WALL ST. SEES FEW WINNERS AMONG SA STOCKS IN 2ND HALF
Byline: CATHERINE M. CURAN
NEW YORK — Wall Street is high on a few select apparel stocks for the second half, but analysts are wary of the category as a whole.
Analysts say it will take a strong fashion trend or solid retail sales this fall to spark interest in the group.
After a poor 1993, apparel stocks have remained sluggish so far this year. Most of the declines were attributable to an overall depressed stock market and a poor apparel climate.
Nevertheless, many analysts are keen on Kellwood, Jones Apparel and Warnaco, among others.
Brenda J. Gall, Merrill Lynch Global Securities Research, said the outlook for apparel stocks this year depends on good retail results in the fall.
“The hope is that people will shift spending to soft goods, including apparel, as interest rates rise,” she said, adding, “Everyone’s got their fingers crossed.”
“In general, the outlook is pretty dismal,” said Josephine Esquivel, apparel analyst at Lehman Bros. “Stocks will take a hit as the year progresses, unless something big happens to swing business around.”
Laurence C. Leeds Jr., managing director of Buckingham Research Group, was more optimistic, saying many stocks are undervalued, considering the solid operating results many have generated.
“The stock market is a bigger fashion business than the fashion industry,” Leeds observed. He said the bearish attitude on apparel stocks is “an irrational response that has nothing to do with business fortunes of companies out there.”
Todd D. Slater, at UBS Securities, expects apparel to perform better in the stores this fall, benefiting some stocks. “There are some relative bargains out there, despite what happens in the market,” he said.
Analysts surveyed highlighted certain stocks that they thought would perform well in this environment.
UBS’s Slater likes Warnaco Group Inc., Kellwood Co., Farah Inc. and Jones Apparel Group, saying these companies all have strong earnings growth potential and are “fashion-oriented.” Slater expects each would “benefit tremendously” from a more robust economy or improving fashion cycle.
“The growing size and appetite of today’s department stores and mass merchants favor larger, well-capitalized, better-sourced companies,” Slater observed.
Richard S. Lawrence, at Janney Montgomery Scott, Philadelphia, is also optimistic about the fall season, based on initial orders. “Good comparable-store sales would help give some confidence about the industry,” he noted.
Lawrence takes a “wait and see” attitude on apparel stocks for the rest of the year, but said he believes apparel stock prices have stabilized. “The period of selling is behind the group,” he said.
Lawrence recommends Kellwood, Fruit of the Loom and Jones.
“FTL is an excellent example of the market getting ahead of earnings,” said Lawrence. After falling 24 1/2 points in 1993 to finish the year at 24 1/8, FTL bounced back to a 1994 high of 33 in April on expectations of a turnaround. However, FTL failed to meet those expectations, sending the stock back around the 24 mark.
Despite FTL’s recent problems, Lawrence said it is very well positioned in the commodity business of fleece and T-shirts, adding, “Nobody has a lower cost structure.” Lawrence also projects international business will be an important segment for FTL in the future.
Lehman’s Esquivel likes Tommy Hilfiger Corp. and VF Corp. She cited VF’s strong growth areas, despite its dependence on denim. Esquivel expects a 15 percent annual sales growth rate for the knitwear and licensed sports apparel area, and sees good potential in children’s wear.
Jones, Kellwood and Warnaco are favorites of Merrill Lynch’s Gall.
“In women’s ready-to-wear, my favorite would be Jones,” Gall said, citing the company’s aggressive divisional structure and success of new lines, including Rena Rowan dresses and the Evan-Picone line. She said Kellwood offers value, an important draw for today’s consumer, and distributes broadly.
Gall said Warnaco benefits from being aggressive at jumping on trends. “They’re taking things into their own hands.” Warnaco is starting to sell through Avon and Gall sees international potential with the Calvin Klein underwear license deal.
Buckingham’s Leeds, the former head of Manhattan Industries, recommends a range of companies, including Jones, Kellwood, Timberland, Warnaco, Authentic Fitness Corp., Farah, Donnkenny Inc., Cygne Designs Inc., Quiksilver, Phillips-Van Heusen Corp., Tommy Hilfiger Corp. and Nautica Enterprises Inc. “All of a sudden these will be back in vogue,” Leeds projected.
Leeds notes the average share price of these companies is down more than 25 percent since the beginning of the year, although “business is quite strong and will continue to be strong.” He projects average earnings growth will move up around 20 percent or more a year and he expects the stocks to appreciate 30 to 40 percent within a two-year period.
In his outlook for today’s public apparel companies, Leeds said the major players have staying power. Commenting on his recommended group, said, “The public companies of today have survived the brutal Darwinian competition of the past 25 years.”