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4 Retail Apparel & Shoes Stocks to Tap in a Prospering Industry

Sumit Singh
·10 min read

The coronavirus-induced temporary store closures and sluggish consumer demand dealt a strong blow to the Zacks Retail - Apparel And Shoes industry. With the pandemic taking a toll on employment and household income, consumers were left with no option but to curtail on discretionary spending. Nonetheless, measures undertaken to support households coupled with the resumption of economic activities post the coronavirus lockdown have acted as tailwinds for the industry.

To beat the COVID-19 blues, companies have been directing resources toward digital platforms, accelerating fleet optimization and augmenting supply chain. Retailers have been focusing on superior product strategy, advancement of omni-channel capabilities and making prudent capital investments to resonate well with shifting consumer demand and behavior in the new normal. Tapestry, Inc. (TPR), Zumiez Inc. (ZUMZ), Sportsman's Warehouse Holdings, Inc. (SPWH) and Vera Bradley, Inc. (VRA) are set to cash in on the opportunities.

About the Industry

The Zacks Retail - Apparel And Shoes industry comprises companies that offer apparel, activewear, footwear, accessories as well as fitness and lifestyle products under various brands in domestic and international markets. These companies showcase products through their own outlets and websites. However, some of the industry participants distribute products via other specialty retail outlets, department stores, franchise stores and catalogs.

4 Trends Shaping the Future of the Retail - Apparel And Shoes Industry

Consumers’ Willingness to Spend: The industry’s prospects are correlated with the purchasing power of consumers. Consumer spending regained momentum following the ease in coronavirus-induced lockdowns. Undoubtedly, the gradual reopening of the economy and measures undertaken to support households such as stimulus checks and enhanced unemployment benefits drove demand. A clear evidence of the same is the uptick in U.S. retail sales. Per the Commerce Department, retail sales in August rose 0.6% sequentially, marking the fourth straight monthly increase. According to the report, sales at clothing & clothing accessories stores grew 2.9% during the August month, following an increase of 2.2% in July. Players in the industry are leaving no stone unturned to expand customer base and improve top-line performance. Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products, and enhancing digital and data analytics capabilities. Clearly, launch of newer styles, customization options and refreshed store environments are likely to boost growth. Also, the growing consumer interest in a healthy lifestyle and rise in the athleisure clothing trend will continue to lend support.

Sustained Efforts to Maintain Capital Discipline: Prolonged store closures, supply-chain disruptions and lower store traffic trends in the wake of the coronavirus outbreak have hurt revenues for quite a few players. While retailers are trying all means to lure customers back to outlets, we believe that sales will take time to reach the pre-COVID-19 levels. Obviously, maintaining liquidity amid such a scenario is a herculean task. The industry players like L Brands, Inc. (LB) and The Gap, Inc. (GPS) are looking to strengthen financial position and improve profitability. In fact, they have been taking every step — from cutting pay to furloughing and from reducing inventory to lowering capital expenditures — to preserve cash. Also, companies have been minimizing operating costs, which consist of travel, marketing and other non-essential items. We believe such efforts are likely to help companies emerge stronger amid coronavirus-induced challenges.

Diversification & Digitization Key to Growth: With the change in consumer shopping pattern and behavior amid the pandemic, industry participants have been evolving to play dual in-store and online roles. In fact, the companies’ digital businesses have played a key role amid the lockdown. Surely, they were not enough to make up for loss of revenues from brick-and-mortar stores. Nonetheless, apart from upgrading digitally, companies are coming up with unique products and better deals. Some of the companies are even trying their hand at subscription or rental services for their offerings. Again, the growing popularity of second-hand clothes and accessories are persuading fashion retailers to alter business models. Initiatives such as building omni-channel, coming up with loyalty and marketing programs, enhancing supply chain and providing faster delivery options, be it curbside pickup or delivery at home, are worth mentioning. Simultaneously, companies are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Markedly, the outbreak has rapidly changed the convenience of digitization into a necessity, and companies have been taking every step to capitalize on that demand. Keeping in mind consumers’ product preferences and growing inclination toward online shopping, retailers need to replenish shelves with in-demand merchandise and ramp up investments in digitization this holiday season.

Focus on Margins: 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. Players in this space are facing competition from online retailers and private-label brands. Addressing these, a significant number of players in the industry have been making 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 might also compress margins. Meanwhile, the impact of additional employee payments and benefits along with investments undertaken to preserve safety and health of customers and team members amid the coronavirus crisis cannot be ruled out. That said, sustained cost-containment measures are necessary to manage margins.

Zacks Industry Rank Indicates Solid 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 #125, which places it in the top 50% 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 August this year, the industry’s bottom-line estimate for the current year has improved from a loss of 56 cents to a loss of 45 cents. Notably, earnings estimates for the next year have moved up 9.9% during the aforementioned period.

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 Versus Broader Market

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

While the stocks in this industry have collectively lost 3.5%, the Zacks S&P 500 composite and the Zacks Retail – Wholesale sector have risen 14.1% and 41.3%, 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 30.04X compared with the S&P 500’s 21.9X and the sector’s 31.66X.

Over the last five years, the industry has traded as high as 88.45X and as low as 8.27X, with the median being at 14.36X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Apparel & Shoes Stocks to Keep a Close Eye On

Tapestry, Inc.: This provider of luxury accessories and branded lifestyle products is poised to benefit from its Acceleration Program aimed at transforming into a leaner and more responsive organization as well as building significant data and analytics capabilities with focus on enhancing digital and omnichannel capabilities. Notably, the company’s compelling pricing strategy, smaller format locations and cost-effective global sourcing model have been contributing to store productivity. These strategies should help drive sales and margins. Impressively, Tapestry reported positive earnings surprise in the last-reported quarter. Also, the Zacks Consensus Estimate for its current-fiscal EPS has moved up by a penny in the past 30 days. The company has an estimated long-term earnings growth rate of 9.3%. We also note that shares of this Zacks Rank #1 (Strong Buy) company have surged 23.9% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: TPR

Zumiez Inc.: This specialty retailer of apparel, footwear and accessories is striving to expand its e-commerce and omni-channel platforms to provide consumers with the facility of quick and easy access to its products and brands. In this regard, the company has considerably enhanced customers’ experience by integrating its physical and digital networks. This enables customers to access inventories through all channels alongside availing facilities like buy online, pick up in store and reserve online and pay in store. The company’s well-balanced store expansion and e-commerce strategies will help this Zacks Rank #1 company keep track of the evolving patterns and drive the top line. Impressively, shares of this Lynnwood, WA-based company have advanced 64.7% in the past six months. Also, the Zacks Consensus Estimate for its current-fiscal EPS has increased 49.4% in the past 30 days. Notably, Zumiez has a trailing four-quarter earnings surprise of 41.2%, on average.

Price and Consensus: ZUMZ

Sportsman's Warehouse Holdings, Inc.: This outdoor sporting goods retailer is benefiting from rise in outdoor activities, such as fishing, hunting, camping and hiking. Management believes that the addition of participants in outdoor activities bodes well for outdoor specialty retail in general and Sportsman's Warehouse in particular. We note that the company’s net sales soared 79.9% year over year during the second quarter of fiscal 2020. The company’s ecommerce-driven business registered an increase of more than 300%. Markedly, shares of this Zacks Rank #1 company have more than doubled in the past six months. Also, the Zacks Consensus Estimate for its current-fiscal EPS has risen 14.8% in the past 30 days. Notably, the company has a trailing four-quarter earnings surprise of 64.8%, on average.

Price and Consensus: SPWH

Vera Bradley, Inc.: This Indiana-based company has been benefiting from customers’ favorable response toward product launches and marketing initiatives, and cotton masks. We note that the company’s second-quarter revenues grew 10% on a year-over-year basis, driven by the addition of Pura Vida for a full quarter and Vera Bradley e-commerce sales. Moreover, effective inventory management, cost containment and tightly-controlled promotional activity have been driving margins. Markedly, shares of this Zacks Rank #1 company have zoomed 95.8% in the past six months. Also, the Zacks Consensus Estimate for its current-fiscal EPS has increased 40.4% in the past 30 days. Impressively, this designer, manufacturer and seller of women's handbags, luggage and travel items, fashion and home accessories, and gifts reported positive earnings surprise in the last-reported quarter.

Price and Consensus: VRA


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Zumiez Inc. (ZUMZ) : Free Stock Analysis Report
Vera Bradley, Inc. (VRA) : Free Stock Analysis Report
Tapestry, Inc. (TPR) : Free Stock Analysis Report
Sportsmans Warehouse Holdings, Inc. (SPWH) : Free Stock Analysis Report
L Brands, Inc. (LB) : Free Stock Analysis Report
The Gap, Inc. (GPS) : Free Stock Analysis Report
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