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Retailers are likely to stage a comeback this earnings season. Much of the recovery is expected to have come from the resumption of economic activities and movements as vaccination drives catch pace. As consumers have started to get out of their houses, there has been a revived demand for social and business attire alongside continued momentum in casual and at-home clothing. The impacts of the trends are likely to get reflected in the top lines of apparel companies this earnings season.
Moreover, apparel retailers are expected to have gained from easy year-over-year sales comparisons as most stores were closed in March 2020 amid the onset of the pandemic. This is likely to have reflected in robust year-over-year sales growth for most apparel companies in the first quarter of 2021.
Further, companies in the apparel space are anticipated to have benefited from continued strength in digital commerce, which has been a major survival hack amid the pandemic. Even with the reopening of stores, improvement in digital sales is expected to have remained intact, contributing significantly to top-line growth in the to-be-reported quarter. Also, benefits from evolved omni-channel capabilities, enhanced supply chain and faster delivery options (be it curbside pickup or delivery at home) are expected to have contributed to the sales momentum of apparel companies this earnings season.
However, margins are likely to have been an area to watch in the quarter under review. Some companies are poised to benefit from stringent inventory management, more full-price sales and tight expense control. Meanwhile, some companies are expected to have been burdened with higher costs related to the pandemic-driven cleaning measures, higher staff pays, increased investments in e-commerce and omni-channel, SG&A deleverage, and higher marketing, data and analytics costs.
Favorable Economic and Industry Trends
We note that the U.S. economy has been gathering pace, with a marked improvement in consumers’ spending patterns. The Bureau of Economic Analysis’ advance estimate indicated that the U.S. annual GDP rate increased 6.4% in the first quarter of 2021, after witnessing growth of 4.3% in the fourth quarter of 2020. The increase resulted from the continued economic recovery, the reopening of establishments and continued government stimulus in response to the COVID-19 outbreak. The increase in GDP also reflected a marked increase in consumer spending, with consumers inclined to spend the stimulus package on discretionary items.
Notably, consumer spending for the first quarter of 2021 rose 10.7%, following 2.3% growth recorded in the fourth quarter of 2020. Additionally, consumer spending has increased 4.2% in March 2021 mainly as the stimulus paychecks related to the American Rescue Plan Act of 2021 were distributed in March.
Increased consumer spending was well-absorbed by the retail sector, as reflected by a rebound in March retail sales. Retail sales, reported by Nation Retail Federation (“NRF”), increased 17.7% year over year in March, as stimulus checks and paced-up vaccination drives made it easier for consumers to go out and shop. NRF pointed out that the year-over-year increase in retail sales was more inclined toward some categories, including clothing store sales, which more than doubled this year, owing to the closure of most stores in March 2020 due to the pandemic.
Decent Earnings Picture
The Zacks Retail – Apparel and Shoes industry, which is part of the Zacks Retail-Wholesale sector, seems poised for growth in the to-be-reported quarter, owing to the improved consumer spending trends as well as the revived demand for clothing as social outings pick up due to the robust vaccination drives. Overall earnings for the Retail-Wholesale sector are expected to witness year-over-year growth of 67.4% on 10.6% higher revenues, per the latest Earnings Preview.
Some of the industry players, which are lined up to report earnings in the coming weeks, are Boot Barn Holdings, Inc. BOOT, American Eagle Outfitters Inc. AEO, Nordstrom Inc. JWN and L Brands, Inc. LB.
A Winning Strategy
We strategized to arrive at the potential winners by picking stocks that have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chances of a positive earnings surprise are as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
We have identified four apparel and shoe retailers, which are poised to trump estimates this earnings season.
Abercrombie & Fitch Company ANF is scheduled to report first-quarter fiscal 2021 results on May 26. The company is expected to have a strong start to fiscal 2021, thanks to robust digital sales momentum coupled with investments in omnichannel capabilities, marketing, data and analytics. Continued strength in traffic across its websites and apps is expected to have bolstered digital sales and gross margins in the to-be-reported quarter. Moreover, the company’s bottom line and margins are expected to reflect benefits from its prudent inventory management strategies. Tight control over expenses is expected to have boosted operating income in the to-be-reported quarter. On the last reported quarter’s earnings call, management predicted year over year gross margin growth of 500 basis points for the fiscal first quarter.
Abercrombie, a specialty retailer of premium, high-quality casual apparel for men, women and kids, has an Earnings ESP of +22.92% and it sports a Zacks Rank #1 at present. The company’s loss per share estimate of 48 cents for the current quarter suggests an improvement from a loss of $3.29 per share reported in the year-ago quarter. It delivered an earnings surprise of 404.9%, on average, in the trailing four quarters.
Abercrombie & Fitch Company Price, Consensus and EPS Surprise
Abercrombie & Fitch Company price-consensus-eps-surprise-chart | Abercrombie & Fitch Company Quote
Boot Barn is a lifestyle retail chain operating in the United States. Solid omni-channel investments, robust e-commerce business, and strength in brands and merchandising strategies are expected to have aided the company’s fourth-quarter fiscal 2021 performance. Also, its direct-to-consumer supply chain is helping it to meet the outsized demand. Moreover, the company has been witnessing a robust merchandise margin, driven by improved full-price selling and lower promotions. Boot Barn’s workwear has been the strongest performing category, including growth in lace-up and pull-on styles. The company has also been seeing growth in kids’ boots, hats and belts alongside men's and ladies’ western apparel, mostly driven by denim. The aforementioned factors have likely driven Boot Barn’s performance in the fiscal fourth quarter.
Currently, the company has an Earnings ESP of +20.46% and a Zacks Rank #2. The Irvine, CA-based company’s earnings for the current quarter are pegged at 43 cents per share, suggesting substantial growth of 138.9% from the year-ago quarter’s reported figure. It is scheduled to report results on May 12.
Boot Barn Holdings, Inc. Price, Consensus and EPS Surprise
Boot Barn Holdings, Inc. price-consensus-eps-surprise-chart | Boot Barn Holdings, Inc. Quote
Foot Locker, Inc. FL is a retailer of athletic shoes and apparel. The company’s first-quarter fiscal 2021 earnings are expected to have benefited from sturdy growth in the digital business, robust brand portfolio and prudent inventory management strategies. It has been focused on augmenting its e-commerce platform and growing direct-to-consumer (“DTC”) operations to reinforce its digital presence. Also, solid product demand and reduced promotional activity on fresh inventory are expected to have aided the gross margin. However, SG&A deleverage, increased freight expenses and higher digital sales penetration have likely been threats to margins.
The company currently has an Earnings ESP of +19.81% and a Zacks Rank #2. The New York-based company’s earnings for the current quarter are pegged at $1.06 per share, suggesting substantial growth of 258.2% from the year-ago quarter. It is scheduled to report results on May 21.
Foot Locker, Inc. Price, Consensus and EPS Surprise
Foot Locker, Inc. price-consensus-eps-surprise-chart | Foot Locker, Inc. Quote
Urban Outfitters, Inc. URBN is a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor, and gift products. The company’s first-quarter fiscal 2022 results are likely to reflect benefits from the rebound in consumer spending and the increase in apparel sales. In its latest business update released in April, the company pointed out that total comparable net sales for the Retail segment have increased in the high-single digits in the first quarter of fiscal 2022. On its last earnings call, the company informed that the fiscal first quarter will witness steady sales improvement as the quarter progresses.
Currently, it has an Earnings ESP of +26.31% and a Zacks Rank #3. The Philadelphia, PA-based company’s earnings for the current quarter are pegged at 16 cents per share, suggesting substantial growth of 112.2% from the year-ago quarter. It is scheduled to report results on May 25.
Urban Outfitters, Inc. Price, Consensus and EPS Surprise
Urban Outfitters, Inc. price-consensus-eps-surprise-chart | Urban Outfitters, Inc. Quote
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Urban Outfitters, Inc. (URBN) : Free Stock Analysis Report
Abercrombie & Fitch Company (ANF) : Free Stock Analysis Report
Nordstrom, Inc. (JWN) : Free Stock Analysis Report
Foot Locker, Inc. (FL) : Free Stock Analysis Report
American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report
Boot Barn Holdings, Inc. (BOOT) : Free Stock Analysis Report
L Brands, Inc. (LB) : Free Stock Analysis Report
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