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Coronavirus Mars Shoes & Apparel Industry's Near-Term Outlook

Rajani Lohia
·7 min read

The Zacks Shoes and Retail Apparel industry comprises companies that design, source and market clothing, footwear and accessories for men, women and children, under various brand names. The product offerings of these companies mostly include athletic and casual footwear, fashion apparel and active-wear, sports equipment, bags, balls, as well as other sports and fashion accessories.

These companies showcase their products through their own branded outlets and websites. However, some companies also distribute products via other retail stores, such as national chains, online retailers, sporting goods stores, department stores, mass merchandisers, independent retailers and catalogs.

Here are the three major industry themes:

  • The prospects of this customer-focused industry are correlated with the purchasing power of consumers. We note that consumer spending activity, which is one of the pivotal factors driving the economy, has somewhat slowed down due to the coronavirus outbreak. Notably, Americans are restricting their purchases to essential products and avoiding spending on discretionary items amid the virus outbreak. Consequently, U.S. consumer confidence in March 2020 fell to the lowest level since June 2017. The pandemic has caused supply-chain bottlenecks, slowdown in production activities and reduced demand for several commodities. Companies have temporarily closed brick-and-mortar stores and permitted work from home to ensure safety of employees and consumers. This will not only hurt sales and productivity but will also escalate cost burden of companies that are willing to give full payments and benefits to their employees during the temporary closure.

  • These companies incur higher demand creation expenses due to increased involvement in global brand campaigns and key sports events, which are crucial for gaining market share. Moreover, the participants’ continued investments in innovation, data and analytics, and new capabilities to speed up the aforementioned digital transformation results in higher operating costs, causing SG&A expense to rise. These apart, adverse currency rates due to a strong U.S. dollar are a threat to the profits of overseas operations. Altogether, these headwinds will continue to be a threat to margins and bottom-line performance of the industry participants.

  • Most industry participants are aggressively bolstering their digital and e-commerce capacities, though investments in differentiated retail concepts, mobile apps, dotcom and digital partners to stay put in a fiercely competitive environment. In fact, the companies’ digital businesses are up and running amid the coronavirus outbreak, which is playing a key role in fighting the situation when physical stores around the world are closed. Additionally, efforts to speed up deliveries through investments in supply chain and order fulfillment avenues provide an edge in the market. Simultaneously, companies are investing in renovation and improved checkouts as well as mobile point-of-sale capabilities to make stores attractive. These efforts to enhance guests’ experience through multiple channels have been contributing significantly to improve traffic and transactions both in stores and online.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Shoes and Retail Apparel Industry is a 12-stock group within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #189, which places it in the bottom 25% 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 continued underperformance in the near term. 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 positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined 16.8%.

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 Outperforms Shareholder Returns

The Zacks Shoes and Retail Apparel industry has outperformed both the S&P 500 and its own sector over the past year.

While stocks in this industry have collectively lost 4.6%, the Zacks S&P 500 composite and the Zacks Consumer Discretionary sector have declined 7.6% and 20.6%, respectively.

One-Year Price Performance

Shoes and Retail Apparel Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing Consumer Discretionary stocks, the industry is currently trading at 24.09X compared with the S&P 500’s 16.91X and the sector’s 17.91X.

Over the last five years, the industry has traded as high as 26.48X, as low as 18.63X and at the median of 23.29X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

The COVID-19 crisis is a litmus test for all consumer-driven industries. The near-term prospects of the Shoes and Retail Apparel industry are shadowed by disrupted supply-chains, lesser production activities, store closures and lower demand for discretionary items, all thanks to the coronavirus pandemic.  However, the launch of newer styles, customization options, digital expansion and refreshed store environments are among the few aspects likely to poise the industry for growth. Also, the growing consumer interest for a healthy lifestyle and rise in athleisure clothing trend will continue to support long-term trends.  

We have one stock in the Zacks Shoes & Retail Apparel universe currently sporting a Zacks Rank #1 (Strong Buy). Additionally, we suggest three more with a Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at them.

Rocky Brands, Inc. (RCKY): The stock of this Nelsonville, OH-based company has declined 26.5% in the past year. However, the consensus EPS estimate for the current year has remained unrevised in the last 30 days. Currently, the company sports a Zacks Rank #1.

Price and Consensus: RCKY

NIKE Inc. (NKE): The stock of this Beaverton, OR-based designer, manufacturer and marketer of athletic footwear, apparel, equipment and accessories, and services for men, women and children worldwide, has dropped 0.2% in the past year. The Zacks Consensus Estimate for its current-year EPS has been unchanged in the past seven days. Moreover, the company has an expected long term EPS growth rate of 12.9%. The company currently carries a Zacks Rank #3.

Price and Consensus: NKE

Deckers Outdoor Corporation (DECK): The stock of this Goleta, CA-based provider of footwear, apparel and accessories for casual lifestyle and high performance activities has declined 3.2% over the past year. The company has an expected long term EPS growth rate of 17.2%. The company carries a Zacks Rank #3.

Price and Consensus: DECK

Carter’s Inc. (CRI): The stock of this Atlanta, GA-based marketer of branded apparel and related products for babies, and young children in North America has declined 28.2% in the past year. The consensus EPS estimate for the current year has remained unrevised in the past seven days. It has an expected long term EPS growth rate of 5.5%.  Currently, the company carries a Zacks Rank #3.

Price and Consensus: CRI

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