5 Future Amazon Victims That Wall Street Is Ignoring

It's not just the big box retailers feeling the heat from Amazon

Amazon Stock Can't Be Stopped By Short-Seller Mania

Source: Shutterstock

Amazon.com, Inc. (NASDAQ:AMZN) will crush the fashion industry into oblivion over the next few years as it sets out to conquer the apparel market. It may not happen tomorrow or next week, but it is in the cards.

Analysts at Cowen are expecting AMZN to generate some $28 billion in apparel sales, topping Macy’s Inc (NYSE:M), the largest department store operator, which has held the title for years. By 2021, the Seattle-based company will sell $62 billion in annual apparel sales. The next biggest competitor will be TJX Companies Inc’s (NYSE:TJX) TJ Maxx chain with $26 billion, with M in third place with $22 billion.

It’s hard to underestimate the magnitude of the bad news for apparel makers across the sector, ranging from high fashion operations such as Ralph Lauren Corp (NYSE:RL) to makers of basics such as underwear name Hanesbrands Inc. (NYSE:HBI). Many of these companies are already reeling from a decline in retail sales and lack the resources to boost their e-commerce business so that it would offset the declines from bricks-and-mortar operations. The leaves the apparel makers with little choice but to play ball with Amazon and the margin-crushing discounts that will follow.

Indeed, Jeff Bezos & Co. has shown a willingness over the years to sacrifice short-term profits for long-term growth. Thanks to the success of its Amazon Web Services (AWS) cloud computing business and Amazon Prime, AMZN can operate with even thinner profit margins.

Apparel Stocks Wall Street Is Overestimating: Tailored Brands (TLRD)

Year-to-Date Performance: -49%

For Fremont, Calif.-based Tailored Brands Inc (NYSE:TLRD), the picture is especially bleak. Its shares are in a tailspin. The parent company of Men’s Wearhouse and Jos. A. Bank already is struggling to make a profit. It scrapped its tux rental partnership with Macy’s and shuttered 233 stores last year. Even worse, AMZN is already encroaching on TLRD’s business.

Last year, Amazon launched six private-label brands such as Franklin Tailored men’s suits and James & Erin’s women’s clothing. These names probably won’t ring a bell with fashionistas or “creative slobs” like me, but given the time they will because Jeff Bezos & Co. will crack the apparel market just as they have for practically everything else.

Remember how people mocked the ridiculous buy one suit, get three free offers that Men’s Warehouse used to flog through its Joseph A Bank chain? AMZN can afford those types of margin-crushing offers all the time. Remember, operating income at AWS more than doubled in 2016 from $1.5 billion to $3.1 billion. Sales skyrocketed more than 55% to $12.2 billion and may hit $81.2 billion in 2021.

Apparel Stocks Wall Street Is Overestimating: Hanesbrands (HBI)

YTD: +5.3%

Though Barron’s has written two articles arguing that HBI’s shares are cheap, the market seems to think otherwise. Hanes shares have gained about 5% this year even as the overall market has hit record highs. That’s not a shock in light of the company’s recent disappointing results, when declines in the underwear business weren’t offset by gains in active wear.

One reason for this dilemma is that underwear — known in HBI talk as “Innerwear” — is roughly ten times as profitable as workout clothing.

Though Amazon hasn’t gotten into the underwear business yet, it’s only a matter of time before that happens.

HBI is particularly vulnerable to AMZN’s strong-arming and those of its brick-and-mortar counterparts such as Target Corporation (NYSE:TGT) and Wal-Mart Stores Inc (NYSE:WMT), which currently buy 70% of the company’s products. Look for big box retailers to follow Costco Wholesale Corporation’s (NYSE:COST) lead and move into private label products which they can sell for low prices to attract customers, further undercutting HBI and other suppliers.

Apparel Stocks Wall Street Is Overestimating: VF Corp. (VFC)

Apparel Stocks Wall Street Is Overestimating: VF Corp. (VFC)
Source: Shutterstock

YTD: +4.3%

Like other apparel names, VFC Corp (NYSE:VFC) has missed the broader market rally and appears headed nowhere fast.

Core VFC brands such as Wrangler, Lee and Timberland are struggling, with the denim businesses each posting double-digit declines during the most recent quarter hurt by soft demand in North America. Timberland recently reported a 5% decline in sales, hurt by the bankruptcies of outdoor and action sports chains and shrinking business from department stores. Those trends don’t appear to be improving anytime soon.

Indeed, AMZN likely will push into the denim business as part of its plans to conquer the apparel market, further undercutting Wrangler and Lee’s pricing power.

As for the outdoors business, VFC is fighting against a declining interest in hunting and fishing, as evidenced by the recent disappointing quarter at Cabela’s Inc (NYSE:CAB), which is among the many retailers caught up in the AMZN tsunami.

Apparel Stocks Wall Street Is Overestimating: Ralph Lauren (RL)

YTD: -7.6%

The fashion house founded by the former Ralph Lifshitz has already taken an ugly turn for investors and as result, RL shares have slumped more than 7% this year.

CEO Stefan Larsson resigned earlier this year after clashing with the company’s namesake founder over strategy. For many investors, that was worrisome since Larsson was well regarded on Wall Street, given his past success at Gap Inc (NYSE:GPS) and elsewhere. Larsson also launched a cost-cutting program and began shuttering stores. Given the company’s plunging stock price, most RL shareholders think that Ralph Lauren should stick to designing clothes.

Unfortunately, RL is very dependent on Macy’s. The department store chain accounts for 25% of its wholesale business. No wonder RL expects its sales to drop by double-digit percentages during this fiscal year and by mid-single-digit percentages next fiscal year.

It’s unlikely that it can build a digital business fast enough to offset these declines. As a result, RL is going to be increasingly dependent on Amazon.

Apparel Stocks Wall Street Is Overestimating: PVH (PVH)

YTD: +14.3%

PVH Corp (NYSE:PVH) has been a bright spot in the apparel sector thanks to its better-than-expected earnings. Investors who have pushed it up by double-digit percentages may be missing the bigger picture.

During the most recent quarter, PVH reported declines in revenue and earnings before interest and taxes (EBIT) in its Calvin Klein businesses, as double-digit sales drop in North America outweighed gains overseas. Weak performance in its home market also hurt Tommy Hilfiger, which reported an overall gain in sales of 3% and a drop off in EBIT.

During PVH’s recent earnings conference call, CEO Manny Chirico noted that he expecting “the recently announced department store closures and the challenging traffic trends” to continue throughout 2017. Weak traffic also will continue to hurt its North American retail business.

Though PVH posted an impressive 20%-plus gain in its e-commerce business — a trend it expects to continue — it will be tough for the company to build its digital platform up fast enough to offset the drop-off in its more traditional channels. That presents yet another opening for Amazon.

Indeed, it’s hard to imagine how the sector can avoid being pushed to the back of Wall Street’s discount rack.

As of this writing, Jonathan Berr did not own shares in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/apparel-stocks-retail-wall-street-is-ignoring-vfc-hbi-pvh-tlrd-rl/.

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