embedded across the investment landscape. The Dow Jones Industrial Average Volatility Index has doubled over the past year alone.
And according to monthly surveys of global fund managers conducted by Bank of America Merrill Lynch, investors have been pulling out of U.S. and Asian equities and have poured their money into safer havens such as cash, bonds and select European stocks that have benefited from a weak euro.
Despite the turmoil, U.S. equities have survived the stress test with major indices showing increases over the past one-year period. And retail stocks in particular have shown significant gains.
The WWD Global Stock Tracker is up 12.3 percent over the past 12 months with 56 issues in the composite showing gains and 44 stocks declining. At 113, the tracker is closer to its 52-week high of 117.17 than it is to its low of 96.13. Meanwhile, the broader S&P Retailing Industry Group index is up 28 percent for the 12-month period. This compares to a 6 percent gain in the S&P 500 and a 5 percent gain for the Dow.
In the WWD tracker, the two top 12-month gainers not surprisingly include Chinese companies that have benefited from a bull market in that country: Shanghai Metersbonwe with a 202 percent increase; and the Youngor Group Co. with a 155 percent.
Next on the list includes U.S.-based G-III Apparel Group Ltd. with an 82 percent gain and Japanese firm Matsuya Co. with a 68 percent increase. American Eagle Outfitters garnered the number five position with a 66 percent gain for the 52-week period.
Rounding out the top 10 spots are Coty Inc., Lululemon Athletica Inc., Ross Stores Inc., Ted Baker plc and Pandora A/S — all with gain of between 48 and 64 percent. Not far behind these gainers are companies with gain between 20 and 40 percent such as: Nike Inc., Under Armour Inc., L Brands Inc., Perry Ellis International Inc., Target Corp., Kohl’s Corp., Hanesbrands Inc., Fast Retailing Co., TJX Cos. Inc. and Yoox.com, among others.
Other notable double-digit gainers include Nordstrom Inc., Macy’s Inc., Revlon Inc., Ann Inc., Marks and Spencer Group plc, and Express.
So, what’s behind these gains? Analysts say delivering strong fundamentals such as consistent sales and earnings is essential. And making strategic acquisitions, extending a brand deeper into a market, developing a strong omnichannel approach for retailers and launching products that resonate with consumers also helps.
G-III Apparel, for example, recently inked a deal with Karl Lagerfeld for a joint venture in North America. Earlier this year, it developed a footwear license for G.H. Bass, and the company also has delivered strong sales and profits. For American Eagle, investors have keyed into the specialty retailer’s consistent sales that reflect how the retail brand is resonating with consumers.
Collectively, the other gainers in the WWD tracker can be categorized as segment leaders that have either carved out specific niches in their respective markets, grabbed market share from competitors or have benefited from new segments such as ath-leisure.
With these leaders, though, comes decliners. And the past 52-weeks have revealed some steep drops in stock valuations. In the WWD stock tracker, the bulk of the decreases range from 30 to 50 percent and include firms such as Sears Holdings Inc. (down 38 percent) and Kate Spade & Co. (off 40 percent) as well as Abercrombie & Fitch (off 47 percent) and Elizabeth Arden Inc. (down 42 percent). The top three decliners in the tracker are: Quiksilver Inc., which is down 80 percent; American Apparel Inc., which is off 72 percent; and Vince Holding Corp., which has dropped 64 percent in the 52-week period. In broad terms, the decliners are companies that are either engaged in strategic repositioning, are suffering from steep sales declines (and, subsequently, profits), or have lost their connections to their core customers.
So, as there is opportunity in the fashion apparel and retail sectors, there is clearly risk given the steep declines in stock prices. Still, these market segments — from an investment perspective — are worth examining.
“The U.S. retail sector over a medium to long time frame is extremely volatile because if you look at industries such as industrial companies that make say, large industrial equipment, there are such heavy costs that go into starting up these companies it’s very rare for them to actually disappear, but there are movements in market shares and in trends,” said an equity salesman at a major European investment bank. “Whereas retail companies everyone can analyze them because you are walking down the street and you can see [the business] for yourself.”
The equity banker said the volatility at retail is due to shifting trends where you may have a company that goes from thousands of stores at one point to zero within a decade. But this also presents a chance for investors to cash in on. “So yes, there are always opportunities in retail because fashion moves quickly,” he added.
And although the transparency of retail and fashion makes it easier for investors, there are market subtleties and evolving trends that require careful attention. Dana Telsey, chief investment officer at Telsey Advisory Group, said “even as there appears to be more newness in apparel (including denim), sales trends in athletic footwear (basketball shoes remain hot) and activewear (yoga pants and sports bras) remain robust as the product is better, the marketing is better, and both the merchandising and distribution are better,” she said adding that if Nike’s futures orders “are any indication of what’s going on in the athletic footwear market — we think they are and point out that they were up 13 percent at constant currency — then expect the strength in the category to continue.”
Telsey and her team also said in a research note today that activity with real estate remodels and store openings is higher this year than in the past — another trend worth consideration.
There’s also the expansion of the off-price sector, which now includes an influx of specialty and department stores. “The value retail space keeps gaining new entrants with many opening in fall 2015, including Macy’s Backstage, Primark and J. Crew Mercantile,” which is launching this month in Dallas and will sell product that’s been previously available at its factory stores. “We believe the continuation of above-plan sales increases in the channel are necessary to maintain multiple expansion in the sector, given the flurry of new entrants,” TAG analysts said in the report.
From a broader equities market perspective, macroeconomic factors such as the Greek fiscal crisis and China’s stock market declines will continue to drive prices up and down. And investment models and algorithms will adjust accordingly. Volatility is here to stay, and hard to mitigate against. But what are the real threats of Greece’s fiscal woes and China’s stock market implosion? For China, at least, history can provide a lesson to investors.
Brian Jackson, China economist for IHS Global Insight, said in his research note today that most “observers understand the basic figures about the rise and fall of valuations in China, along with their inconsistency with underlying fundamentals. Fewer have an understanding of how turmoil in China’s financial markets is likely to impact the real economy, or their particular sector.”
Jackson went on to say that investors and other market observers are “unfamiliar with the composition and linkages of China’s economy [and] are inflating the likely impact of the recent decline, and in the process perhaps introducing more speculative volatility into the situation.”
Based on prior bubbles in the Chinese market, Jackson said the current decline “will have a negative impact on growth,” but quickly added that “it is unlikely to disrupt non-financial sectors deeply or over a long period of time.”
“In addition to the 2015 rally failing to meet the speculative fervor of that in 2007, stock market linkages to the real economy are also low — in fact, much lower than in the past,” Jackson said. “Investment, still a major pillar of output and growth for the Chinese economy, is hardly impacted by paper values in the stock market.”