As major indices tangle with market volatility due to sour earnings expectations, the impact of a strong dollar on sales and profits and uncertain due dates for an interest rate hike, the WWD Global Stock Tracker has been a steady and robust market performer.
Since the beginning of the year, the WWD Tracker is up 9 percent — far outpacing the Dow Jones Industrial Average’s 1.3 percent gain in the same period and the S&P 500’s 2 percent increase. The WWD Tracker has even outpaced the Nasdaq Composite, which is similarly weighted by market capitalization, and is up 7.7 percent since the beginning of the year.
More impressive is the six-month performance of the fashion and retail apparel index: the WWD Tracker is up 20 percent over the past six months, which compares with a 10 percent gain for the Dow, an 11 percent gain for the S&P 500 and a 18 percent gain for the Nasdaq.
On Monday, the WWD Tracker closed the day down 0.26 percent to 117.01 while the Nasdaq shed 0.15 percent to 4,988.25. The Dow posted a 0.45 percent decline to 17,977.04 while the S&P 500 fell 0.46 percent to 2,892.43. The declines of the broader indices were amid reports that investors were jittery over upcoming second-quarter earnings from the financial sector.
The six-month gains among fashion and retail apparel companies are primarily due to solid fundamentals on the sales and earnings front. Of the 100 stocks in the WWD tracker, 69 have advanced in the past six months while 31 have declined. And the lineup of top 25 gainers of the composite is an eclectic cast of companies that includes Lululemon Athletica Inc., G-III Apparel Group Ltd., Shanghai Metersbonwe and Sears Holdings Corp.
Anyone weaving an investment thesis on retail and fashion apparel companies might be startled to see how strong the stocks of these companies have performed. Of the top 25 gainers, all have posted six-month increases of more than 20 percent. And the top 10 have gains over 40 percent. Interestingly, all but five of the top 25 companies would be considered small-cap stocks (investors and analysts consider small-cap companies to have market capitalizations of between $300 million and $2 billion).
So, what’s at the heart of these companies’ robust gains? It may pay to look no further than the consumer. Despite some bumps over the past year, consumer confidence is up and consumer spending is on target to swell. IHS Global Insight chief U.S. economist Doug Handler said the “promised acceleration in growth begins in the second quarter — from stronger consumer spending, as consumers increasingly recognize their newly increased purchasing strength from lower inflation and the dissipation of short-term headwinds. Very soon, the U.S. economy will feel the impacts of the stronger dollar and flattening energy prices.”
Handler said trade will continue to “subtract from overall economic growth, but not nearly enough to offset the improvement in consumer spending. In fact, the higher dollar is contributing to the consumer spending boom through relatively low import prices.”
It’s important to note that although market segment and channels of distribution at retail determine how analysts cover public retail and fashion apparel stocks, the drivers of stock performances are generally similar, and include other factors in addition to consumer confidence and consumer spending. These factors include longer-term gross margins rate trends and profitability; brand positioning; management effectiveness, and — for retailers — store closures of competitors as well as their own.
So, for the components for the WWD Tracker, an analysis of the top-gainers would include changes in Lululemon’s management and its brand positioning over the course of the past year. For L Brands Inc., examining the company’s same-store sales trends — which have been up and trending better than its competitors — would play a role in understanding why the stock has gained over 44 percent in the past six months.
For Sears Holdings Corp., Wall Street could be keying into recent deals that strengthen the company’s financials. Store closings for retailers can also win favor with investors who see efforts to cut costs in the long-term as smart business moves. This is likely the case with J.C. Penny Co. Inc.’s 30 percent gain over the past six months.
In some cases, it’s not clear why shares rise. Investors can eye a firm like Youngor Group Co. in China and see upside potential because the company not only produces its own apparel, but distributes goods as well. And it is diversified, and has investments in real estate — another plus for investors.
Generally, the top performers have been buoyed by their ability to leverage demand for products and brands, which add to the top line and bolster profits. For many investors, the focus has been the U.S. market, which continues to surprise. For example, the RetailNext Performance Pulse report for March showed a 5.8 percent increase in sales per shopper, which “was the highest uptick in over a year — perhaps an indicator of pent-up demand after a long, hard winter,” the analysts said in their research note.
The gain came as traffic showed a decline of 8.2 percent, which was offset by higher average transaction values. But taking such a “deep read” on sales trends is often left only for investors willing to do a lot of homework. More often than not, Wall Street has been obsessed with broader influences and its impact on larger sectors. This would include how a strong dollar, for example, will affect overall sales and earnings. Or when the Federal Reserve is going to raise interest rates, or the cost of crude oil and its impact on energy stocks.
Dana Telsey, chief executive officer and chief research officer of Telsey Advisory Group, noted that in the broader retail sector there’s “a favorable sentiment on consumer companies” and it’s “showing up in year-to-date stock prices, with all of [Telsey Advisory Group]’s covered consumer sectors posting increases, except for luxury with a drop of 1.5 percent.”
In the firm’s coverage areas, the sporting goods segment is up over 22 percent while department stores are up over 13 percent. Specialty apparel and supermarkets are up 10.6 and 11.4 percent, respectively. Telsey added that consumers are “beginning to open their wallet to innovative and new products” while retail promotions are being more carefully deployed.