Apparel stocks have fallen off a cliff over the past three months. Ever since the novel coronavirus pandemic swept across America, apparel companies have been forced to close their stores, and consumer spending on discretionary items (like clothes) has tanked. In April, consumer spending at clothing stores dropped 90% year-over-year — its biggest drop, ever, by a mile.
But new Placer.ai data shows that a consumer discretionary spending recovery is underway. Specifically, Placer.ai found that foot traffic at apparel stores across America has grown for five straight weeks, with the two most recent weeks in May showing 100%-plus week-over-week growth.
This data isn’t isolated. It’s corroborated by a bunch of other data. The number of Americans that categorized themselves as “extremely worried” about Covid-19 has dropped from 28% in late March, to 23% in late May, according to a Statista survey. Consumer confidence levels have already bottomed. Beaches and restaurants were very crowded Memorial Day weekend. Malls have reported strong early reopening traffic trends.
In other words, there is an overwhelming amount data that support one simple conclusion: the economic recovery, and by extension the consumer spending recovery, is finally here.
As consumer spending trends gradually recover over the next few months, beaten-up apparel stocks will bounce back. By a bunch, since they dropped by a whole lot in March/April. With that in mind, here are seven of the best apparel stocks to buy as consumer spending recovers:
- Urban Outfitters (NASDAQ:URBN)
- Under Armour (NYSE:UAA)
- Kohl’s (NYSE:KSS)
- American Eagle Outfitters (NYSE:AEO)
- Foot Locker (NYSE:FL)
- Crocs (NASDAQ:CROX)
- Nordstrom (NYSE:JWN)
Apparel Stocks to Buy: Urban Outfitters (URBN)
I like Urban Outfitters as one of the top apparel stocks to buy over the next few months for two reasons.
First, this is a best-in-breed apparel retailer. Sales have grown by more than 75% since 2010 — a remarkable and largely unparalleled feat for a mall-based physical apparel retailer. Brand popularity is sky-high, with Piper Jaffray’s Taking Stock with Teens Survey consistently rating Urban Outfitters as one of the most popular shopping destinations for young consumers. And the company has truly embraced the e-commerce revolution, transforming into one of the most formidable omni-channel retailers in the world.
Second, Urban Outfitters targets the 18 to 28 year-old demographic. That demographic is the least at-risk to the coronavirus pandemic. They are also the ones more anxious to get back out into the world and spend money. As such, the first wave of the consumer spending recovery will likely be driven by young consumers. That’s good news for Urban Outfitters.
Bottom line, thanks to its demographic positioning and strong brand, Urban Outfitters is one of the best apparel stocks to buy now.
Under Armour (UAA)
Under Armour has forever been the eyesore in an otherwise red-hot athletic apparel category. That’s because the company entirely missed the boat on the athleisure trend, and instead chose to double-down on performance styles.
This reality remains true today. Under Armour is still missing out on the athleisure trend. The company is still the eyesore in a red-hot industry.
That multiple only makes sense if Under Armour’s growth goes and stays negative. But it won’t. Under Armour may be the worst company in the athletic apparel space. But it’s still in the athletic apparel space, which is supported by robust adoption tailwinds. As such, by being the worst company in the best space, Under Armour will be able to sustain mild growth over the next several years.
Mild growth isn’t priced in today. Consequently, as consumer spending trends recover over the next few months, UAA stock could be a big winner.
There are three reasons why Kohl’s is one of the best apparel stocks to buy on the dip.
First, the worst is over for this retailer. About 76% of this company’s sales happen in-store. All of Kohl’s stores were closed for part of March and all of April. Those closed stores are now reopening. Today, about 50% of Kohl’s stores are open. Within the next few months, that number will move towards 100%. As it does, Kohl’s growth trends will meaningfully recover.
Second, like Urban Outfitters, Kohl’s is a strong retailer. The company is both off-mall and off-price. Four out of Kohl’s top five selling brands are private brands (you can only buy them at Kohl’s). About 80% of Americans live within 15 miles of a Kohl’s store. The digital business is on fire, growing at a 17% compounded annual growth rate since 2014. And Kohl’s has a strong loyalty program, with 30 million members accounting for the lion’s share of total sales.
Third, like UAA stock, KSS stock is dirt-cheap, at less than 0.2-times sales (versus a historically average multiple of 0.5-time sales).
All of that means that as consumer spending trends recover, KSS stock could pop.
American Eagle Outfitters (AEO)
Another best-in-breed apparel retail stock to buy now is American Eagle Outfitters.
Much like Urban Outfitters, American Eagle is an unusually strong mall-based apparel retailer with a differentiated and popular brand. Sales are up nearly 50% since 2010. The brand is consistently rated as one of the top clothing brands on Piper Jaffray’s Taking Stock with Teens Survey. The company is also a leader in omni-channel experience, with a particularly strong mobile platform.
Also like Urban Outfitters, American Eagle caters to young shoppers. Those young shoppers will fuel the first wave of the consumer spending recovery.
For investment purposes, AEO stock is just URBN stock 2.0.
Buy both of these apparel stocks to play the consumer spending recovery.
Foot Locker (FL)
A lot of sporting goods stores have gone under over the past few years amid e-commerce disruption and shift in sales strategy from the likes of Nike and Under Armour to direct selling.
Sports Authority. Sport Chalet. Modell’s. MC Sports. The list goes on and on.
Foot Locker is not one of those companies.
Instead, Foot Locker is a differentiated retailer of premium athletic apparel that — due to its strong omni-channel capabilities, branded in-house shopping experience, and in-demand product portfolio — is an indispensable piece of the athletic apparel retail distribution network.
That’s why Foot Locker’s revenue growth has been consistently positive every single year in the 2010s.
Because of its strong positioning in the physical retail market, as that market rebounds over the next several months, Foot Locker’s growth trends will rebound even more emphatically.
Those rebounding growth trends will converge on a discounted valuation (0.4-times trailing sales, versus a five-year-average sales multiple of 0.9) to spark a big rally in FL stock.
Make no mistake. Crocs is the hottest footwear brand in the world right now.
Thanks to the rise of the “ugly” fashion trend, Crocs has become an instant stay-at-home favorite option. The shoes are trending all over social media. The company was one of the only brands to report positive revenue growth in North America in the first quarter of 2020. Domestic and international Google search interest related to “Crocs” has surged to all-time highs in March and April 2020. Crocs.com web traffic is surging, too.
In other words, Crocs is the “It” footwear brand today.
Consequently, as consumers get out and spend money on shoes over the next few months, they will spend a bunch of that money on Crocs shoes.
Crocs’ sales and profits will roar higher. So will CROX stock. All the way back to all-time highs.
Mall-based department retail stores have been awful investments over the past few years.
Macy’s (NYSE:M) stock is down 90% over the past five years. JCPenney and Sears have declared bankruptcy. Nordstrom stock is down nearly 80%.
But in that group, Nordstrom is differentiated. And better shielded from e-commerce disruption. Nordstrom sells premium products, at premium prices, with a premium in-store shopping experience. In other words, if you’re going to buy a premium apparel item, you won’t go to Amazon (NASDAQ:AMZN) or Walmart‘s (NYSE:WMT) website. You’re going to go Nordstrom.
Because of this, Nordstrom has staying power in the retail landscape as an omni-channel retailer of premium apparel and accessories.
This staying power isn’t priced into JWN stock. Shares trades at less than 0.2-times trailing sales. That’s too cheap for this company.
The coming recovery in consumer spending will create a meaningful lift for Nordstrom’s sales and profit trends. That meaningful lift will converge on today’s discounted valuation to spark big gains in JWN stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long UAA and KSS.