The U.S. apparel industry, one of the largest in the global market, has lately become nothing more than a puppet in the hands of consumers. The drastic change in consumer preferences, not only for designs and patterns of merchandise, but also shopping trends have left apparel retailers in bewilderment for ways to attract customers keep changing persistently.
In response to the challenging retail backdrop, retailers are allocating a large chunk of capital toward a multi-channel growth strategy focused on improving merchandise offerings and developing IT infrastructure to enhance web and mobile experience. Further, modernizing stores, developing fulfillment centers to enable speedy delivery, implementing an enterprise-wide inventory management system along with enhancing relationship with existing and new customers have become a prerequisite.
Additionally, apparel retailers are bringing in new capabilities like “Buy Online Pick Up in Store,” “Buy Online Return in Store,” and “Dressing Room” by Gap Inc. GPS.
Despite all the brainstorming, apparel stores across the nation are crumbling due to soft mall traffic as customers increasingly prefer online shopping to store hopping. The increasing competition from e-tailers like Amazon.com Inc. AMZN, which is expanding on apparel lines, has been a rising concern for the apparel store operators.
In 2016, the industry saw bankruptcy filings from many teen retailers including Pacific Sunwear, Wet Seal, Delia’s, Aeropostale and Quiksilver. Further, many have resorted to closing stores to tackle weak performances including the likes of Macy’s Inc. M, Kohl’s Corp. KSS, Men’s Wearhouse and Finish Line Inc. FINL.
Fate of the Apparel Industry
As evident from the above discussion, the apparel industry is not doing well given the decline in foot traffic as well as the rising competition in the space. This is well reflected by the industry returns delivered in a span of one year.
At Zacks, we have two separate industry classifications for the apparel industry including the Retail – Apparel and Shoes and the Textile – Apparel Manufacturing. The basic difference in this classification is that the first one includes apparel retailers, while the second comprises apparel manufacturers.
Coming to the performance, the Zacks categorized Retail – Apparel and Shoes industry lost 22.8% in the past one year, while the Zacks categorized Textile – Apparel Manufacturing industry declined 16.2%. Both the industries have underperformed the 16.7% growth registered by the S&P 500 index in the same period.
Further, a look at the Zacks Industry Rank reveals that the apparel industry is in an unfavorable position at the moment. Of the 256 Zacks industry ranks, the Retail – Apparel and Shoes industry is ranked #245 and is placed in the bottom 4% of the Zacks Rank industries. Likewise, the Textile – Apparel Manufacturing industry is ranked #244, placed in the bottom 5% of the Zacks rank industries.
Going forward, we believe the challenging trends in the apparel industry will persist as brick-and-mortar stores continue to lose sheen to the rising online businesses.
Are Apparel Stocks Worth Buying?
The dismal performance of the industry as a whole and expectations that the turmoil will persist surely suggests staying away from the stocks in the space. In spite of big losers in the industry such as Abercrombie & Fitch Co. ANF, American Eagle Outfitters Inc. AEO, Michael Kors Holdings Ltd. KORS, Ralph Lauren Corp. RL and many more, there are a few stocks that still hold promise and are backed by a favorable Zacks Rank.
Here, we bring you two apparel stocks worth buying based on their favorable Zacks Rank and VGM Style Score, alongside a positive surprise trend. These stocks have a VGM Score of ‘A’ or ‘B’ and flaunt a solid Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that stocks with VGM Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best investment opportunities in the growth investing space.
Investors can count on The Children’s Place Inc. PLCE, which operates as a children's specialty apparel retailer. The company, with a VGM Score of ‘A’, posted an average positive earnings surprise of 39% in the trailing four quarters. Moreover, it has a long-term earnings growth rate of 8% and sports a Zacks Rank #1. On a year-to-date basis, the stock has advanced roughly 11.9% and crushed the Zacks categorized Retail – Apparel/Shoe industry, which declined 12.8%.
You may also consider Foot Locker Inc. FL, a retailer of athletic shoes and apparel. The stock has a VGM Score of ‘A’ and carries a Zacks Rank #2. The company posted an average positive earnings surprise of 2.2% in the trailing four quarters and has a long-term earnings growth rate of 9.7%. Further, the stock has returned nearly 2.2% year to date, crushing the Zacks categorized Retail – Apparel/Shoe industry’s decline of 12.8%.
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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
Abercrombie & Fitch Company (ANF): Free Stock Analysis Report
American Eagle Outfitters, Inc. (AEO): Free Stock Analysis Report
Gap, Inc. (The) (GPS): Free Stock Analysis Report
Foot Locker, Inc. (FL): Free Stock Analysis Report
The Finish Line, Inc. (FINL): Free Stock Analysis Report
Children's Place, Inc. (The) (PLCE): Free Stock Analysis Report
Macy's Inc (M): Free Stock Analysis Report
Kohl's Corporation (KSS): Free Stock Analysis Report
Ralph Lauren Corporation (RL): Free Stock Analysis Report
Michael Kors Holdings Limited (KORS): Free Stock Analysis Report
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