Believe it or not, it’s actually a good time to invest in retail and apparel stocks. At least certain ones — and for now.
Retail industry sources say an uptick in sales of certain apparel segments is attracting investors — especially institutional ones — who are comfortable with the cyclical nature of fashion apparel retailing. As a result, share prices of companies in the activewear, intimate apparel and denim markets are soaring.
The inflow of investors has helped the WWD Global Stock Tracker outperform major indices and market sectors. For the 12-month period, the tracker is up 10.4 percent, which compares with a 7.7 percent gain for the S&P 500 and a 4.7 percent gain for the Dow Jones Industrial Average.
Of the 100 companies in the WWD tracker, 57 have advanced in the 12-month period while 43 have declined. Of the stock gainers in that period, 37 have posted gains of more than 10 percent. And an astonishing 14 companies have had increases of more than 30 percent.
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The top three gainers include Yoox.com with a 69 percent increase, Coty Inc., up 68 percent, and Pandora A/S with a 62 percent rise. The bulk of gainers are key players in activewear and intimates, and include: G-III Apparel Group Ltd., up 59 percent; Under Armour Inc., up 55 percent; L Brands Inc. and Nike Inc., each up 43 percent, and Lululemon Athletica Inc., with a 32 percent gain.
That’s the good news. The bad news is that major storm clouds have been forming since August. That’s when concerns over China’s economy, as well as weakness in emerging markets, forced global investors to shift their equity investments from Asia to Europe while building up cash holdings, according to recent monthly surveys of fund managers conducted by Bank of America Merrill Lynch.
Looking ahead, investors in the U.S. are keeping close tabs on consumer spending. The National Retail Federation’s forecast for the holiday shopping season included cautionary statements about a challenging environment. In its holiday outlook, PricewaterhouseCoopers said consumers will spend, but Millennials in particular will dole out money on entertainment and travel instead of apparel. Wage stagnation is also a worry, as well as employment conditions.
So have retail and apparel stocks reached their peaks? Analysts are concerned that sluggish sales in September — partly due to warmer weather that delayed fall merchandise spending as well as the impact of Hurricane Joaquin — will make quarterly results a washout for many companies. But a few still see opportunities in the market.
Analysts at Telsey Advisory Group said in an outlook report that “with denim, intimate apparel and activewear performing, there is investor interest in apparel, particularly in PVH Corp.”
PVH, which is down 12 percent for the 12 months to $101, posted strong quarterly results at the end of August, which beat expectations and triggered higher sales and earnings guidance for the full-year period.
The Telsey analysts said, “even with what is expected to be a very choppy sales environment in [the third quarter], key focal areas” for investors to consider include strength in orders from department stores, higher average unit costs — and higher margins — and the possibility of acquisitions in the apparel vendor side of the business.” The analysts said “many of the large apparel conglomerates have the balance sheet and expertise to make an acquisition that would be complementary to their existing portfolios.”
Some of the bigger vendors include VF Corp., which said in its most recent quarterly report that strong sales in its outdoor and action sports unit as well as its jeanswear business pushed sales up 10 percent. The company’s stable of brands includes The North Face, Reef, Lee, Wrangler and Seven For All Mankind.
In other corners of the market, Perry Ellis International Inc. is a vendor with a broad offering of brands that stretch from jeans and activewear (including golf apparel) to dress shirts and casualwear. Last week, Eric Beder, equities analyst at Wunderlich Securities Inc., reiterated a “buy” rating on the stock, and set a $35 price target. At about $21, the stock has been trading close to its 52-week low of $19.70.
Beder said the company is better positioned than others as it “consciously pushed back the shipments of fall goods to October, a month later than last year, to offer a deeper ‘wear-now’ focus.” Beder said he also believes the “warmer weather has not materially impacted the company.”
For the remaining few retailers that reported September same-store sales last week, results were mostly weak and many blamed the warm weather. L Brands Inc. was one bright spot and its Victoria’s Secret unit posted a 9 percent same-store sales gain — further evidence of strength in the intimates segment.
But the rise in denim, intimates and activewear has not buoyed all companies in the space. Earlier this year, Frederick’s of Hollywood filed for bankruptcy, and more recently, Quiksilver Inc. and American Apparel have both faltered and filed Chapter 11.
Investors are likely eyeing these moves closely to gauge where the market is heading, and who can increase market share. Macroeconomic issues are also in their sights.
Last week, the Federal Reserve Open Markets Committee released its minutes from September, which revealed its concern over a slowing global economy and volatility in the stock market. The Fed said it was weighing the “material slowdown in economic growth in China and potential adverse spillovers to other economies.” Inflations, employment and wages were also examined, which led the Fed to hold off on an interest-rate hike. For now, though, holiday sales and the employment outlook will be key factors for Wall Street and investors in the retail apparel sector.
NRF chief economist Jack Kleinhenz said the market remains challenging and highly competitive. He told WWD last week that with deflation running at about 2 percent, “there’s no pricing power” for retailers. Kleinhenz also said the “underpinning for growth is more jobs. If you get more jobs, you get more spending power, but job growth in the first nine months has been on average lower than 2014. We are creating jobs, but not as many as 2014.”
Ozlem Yaylaci and Sara Johnson, economists at IHS Global Insight, said if the “job numbers for October and November are strong, we still see a December rate hike as the most likely scenario; however, more bad news from the job front can delay the hikes to 2016.”
So, for the foreseeable future, the financial markets will be filled with the one thing investors hate: uncertainty.