Players in the Zacks Textile – Apparel industry have been reeling under coronavirus-related concerns like sluggish store traffic as increased fears stemming from the coronavirus outbreak has kept a number of consumers confined to their homes. Also, higher operating expenses and elevated promotional activity have been weighing on margins.
Nonetheless, there are players in the industry that have been gaining on rising e-commerce sales as the pandemic-induced social distancing has boosted online shopping to a great extent. To this end, concerted efforts to bolster digital operations have been working in favor of Crocs, Inc. (CROX), Guess?, Inc. (GES), Ralph Lauren Corporation (RL), Under Armour, Inc. (UAA) and PVH Corp. (PVH), to name a few.
About the Industry
The Zacks Textile – Apparel industry includes companies and lifestyle brands, which produce, design, distribute and market basic and fashion apparel, footwear and accessories. The industry also comprises providers of athleticwear and related equipment and fitness accessories. Most of the textile apparel players operate through stores and digital networks in the United States and overseas.
3 Trends Shaping the Future of the Textile – Apparel Industry
Coronavirus-Related Concerns Likely to Linger: Textile-apparel companies have taken quite a hit from the novel coronavirus, which resulted in temporary store closures, supply-chain disruptions and volatile consumer spending dynamics. Although stores have reopened with curbs being lifted, traffic has been below pre-pandemic levels as fears related to the virus are keeping a number of people confined indoors. In fact, some companies had to take to another round of temporary store closures, especially in Europe, due to the resurgence of coronavirus cases. Certainly, these factors have been weighing on revenues of several textile-apparel players. Apart from this, the pandemic has had a huge financial impact, leading to job losses and tighter pockets for many consumers. Incidentally, consumer spending, which is one of the pivotal factors driving the economy, rose 1.3% in September 2020, while it saw a sharp deceleration in growth rate to 0.3% in October, and swung to a 0.4% decline in November – per the Bureau of Economic Analysis. Further, per Mastercard SpendingPulse, apparel sales tumbled 19.1% year over year during the holiday season from Oct 11, 2020 to Dec 24, 2020. Industry experts believe that consumer spending on discretionary items will continue to take a hit in the near term as financial fears prevail. That said, we believe that soft traffic and uncertainty related to consumer spending activity pose near-term challenges for companies in the consumer-focused textile-apparel industry.
Keeping Pace With the Evolving Trends: The pandemic has transformed the industry, putting e-commerce at the forefront as consumers have increasingly resorted to online shopping amid the pandemic. In fact, even as stores reopen, companies continue to witness strong digital trends, which demonstrate that the shift to online shopping is here to stay. That said, companies like V.F. Corporation (VFC) and Hanesbrands Inc. (HBI) have been benefiting from their strong digital endeavors to make the most of the surge in online demand. Incidentally, companies in the space have been investing in improving e-commerce sites, upgrading mobile apps, enhancing payment systems, linking online and store operations, and increasing fulfillment capabilities. Companies are also investing in renovation and improved checkouts as well as mobile point-of-sale capabilities to make stores attractive. Such concerted efforts to enhance shoppers’ experience via multiple channels are likely to help improve traffic and transactions, both in stores and online. Apart from this, rising inclination toward health and fitness and elevated exercise at-home trends amid the pandemic should work in favor of sporting equipment and activewear providers like lululemon athletica inc. (LULU) and Columbia Sportswear Company (COLM). Also, many companies have expanded their offerings of fitness gadgets and are adopting other tracking platforms to make the most of consumers’ evolving preferences.
Pressure on Margins: A number of players in the textile-apparel space are seeing soft margins due to a rise in operating expenses, largely due to higher shipping costs stemming from increased digital transactions. Also, costs associated with COVID-19, such as expenses allocated toward ensuring increased safety and well-being, are eating into margins of some companies. Several companies are also seeing margin pressure from heightened promotional activity, undertaken to stay afloat amid such tough times and also to tackle the stiff industry competition.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Textile – Apparel industry is housed within the broader Zacks Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #189, which places it in the bottom 26% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates drab 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 becoming less confident about this group’s earnings growth potential. Since the beginning of March 2020, the industry’s consensus earnings estimate for the current and next financial year have dropped 32.7% and 30.1%, respectively.
Despite the grim prospects, we are presenting a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s recent stock-market performance and valuation picture.
Industry Versus Broader Market
The Zacks Textile – Apparel industry has underperformed the broader Zacks Consumer Discretionary sector as well as the S&P 500 composite over the past year.
The industry has risen 8.2% over this period, compared with the S&P 500 and the broader sector’s increase of 16.5% and 12.7%, 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 consumer discretionary stocks, the industry is currently trading at 25.44X compared with the S&P 500’s 22.89X and the sector’s 33.71X.
Over the last five years, the industry has traded as high as 29.17X, as low as 13.28X, and at the median of 18.05X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
5 Textile – Apparel Stocks to Keep a Close Eye on
Guess?: The designer, marketer, distributor, and licenser of lifestyle apparel and accessories has been benefitting from its solid digital efforts, especially amid the pandemic. Notably, Guess?’s e-commerce business in North America and Europe increased 19% in the third quarter of fiscal 2021, wherein management stated that it was optimistic about online growth in the fiscal fourth quarter. Certainly, Guess?’s focus on its customer centricity initiatives, including global ecommerce strategy, salesforce implementation as well as omnichannel experience redesign projects bodes well. Apart from this, the company is on track with boosting operating margin through cost-saving efforts, enhancing operating efficiencies as well as gross margin improvement efforts. The Zacks Consensus Estimate for Guess?’s current financial-year bottom line has narrowed from a loss of 76 cents to a loss of 72 cents in the past 30 days. This Los Angeles, CA-based company’s bottom line has beaten the consensus mark by a significant margin, on average, in the trailing four quarters. Notably, the Zacks Rank #1 (Strong Buy) stock has more than doubled, with its shares up 137.8% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: GES
Crocs: The company has been making significant progress in expanding digital and omni-channel capabilities. Notably, Crocs witnessed a strong online show amid the coronavirus pandemic, which aided the top line in third-quarter 2020, which also marked the company’s 14th successive quarter of double-digit e-commerce growth. Notably, Crocs has been benefiting from its brand strength even amid a pandemic-led tough retail environment. Further, this designer, manufacturer, developer, distributor and marketer of casual lifestyle footwear and accessories has an estimated long-term earnings growth rate of 15%. Encouragingly, this Zacks Rank #2 (Buy) company has seen its shares rise as much as 93.5% in the past six months. Moreover, Crocs’ bottom line has beaten the consensus mark by a wide margin, on average, in the trailing four quarters. The Zacks Consensus Estimate for this Niwot, Colorado-based company’s current financial-year earnings per share (EPS) has moved up by a couple of cents in the last 30 days.
Price and Consensus: CROX
Ralph Lauren: The designer, marketer and distributor of lifestyle products in North America, Europe and Asia is benefiting from its robust efforts to expand digital and omni-channel capabilities through investments in mobile, omni-channel and fulfillment. Notably, increased focus on home and loungewear in sync with consumers’ changing preferences along with expansion in connected retail offerings contributed to digital sales in the last reported quarter. Further, the company’s omni-channel services, including digital clienteling, Buy Online Ship from Store, curbside pickup, contactless delivery and mobile checkout options, bode well. Apart from this, Ralph Lauren is poised to continue gaining from its “Next Great Chapter” strategic plan. The Zacks Consensus Estimate for this Zacks Rank #3 (Hold) company’s current financial-year EPS has risen by two cents in the past 30 days. The New York-based company, with a long-term earnings growth rate of 8.5%, has seen its shares soar 57.4% in the past six months.
Price and Consensus: RL
Under Armour: The Zacks Rank #3 company is moving well with its multi-year transformation plan. The company is focused on strengthening its brand through enhanced customer connections, effective innovation and strict go-to-market process. Further, to harness benefits from growth areas, it intends to consistently invest in the direct-to-consumer, international, women’s and footwear businesses. Apart from this, the company’s increased focus on digitization amid the pandemic-led rise in online shopping bodes well. We believe that efforts to build brand image, strengthen supply chain, manage inventory and contain costs should benefit Under Armour. The Zacks Consensus Estimate for this Baltimore, Maryland-based company’s current financial-year bottom line has remained unchanged in the past 30 days. Shares of the company have gained 87% in the past six months. Encouragingly, Under Armour has an estimated long-term earnings growth rate of 15.6%.
Price and Consensus: UAA
PVH Corp.: The company’s shares have surged a whopping 127.8% in the past six months. This renowned designer, marketer and retailer of men’s and women’s apparel and accessories offers products under its own as well as licensed brands, and has been witnessing impressive performance in digital platform. In the last reported quarter, the company saw digital sales growth across all regions driven by solid online demand, particularly for essential items and casualwear. Certainly, consumers’ increased shift to online shopping has been helping PVH Corp. amid traffic declines at stores due to the pandemic. Apart from this, PVH Corp. has been benefiting from its efficient brand management strategy. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current financial-year bottom line has narrowed from a loss of $2.17 to a loss of $1.97 in the past 30 days. The New York-based company’s bottom line has surpassed the Zacks Consensus Estimate by a considerably high margin, on average, in the trailing four quarters. Impressively, PVH Corp. has an estimated long-term earnings growth rate of 9.6%.
Price and Consensus: PVH
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V.F. Corporation (VFC) : Free Stock Analysis Report
Under Armour, Inc. (UAA) : Free Stock Analysis Report
Ralph Lauren Corporation (RL) : Free Stock Analysis Report
PVH Corp. (PVH) : Free Stock Analysis Report
lululemon athletica inc. (LULU) : Free Stock Analysis Report
Hanesbrands Inc. (HBI) : Free Stock Analysis Report
Guess, Inc. (GES) : Free Stock Analysis Report
Crocs, Inc. (CROX) : Free Stock Analysis Report
Columbia Sportswear Company (COLM) : Free Stock Analysis Report
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