4 Retail-Apparel & Shoe Stocks With Potential Amid Industry Woes
Players in the Zacks Retail - Apparel And Shoes industry have been facing several challenges that are impacting growth and profitability. A tough operating environment, lower discretionary spending due to an overall inflationary landscape and a higher interest rate environment have cooled demand.
To navigate troubled waters, industry participants have been directing resources toward digital platforms, accelerating fleet optimization and augmenting the supply chain. Retailers have been focusing on the superior product strategy, the advancement of omnichannel capabilities, prudent capital investments and greater customer reach. Backed by these initiatives, companies like Tapestry, Inc. TPR, Urban Outfitters, Inc. URBN, Abercrombie & Fitch Co. ANF and Stitch Fix, Inc. SFIX are better placed.
About the Industry
The Zacks Retail - Apparel And Shoes industry comprises companies that offer apparel, footwear, accessories, intimates and beauty products, as well as fitness and lifestyle products for use in yoga, training and sports under various brands in domestic and international markets. Quite a few players offer bag collections, including business cases, computer bags and backpacks, leather goods, such as wallets, card cases, travel organizers and belts, and watches, sunglasses, fragrances and ready-to-wear as well as cold-weather accessories. Markedly, companies showcase products to customers directly through their branded retail stores, mobile applications, catalogs and websites. Some industry participants also provide products via department stores, specialty retailers, third-party e-commerce sites and franchisees who operate brand-dedicated stores.
4 Key Trends to Watch in the Retail - Apparel And Shoes Industry
Pressure on Margins to Linger: 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. To address these, a significant number of players in the industry have been investing in strengthening their digital ecosystem and delivery capabilities. While these endeavors bolster sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses might compress margins. Of late, the industry participants have been dealing with product cost inflation. Nonetheless, companies have been focusing on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and adopting effective pricing policies.
Soft Consumer Activity May Hit Revenues: Elevating prices and geopolitical concerns continue to pose a threat to consumer spending activity. Undoubtedly, the industry’s prospects are correlated with the purchasing power of consumers. Rising prices have been discomforting family budgets. The Fed’s aggressive rate hikes to tame inflation also made things tough for consumers by squeezing disposable income. Consequently, the demand has softened. Per the Commerce Department, sales at clothing & clothing accessories outlets declined 0.2% year over year in May.
Brand Enhancement, Capital Discipline: Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products and enhancing digital and data analytics capabilities. The launch of newer styles, customization options and refreshed store environments enable them to woo shoppers. Efforts to enhance the brand portfolio via marketing strategies, buyouts, innovations and alliances are likely to keep supporting players in the space. The companies have been taking steps to strengthen their financial position. They have been making every move, from managing the inventory and closing underperforming stores to optimizing capital expenditures and enhancing operational efficiency.
Diversification & Digitization Key to Growth: With the change in consumer shopping patterns and behavior, industry participants have been playing dual in-store and online roles. They are building an omnichannel, coming up with loyalty and marketing programs, enhancing the supply chain and providing faster delivery options, be it doorstep delivery, curbside pickup or buy online and pick up at a store, which are worth mentioning. Simultaneously, companies are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Keeping in mind consumers’ product preferences and growing inclination toward online shopping, companies have been replenishing shelves with in-demand merchandise and ramping up investments in digitization.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Retail - Apparel And Shoes industry is a group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #201, which places it in the bottom 20% 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 drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate.
Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since the beginning of January 2023, the industry’s earnings estimate has declined 29.5%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry vs. Broader Market
The Zacks Retail - Apparel And Shoes industry has underperformed the broader Zacks Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
The industry has advanced 5.1% over this period compared with the S&P 500’s increase of 16.5%. Meanwhile, the broader sector has risen 10.7%.
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 14.8X compared with the S&P 500’s 19.68X and the sector’s 23.07X.
Over the last five years, the industry has traded as high as 118.66X and as low as 8.8X, with the median being at 14.8X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Stocks Worth Considering
Urban Outfitters: This leading lifestyle product and services company seems a promising bet due to its solid business strategies and sound fundamentals. Management has been strengthening its direct-to-consumer business, enhancing productivity across existing channels and optimizing inventory levels. URBN’s strategic growth initiative, FP Movement and store-growth endeavors are also impressive.
The Zacks Consensus Estimate for Urban Outfitters’ current-fiscal sales and earnings per share (EPS) suggests growth of 5.1% and 57.1%, respectively, from the year-ago reported figure. It has an estimated long-term earnings growth rate of 18%. Shares of this Zacks Rank #1 (Strong Buy) company have risen 73.8% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: URBN
Abercrombie & Fitch: The company has been making strategic investments in stores, digital and technology to drive top-and-bottom-line growth. The company also remains on track with its 2025 Always Forward Plan. Moreover, a strong balance sheet allows it to navigate the current macroeconomic environment.
This leading, global, omnichannel specialty retailer of apparel and accessories for men, women and kids delivered a trailing four-quarter earnings surprise of 480.6%, on average. The Zacks Consensus Estimate for Abercrombie & Fitch’s current financial-year sales and EPS suggests growth of 3.4% and 732%, respectively, from the year-ago period. Shares of this Zacks Rank #1 company have zoomed 119.3% in the past year.
Price and Consensus: ANF
Stitch Fix: Stitch Fix is revolutionizing the fashion industry with its unique data-driven approach to personal styling. The company curates personalized fashion selections for its customers. With a loyal customer base and impressive growth, Stitch Fix has established itself as a leader in the online styling space. The company's ability to combine technology, data analytics and human expertise sets it apart from traditional retailers. As the demand for personalized fashion experiences continues to grow, Stitch Fix presents an enticing investment opportunity with its innovative business model and potential for long-term success.
The Zacks Consensus Estimate for Stitch Fix’s current-fiscal bottom line suggests growth of 9.6% from the year-ago reported figure. SFIX has a trailing four-quarter earnings surprise of 7.7%, on average. Shares of this Zacks Rank #2 (Buy) company have decreased 21.5% in the past year.
Price and Consensus: SFIX
Tapestry: The company's ability to adapt to changing consumer preferences and leverage its portfolio of iconic brands, including Coach, Kate Spade and Stuart Weitzman, has been the key to its success. The company's commitment to innovation and product diversification positions it well to capitalize on evolving trends. Moreover, Tapestry has been harnessing the power of the direct-to-consumer business model.
Tapestry has a trailing four-quarter earnings surprise of 11.7%, on average. It has an estimated long-term earnings growth rate of 12.5%. Shares of this Zacks Rank #3 (Hold) company have rallied 38.8% in the past year.
Price and Consensus: TPR
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Tapestry, Inc. (TPR) : Free Stock Analysis Report
Abercrombie & Fitch Company (ANF) : Free Stock Analysis Report
Urban Outfitters, Inc. (URBN) : Free Stock Analysis Report
Stitch Fix, Inc. (SFIX) : Free Stock Analysis Report
