4 apparel and footwear retail stocks braving industry-wide challenges – July 11, 2022
Product cost inflation, tight job market, and supply chain bottlenecks are some of the headwinds that industry players in the Zacks Retail – Apparel & Footwear industry have faced in recent time. These, along with geopolitical turbulence, thanks to the conflict between Russia and Ukraine, have dampened consumer sentiment.
That said, industry players have directed their resources towards digital platforms, accelerating fleet optimization and increasing the supply chain. Retailers have focused on superior product strategy, advancing omnichannel capabilities, and prudent capital investments. Building on these initiatives, companies like Capri Holdings Limited (IRCP – free report), Boot Barn Holdings, Inc. (BOOT – free report), Designer Brands Inc. (DBI – free report) and Chico’s FAS, Inc. (CHS – Free report) are ready to take advantage of opportunities.
About the industry
The Zacks Retail – Apparel and Footwear industry includes companies that offer apparel, footwear, accessories, lingerie and beauty products, as well as fitness and lifestyle products for yoga, workout and sports under various brands in the national and international markets. Many players offer collections of bags, including business briefcases, laptop bags and backpacks; leather goods, such as wallets, card holders, travel organizers and belts; and watches, sunglasses, perfumes and ready-to-wear as well as winter accessories. Obviously, companies present their products to customers directly through their branded retail stores, mobile apps, catalogs and websites. Some industry players also offer products through department stores, specialty retailers, third-party e-commerce sites, and franchisees that operate dedicated brand stores.
4 key trends to watch in retail – apparel and footwear industry
Pressure on margins to linger: The industry is quite fragmented, with companies vying for a bigger slice of the pie on attributes like price, products, and speed to market. In order to address these issues, a significant number of industry players have invested in strengthening their digital ecosystem and delivery capabilities. While these efforts boost sales, they come with high costs. Apart from that, an increase in spending on marketing, advertising and other store-related expenses could squeeze margins. In recent times, industry players have been faced with product cost inflation, labor market tightening and supply chain headwinds. Nonetheless, companies have focused on initiatives to mitigate cost challenges. These include streamlining operational structures, optimizing supply networks and adopting efficient pricing policies.
Consumer confidence weakens amid soaring inflation: Escalating prices and the war between Russia and Ukraine continue to threaten consumer spending and confidence. According to Conference Board data, the consumer confidence index fell to 98.7 in June from May’s downwardly revised reading of 103.2. Undoubtedly, industry outlook is correlated with consumer purchasing power. But rising gas and food prices have reduced disposable income. The consumer price index rose 1% month on month in May, after rising 0.3% in April. Year-over-year, the measure rose 8.6%, the fastest pace since December 1981.
Brand enhancement, capital discipline: Industry participants focused on deepening engagements with consumers, creating innovative and engaging products, and improving digital and data analytics capabilities. The launch of new styles, customization options and updated store environments allow them to appeal to shoppers. Efforts to improve the brand portfolio through marketing strategies, takeovers, innovations and alliances are likely to continue to support players in the space. Companies have taken steps to strengthen their financial position. In fact, they’ve taken all the necessary steps, from managing inventory and closing underperforming stores to optimizing capital expenditures and improving operational efficiencies.
Diversification and digitization key to growth: With changing shopping habits and consumer behavior amid the pandemic, industry players have played a dual role in-store and online. Initiatives such as building an omnichannel channel, developing loyalty and marketing programs, improving the supply chain and providing faster delivery options, whether home delivery, curbside pickup or online shopping and in-store pickup, are worth mentioning. At the same time, companies are investing in renovations, improved checkouts and mobile POS capabilities to keep stores relevant. Keeping consumer product preferences in mind and the growing inclination for online shopping, companies have been restocking shelves with in-demand merchandise and stepping up their investments in digitalization.
Zacks’ industry rankings point to bleak prospects
The Zacks Retail – Clothing and Footwear industry is a group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks industry ranking of #176, which places it in the bottom 30% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates a lackluster near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of industries ranked by Zacks is the result of the negative earnings outlook for the constituent companies overall. Looking at revisions to overall earnings estimates, it appears analysts are losing confidence in the earnings growth potential of this group. Since the beginning of April 2022, the industry’s earnings estimate has fallen by 16%.
Before outlining a few stocks you might consider for your portfolio, let’s take a look at recent stock market performance and the industry valuation picture.
Industry versus wider market
The Zacks Retail – Apparel & Footwear industry has underperformed the overall Zacks Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
The industry fell 60.3% during this period compared to the 11.2% decline in the S&P 500. Meanwhile, the broader sector fell 30.3%.
Year-over-year price performance
Current industry assessment
Based on the 12-month forward price-to-earnings (P/E) ratio, which is commonly used to value retail stocks, the industry is currently trading at 9.53X versus the S&P 500’s 16.74X and to 21.24X of the sector.
Over the past five years the industry has traded as high as 118.93X and as low as 8.81X with the median at 14.9X as seen in the chart below.
Price/earnings ratio (last 5 years)
4 stocks to consider
Startup barn funds: This lifestyle retailer of western and work footwear, apparel and accessories has successfully navigated a challenging environment, thanks to merchandising strategies, omnichannel capabilities and better spend and marketing management. This, combined with the expansion of the store base, helped Boot Barn Holdings gain market share and strengthen its position in the industry.
Impressively, Boot Barn Holdings has an estimated long-term earnings growth rate of 20%. Zacks’ consensus estimate for its current fiscal earnings per share (EPS) has remained stable over the past 30 days. We note that shares of this company Zacks Rank #1 (Strong Buy) are down 20.1% over the past year.
Pricing and Consensus: BOOT
Chico’s FAS: The Florida-based fashion retailer’s efforts to become a “digital-first, customer-focused” business, coupled with a strong portfolio of three unique brands, namely Chico’s, WHBM and Soma, positions it well to expand its customer base and market share. Improved product, planned inventory, operational discipline and marketing strategies have helped drive full price sales, reduce markdowns and produce a higher gross margin.
Chico’s has a surprise on earnings for the last four quarters of 330.6% on average. Meanwhile, Zacks’ consensus estimate for its current budget EPS has remained stable over the past 30 days. Markedly, shares of this No. 1 Zacks Rank company have fallen 27.5% over the past year.
Pricing and Consensus: CHS
Designer brands: Designer Brands’ flexible business model, industry-leading omnichannel capabilities and portfolio of proprietary brands were key drivers of growth. The company’s efforts to expand sourcing and supply chain capabilities have resulted in faster time to market with new designs and faster delivery times.
This footwear and accessories designer, producer and retailer has a four-quarter earnings surprise of 102.5%, on average. The Zacks consensus estimate for current tax EPS for designer brands has remained stable over the past 30 days. Shares of this No. 1 Zacks Rank company are down 19.7% over the past year.
Pricing and Consensus: DBI
Capri Holdings: This designer, marketer, marketer and retailer of branded apparel and accessories has strengthened its position in the luxury fashion space and seeks to maximize the potential of the Versace, Jimmy Choo and Michael Kors brands through products and expanded categories. It has been deploying resources for some time to expand its product offerings, upgrade delivery infrastructure, build seamless omnichannel capabilities, and deepen its engagement with customers.
Capri Holdings has a four-quarter earnings surprise of 49.3% on average. This Zacks No. 2 (buy) company has an estimated long-term earnings growth rate of 11.3%. Shares of the company have fallen 22.5% over the past year.
Pricing and Consensus: CPRI