Bet on ath-leisure and boho, but not on handbags.
This story first appeared in the July 29, 2015 issue of WWD. Subscribe Today.
For investors searching for which fashion sectors will be hot in the second half — and those that won’t be — the consensus among global analysts is that firms in activewear are likely to be the market’s stars, as well as companies that have tapped into the fall season’s key boho trend.
But companies centered on handbags will continue to struggle, analysts believe, as women veer toward spending on products other than fashion.
Retailers are heading into the back-half of the year still facing some challenges, as consumers haven’t felt comfortable enough to pry open their wallets. The U.S. employment picture is looking brighter, but stagnant wage growth has led many in the middle class to continue to feel pressured. Europe has struggled with lackluster growth in labor, geopolitical issues and a weak currency. China has been forced to focus on saving its stock market from collapse.
In the U.S., consumers are finding that shelter costs keep going up. If they buy a home or even rent an apartment, it will cost more. Against this backdrop, consumers are forced to stretch their dollars as far as possible, which has caused retailers to shift focus towards discount options like outlet malls; expanding into lower-priced versions of their higher-priced goods. Off-price retailers like TJ Maxx attract these value-hungry shoppers, which hasn’t gone unnoticed by investors as the company’s stock is up 30 percent for the past year.
In Europe and Asia, housing costs aren’t the problem; instead, it’s the slow pace of recovery from the financial crisis and the ongoing aftereffects of the Greek debacle. The hope is that falling energy prices will help growth and give households more income. The bright side of the depreciation of the euro is that it will strengthen the competitiveness of euro-area companies. China also stands to gain from lower oil prices as the country tries to maintain stability in its slowing economy.
Wherever they are located in the world, apparel retailers have struggled to come up with “must-have” items that will motivate shoppers to become buyers. However, there are some trends that have worked and look like they still have some legs going into the fall and holiday seasons. The athletic trend, the bohemian/festival look and jeans will be the winners, while accessories brands continue to battle one another for the few dollars being thrown their way. Retailers dependent upon Asian shoppers to save the day will be disappointed during the next six months.
Ath-leisure has been going strong for the past one to two years. Analysts generally believe it will continue to be solid for the next six months, especially as sales for hot wearable tech items like FitBit stay strong. There are those who worry that the trend is cresting, however. One reason they believe that sporty fashion could be hitting a plateau is the sheer number of companies and celebrities jumping into the game. There are celebrity athletic labels including Adidas by Stella McCartney, Fabletics by Kate Hudson, and even country and Western singer Carrie Underwood has a new sports line.
Luxury brands are also jumping into sports-inspired lines. Coach, Louis Vuitton, Givenchy, Gucci and Versace are among those high-end brands that have added sneakers to their lineups. It’s this bandwagon mentality that has analysts forecasting the end might be nigh, but until then, some companies will run to the finish line as winners.
Nike and Under Armour look to reap the benefits of the trend. Paul Swinand of Morningstar said, “Nike is an amazing company that always delivers and Under Armour product just keeps getting better.” Under Armour stock is up 47 percent for the past year, causing Swinand to say, “From a valuation standpoint, it’s going to get harder to beat itself.” But beat itself it did last week, when Under Armour reported that second-quarter sales of footwear jumped 40 percent and apparel increased 23 percent, pushing the stock even higher.
Skechers is also poised to take advantage of the ath-leisure trend and Corinna Freedman of BB&T thinks the company will do well in the upcoming back-to-school season. Oliver Chen of Cowen and Co. likes Target’s ath-leisure exposure. “They have a great line called C9 by Champion at a great value, plus a new chief executive officer [Brian Cornell],” said Chen.
The jury is out on whether Lululemon can fight off the competition for yogawear. Beyond the big names like UA and Nike entering its space, there are plenty of upstarts like Yogasmoga and Forever Yoga that are rising quickly. Nike was even savvy enough to create a yoga shoe and slap a $120 price tag on it, which is especially bold considering yoga is known for its bare feet.
Japan’s Fast Retailing, owner of Uniqlo, is also capitalizing on the sports trend with jogging pants and hoodies, while the retailer sponsors Novak Djokovic, the world’s number-one tennis player, who advertises its Dry-Ex products. Oliver Matthew, consumer analyst at CLSA, has a “buy” rating on the company, saying, “It will increasingly be recognized as Asia’s number-one fashion brand.”
Ryota Himeno, an analyst with Barclays in Japan, has an equal weight rating on Fast Retailing although while he believes the company will benefit from overseas growth, he is a little concerned about the losses it is experiencing in North America.
In China, the government is promoting fitness and sports participation nationwide. A big winner from that is likely to be Anta Sports. It is the top choice of Jamie Soo and Anson Chan, analysts at Daiwa. They wrote, “It has value-for-money products that are both functional and stylish, as well as being well-positioned to capture the growth in incomes evident in low-tier cities.”
The only loser in sports looks to be the French luxury company Kering, who cut the full-year outlook for its sports brand Puma. Kering sold its Swedish sneaker line Tretorn to Authentic Brands Group in June and Citigroup analyst Thomas Chauvet thinks the group should also sell Puma. Chauvet said Puma has a valuation of $2.7 billion. Kering seems to want to focus on the restructuring of Gucci and losing Puma could allow it to do so.
Beyond activewear, another trend that could help fashion brands and retailers in the second half is the festival/bohemian look. With blousy tops and lots of embroidery, it’s the polar opposite of the athletic outfit. Street style slideshows on fashion Web sites are showing a lot of this look, which is less body-conscious and more forgiving for women who aren’t in shape. Analysts suggest that women may want to switch from the typical black bag to ones with brown tones, which could boost handbag sales. Fringe bags could also push women to add to their handbag collection, which would be welcome news to the handbag makers who have suffered from slowing sales.
Jeff Van Sinderen of B. Riley & Co. likes Steve Madden and thinks they will benefit from the fashion shift. “They are setting up for a solid second half,” said Van Sinderen. “They have fringe boots and fringe bags.”
Liz Pierce of Brean Capital thinks Urban Outfitters will do well with the boho buyer. “Urban has easy comps ahead and it is well-positioned to take advantage of the boho/Seventies look,” said Pierce. Urban definitely captured the Seventies when it recently highlighted a macramé artist on its blog. The company did experience a little social media ribbing for its high prices, but Urban isn’t apologetic and doesn’t want to be fast fashion — it aims at the young adult post-college.
Either because of the boho trend — or simply because of the never-ending cycle of fashion — denim is making a comeback. The same folks that believe ath-leisure may be showing signs of frothiness think the long-beleaguered denim sector may be due for an upturn. They believe consumers are weary of leggings and want a different silhouette and the longer, looser flowing boho tops look better with jeans than leggings. However, jeans makers have learned a lesson from the ath-leisure crowd and the denim coming to stores now has a stretch quality that makes them more comfortable.
Jean winners include PVH with its Calvin Klein Jeans. Using Kendall Jenner and Justin Bieber as its faces breathes new life into the brand. PVH has grabbed complete control of Calvin Klein Jeans as a result of its acquisition of Warnaco in 2013 and is wasting no time to set it right. VF Corp. will also benefit from the trend since it owns several jean labels including Wrangler, Lee and Seven For All Mankind. VF’s chairman, president and chief executive officer Eric Wiseman last week told Wall Street analysts, “There’s definitely momentum happening in jeanswear.” Matthew Boss of J.P. Morgan likes VF not only for its denim exposure, but also its sports business with brands like Vans sneakers and North Face. VF’s Lucy brand is capitalizing on ath-leisure with its gym-to-street clothes and yogawear. Boss has an “overweight rating” on VF.
Analysts all agreed that handbags are expected to stay weak. The field has become crowded with sameness with a sea of Chanel and Hermès copycats. They all have bags with chains, big logos and branded hangtags. Women are spending their money on furniture, athletic wear and wearable tech, but not on purses.
It’s been a rough ride for stocks of handbag-focused brands, especially in the U.S., and it doesn’t sound like the next six months are going to be any better — boho or no boho. Vera Bradley is down 42 percent for the past year and most analysts have called for a hold or to sell the stock. Michael Kors stock, once a Wall Street favorite has dropped 50 percent this year. Coach has managed to lose only seven percent this year, but the stock’s been off 25 percent for the past three moths. Kate Spade has dropped 45 percent.
Coach used to own the contemporary space in the U.S., but that was long before Michael Kors, Kate Spade and Tory Burch gave it a run for its money. Now Coach is closing full-price stores and opening outlet shops. Coach has had to resort to big discounts to bring in shoppers. Coach’s nemesis Kors could benefit from the fringe trend as it has the best selection amongst the aspirational brands, according to Corinna Freedman of BB&T. Coach has no fringe and could miss the one trend that has the potential to draw in buyers. Freedman has an underweight rating on Coach.
Vera Bradley isn’t doing fringe either, but its new styles are using solid colors and leather in an attempt to win back customers. Vera Bradley, known for its fabric bags with floral prints, now says its top selling color is black. Analysts, however, aren’t convinced that switching to a look that is already well-represented by Coach and Kors will be a winning formula, with most giving Vera Bradley a “hold” rating.
Among the luxury brands, LVMH Moët Hennessy Louis Vuitton looks like it will dodge the problems the handbag sector has faced. Luca Solca at Exane BNP Paribas thinks the company will be a winner in the second half of the year. Solca says that the demand environment is just OK, but LVMH will benefit from internal measures like cost-cutting. He also predicts a rebound in some of LVMH’s businesses like wines and spirits, Bulgari and even Louis Vuitton.
Melanie Flouquet has an “overweight” rating on LVMH and said there is no denying that the handbag category is challenging. Yet she writes, “Louis Vuitton is outperforming the other handbag giants, Prada and Gucci.”
With regard to the Asian consumer, Goldman Sachs & Co. chief Asia-Pacific economist Andrew Tilton writes, “We did not see a major pickup in consumption.” Issues like the volatile Chinese stock market, overall weak growth and the anticorruption campaign concern analysts. Asian clothing company Esprit — in the middle of a painful turnaround — is a “sell,” according to CLSA analyst Mariana Kou. “Management is guiding for a substantial loss for fiscal year 2015-16 as a result of 3 billion Hong Kong dollars [$387 million] of noncash nonrecurring provisions and impairments,” said Kou. “Esprit is basically writing down all the 4.7 billion Hong Kong dollars [$606.4 million] goodwill from the acquisition of the China business.”
Because of the China slowdown, Swatch had a difficult start in the second quarter, according to Daniele Alibrandi, a luxury goods analyst at Intermonte SIM. She noted that local retailers in Hong Kong held back orders in anticipation of price cuts. “Chinese tourism has been sluggish,” wrote Alibrandi. She doesn’t believe the market has priced in the ongoing slump in the Asian market and the competition from the Apple Watch. She has a “sell” rating on Swatch’s stock.
Burberry is also expected to feel the pinch from Hong Kong. Solca noted that like-for-like sales fell by midsingle digits in Hong Kong, due to protests and a crackdown on travel between the island and China. He is lukewarm on Burberry. Alibrandi is also “neutral” on the brand, saying, “Burberry is fighting against the strong pound and lower demand in Hong Kong, which is seeing fewer visits from wealthy Chinese shoppers. “However, Alibrandi is holding out for a surprise.”
Brunello Cucinelli has put the brakes on its store openings in China. Even though the Italian apparel company said total sales were up 14 percent in the first half of the year, its overall pace of store openings has slowed. No stores were opened in China, which the company called a “normalization of growth.” Solca is concerned that Cucinelli has too many products being sold at a discount online and he has low expectations for the second half of the year.
While apparel brands are making adjustments for a less exuberant Chinese shopper, the world’s largest beauty company L’Oréal is still counting sales growth. The company is number one in the Asia-Pacific market with a 9.4 percent market share. For the first quarter of 2015, L’Oréal’s cosmetics sales were up 26.6 percent in the Asia-Pacific market. The dominant category in China is skin care and L’Oréal is a leader. The competition is weak with Procter & Gamble saying in May that it was losing market share and Avon products continues to deal with a bribery probe.
Beauty can also benefit from boho, which emphasizes a more natural look. The Estée Lauder Cos. Inc. is best-positioned to capitalize on consumers buying new colors in order to have a natural-looking face. The customer who doesn’t want to wear a lot of makeup will be spending their money instead on skin care. Lauder also owns brands like Aveda and Origins that present a fresh face. April Scee at Sterne Agee has a “buy” rating on the stock and wrote, “We believe the big changes have already been made at Lauder and progress is starting to show.”
Scee likes the use of Kendall Jenner for the Lauder brand, pointing out that she’s young, has 15 million Instagram followers and often gets 500,000 likes on products she posts.
But all these recommendations are being made now. Who knows what might happen in the coming weeks and months that might see a favored share suddenly dive or a less-favored one suddenly soar.
In the U.S., gas prices remain low; the stock market has hit record highs this summer and hiring is steady nationwide. But many retailers don’t feel that the consumer has shopped ’til they dropped. Several wonder where they have disappeared, especially in light of the June retail economic data that was disappointing. There is also a concern that the Federal Reserve will raise rates in September. It could cause consumers’ credit card rates to rise, making them less motivated to charge purchases.
Despite those worries, kids will still need back-to-school clothes and many consumers will need new winter boots and coats. Christmas won’t get canceled and people will still buy. The key is which retailers and fashion brands will get the smiley emoticons and which will ones get the frowns.