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Retail-Apparel & Shoes Industry Outlook: Prospects Galore

Sumit Singh

The Zacks Retail - Apparel And Shoes industry comprises companies that offer apparel, activewear, footwear, accessories, electronics as well as fitness and lifestyle products under various brand names in domestic and international markets. These companies showcase products through their own outlets and websites. However, some companies distribute products via other specialty retail outlets, department stores, franchise stores and catalogs. Some of the prominent names in the industry are Capri Holdings Limited (CPRI), Foot Locker, Inc. (FL), L Brands, Inc. (LB), The Gap, Inc. (GPS) and Urban Outfitters, Inc. (URBN).

Let’s take a look at the industry’s three major themes:

  • The industry’s prospects are closely tied to the purchasing power of consumers, who look pretty confident now. A solid labor market and rise in disposable income make way for higher spending. Consumer spending, which is one of the driving factors of the economy, rose at a 4.7% rate in the second quarter. While apparel is the core segment of the industry, increasing popularity of fitness activities is driving the need for suitable footwear. Quick product innovation plays a key role in bolstering the sales graph. Companies’ constant endeavors toward bringing new styles allow them to resort to full price, instead of markdowns, which in turn help lift revenues.
     
  • Industry participants are playing dual in-store and online roles with evolving consumers’ shopping pattern. Apart from upgrading digitally, companies are coming up with unique products and better deals. Initiatives such as building omni-channel, coming up with loyalty and marketing programs, enhancing supply chain and providing faster delivery options are also worth a mention. Simultaneously, companies are investing in renovation and improved checkouts and mobile point-of-sale capabilities to keep stores relevant. These should boost revenues of the industry players as well.
     
  • The industry is quite fragmented with companies vying for a bigger slice of the pie on attributes such as price, products and speed-to-market. The space has turned highly competitive since Amazon (AMZN) started dominating all possible business arenas and altering the way consumers shop. A significant number of players have been making heavy investments to strengthen their digital ecosystem and accelerating shipping and delivery capabilities. While these endeavors might boost sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses, and adverse currency rates due to a strong U.S. dollar might also compress margins. Nevertheless, companies are trying all means to contain costs.
     

Zacks Industry Rank Indicates Solid Prospects

The Zacks Retail - Apparel And Shoes industry is a 53-stock group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #49, which places it in the top 19% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence on this group’s earnings growth potential. Since the beginning of July, the industry’s earnings estimate for the current year has increased approximately 6.8%.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Versus Broader Market

The Zacks Retail - Apparel And Shoes industry has underperformed both the broader Retail – Wholesale Sector and the Zacks S&P 500 composite over the past year.

While the stocks in this industry have collectively lost 43.1%, the Zacks S&P 500 Composite and Zacks Retail – Wholesale Sector have gained 3.1% and 2.1%, respectively.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 10.90X compared with the S&P 500’s 17.20X and the sector’s 24.23X.

Over the last five years, the industry has traded as high as 18.35X, as low as 9.62X and at the median of 14.44X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

 

Bottom Line

Players in the industry are gaining from a favorable consumer environment. Endeavors such as ramped-up digital penetration, store openings, merchandising improvement and international expansion bode well. Participants in the industry are making all possible efforts to enhance brand offerings through store refurbishment and bringing in more compelling assortments. These factors are likely to help companies in the industry generate higher revenues. However, SG&A expenses are on the rise and competition is intense.

That said, we are presenting four stocks from the Retail - Apparel And Shoes space that are well positioned to capitalize on the opportunities. Of these, the first three stocks sport a Zacks Rank #1 (Strong Buy) while the last one carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boot Barn Holdings, Inc. (BOOT): Shares of this lifestyle retailer of western and work-related footwear, apparel and accessories have rallied more than 100% so far in the year. The Zacks Consensus Estimate for its current-fiscal EPS has remained stable in the past 30 days. The company has an estimated long-term earnings growth rate of 17%. The company has an average positive earnings surprise of 26.1% for the last four quarters.

Price and Consensus: BOOT

 

Genesco Inc. (GCO): This retailer and wholesaler of footwear, apparel, and accessories has an estimated long-term earnings growth rate of 5%. The stock has advanced approximately 29% in the past month. The Zacks Consensus Estimate for the company’s current-fiscal EPS has risen 9.6% in the past 30 days.
 
Price and Consensus: GCO



Zumiez Inc. (ZUMZ): Shares of this specialty retailer of apparel, footwear, accessories, and hardgoods have gained 69% so far in the year. The Zacks Consensus Estimate for its current-fiscal EPS has moved up 14.3% in the past 30 days. The company has an estimated long-term earnings growth rate of 12%. The company delivered average positive earnings surprise of 60.9% in the trailing four quarters.

Price and Consensus: ZUMZ



Canada Goose Holdings Inc. (GOOS): Shares of this designer, manufacturer and seller of premium outdoor apparel have gained 20% in the past three months. The company has an estimated long-term earnings growth rate of 28.5%. This Zacks Rank #2 company has an average positive earnings surprise of 78.6% for the trailing four quarters.

Price and Consensus: GOOS



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