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Retail-Apparel & Shoes Industry Outlook: Prospects Lack Shine

The Zacks Retail - Apparel And Shoes industry comprises companies that offer apparel, activewear, footwear, accessories as well as fitness and lifestyle products under various brand names 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. Some of the prominent names in the industry are Capri Holdings Limited (CPRI), Foot Locker, Inc. (FL), L Brands, Inc. (LB), Abercrombie & Fitch Co. (ANF), American Eagle Outfitters, Inc. (AEO) and Urban Outfitters, Inc. (URBN).

Let’s take a look at the industry’s four major themes:

  • The prospect of this customer-focused industry is correlated with the purchasing power. We note that consumer spending activity, which is one of the pivotal factors driving the economy, has somewhat slowed down, thanks to the coronavirus outbreak. A clear evidence of the same is the U.S. retail sales data for the month of April that showed a record slump. Per the Commerce Department, retail sales in April nosedived 16.4%, following a decline of 8.3% in March. According to the report, sales at clothing & clothing accessories stores plunged 78.8% on a sequential basis during April. With consumers locked indoors, demand for apparels and shoes shrunk drastically. We believe there’s more pain ahead as Americans are likely to restrict purchases to essential items and will avoid visiting malls or other public places amid fears of contracting the virus. Industry experts believe that consumers might just take too long to loosen their purse strings for such discretionary items. Certainly, financial fears also prevail.
  • Prolonged store closures, supply-chain disruptions and lower traffic trends in the wake of this catastrophe have hurt revenues for quite a few players. Obviously, with no or minimum revenue generation, maintaining liquidity amid the crisis is a herculean task. Industry participants have been taking every step — from pay cut to furloughing and from inventory reductions to lowering capital expenditures — to preserve cash. No wonder, the news of gradual reopening of the economy in a phased manner did provide a confidence boost to companies. This is a great relief for the industry. However, analysts pointed that apart from online rivals, social distancing and sanitization will be other core issues that retailers need to address in the post-lockdown era. While retailers will try every means to lure customers back to outlets, market pundits believe that sales will take time to reach the pre-COVID levels.
  • Industry participants will be playing dual in-store and online roles, with evolving consumer shopping pattern. In fact, the companies’ digital businesses have been playing a key role amid the lockdown. Surely, this is not enough to make up for loss of revenues from brick-and-mortar. 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 change the business model. 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.
  • 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, particularly Amazon (AMZN) 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, and adverse currency rates might also compress margins. Nevertheless, companies are trying all means to keep a check on costs.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Retail - Apparel And Shoes industry is a 35-stock group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #198, which places it in the bottom 22% 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 gloomy 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 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. Since the beginning of the year, the industry’s earnings estimate for the current year has moved down approximately 88%.

Despite the industry’s drab near-term prospects, we will present a few stocks that are worth taking a note of. But before that, it’s better to take a look at the industry’s shareholder returns and current valuation first.

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 40.1%, the Zacks S&P 500 composite and the Zacks Retail – Wholesale sector have risen 11.1% and 24.3%, 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 25.01X compared with the S&P 500’s 22.09X and the sector’s 31.94X.

Over the last five years, the industry has traded as high as 25.01X and as low as 8.13X, with the median being at 14.13X, 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 Zacks Retail - Apparel And Shoes industry are shadowed by disrupted supply chains, store closures and lower demand for discretionary items, all thanks to the pandemic.  However, the launch of newer styles, customization options, digital expansion and refreshed store environments are among the few aspects likely to boost growth in the industry. Also, the growing consumer interest in a healthy lifestyle and rise in the athleisure clothing trend will continue to support long-term trends.

That said, we are presenting one stock in the Zacks Retail - Apparel And Shoes space that currently carries a Zacks Rank #2 (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 (Strong Buy) stocks here.

Sportsman's Warehouse Holdings, Inc. (SPWH): Shares of this outdoor sporting goods retailer have rallied 50.7% in a month. The Zacks Consensus Estimate for its current-fiscal EPS has been stable in the past 30 days. The company reported a positive earnings surprise in the last reported quarter. Currently, the company carries a Zacks Rank #2.
Price and Consensus: SPWH

Stitch Fix, Inc. (SFIX): The company sells a range of apparel, shoes, and accessories through its website and mobile app in the United States. Shares of this Zacks Rank #3 company have soared 51.2% in a month. The company has an estimated long-term earnings growth rate of 15%. The company’s bottom line has outperformed the Zacks Consensus Estimate in the trailing four quarters.

Price and Consensus: SFIX


Levi Strauss & Co. (LEVI): Shares of this apparel company have gained 9.3% in a month. The company has an estimated long-term earnings growth rate of 2.6%. This Zacks Rank #3 company has a trailing four-quarter positive earnings surprise of 15%, on average.

Price and Consensus: LEVI


The Gap, Inc. (GPS): Shares of this apparel retail company have increased 12.1% in a month. The company has an estimated long-term earnings growth rate of 12%. The company has a trailing four-quarter positive earnings surprise of 11%, on average.

Price and Consensus: GPS

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Urban Outfitters, Inc. (URBN): Free Stock Analysis Report
Sportsmans Warehouse Holdings, Inc. (SPWH): Free Stock Analysis Report
Stitch Fix, Inc. (SFIX): Free Stock Analysis Report
Levi Strauss Co. (LEVI): Free Stock Analysis Report
L Brands, Inc. (LB): Free Stock Analysis Report
The Gap, Inc. (GPS): Free Stock Analysis Report
Foot Locker, Inc. (FL): Free Stock Analysis Report
Capri Holdings Limited (CPRI): Free Stock Analysis Report
Abercrombie Fitch Company (ANF): Free Stock Analysis Report, Inc. (AMZN): Free Stock Analysis Report
American Eagle Outfitters, Inc. (AEO): Free Stock Analysis Report
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