After the economy went into lockdown earlier in the year, retailers scrambled to adapt. In March, many apparel stocks hit 52-week lows. But since then, the recovery for many of them has been rather incredible.
Now as the new earnings season kicks in, investors are wondering whether they are late to the party or if there are any apparel stocks that are still appealing to consumers. Therefore today, I’ll take a closer look at the sector and introduce stocks that may deserve to be on your radar.
Before the novel coronavirus pandemic hit our shores, Burlington Stores (NYSE:BURL) CEO Michael O’Sullivan said that the group would be getting out of e-commerce sales to instead focus on its brick-and-mortar business. During the company’s Q4 release of March 5, he highlighted that when an apparel company accounts “for the cost of merchandising, processing, shipping, accepting returns, … [e-commerce is] very difficult, impossible to make at those price points.”
His words and decision underscored how important it was for apparel stocks to welcome customers, i.e., foot traffic, into their physical stores.
According to a recent study led by Jose Maria Barrero of ITAM Business School, in early April spending on apparel was down 70% in the U.S. Among other metrics, the research looked at data from the Survey of Business Uncertainty. The SBU is a “monthly panel survey developed and fielded by the Federal Reserve Bank of Atlanta in cooperation with Chicago Booth and Stanford.”
The research also found that “[s]pending on fast food, auto parts, and autos is down 35 percent. At the same time, spending on home improvement, video streaming, gaming, food delivery, meal kits, and online grocers has boomed. The bulk of these spending cuts and shifts will reverse when the pandemic recedes and the lockdown ends, but some aspects of the shift are likely to persist.”
Despite the scare of a potential second wave of Covid-19, most global economies are reopening. Retailers are hopeful that consumers will return in solid numbers to a range of stores, including apparel retailers.
With that in mind, here are three of the apparel stocks that are still appealing to consumers:
Apparel Stocks: Crocs (CROX)
Crocs designs, manufactures and sells casual footwear, apparel and accessories for men, women, and children. The group believes it offers a niche proposition. “All Crocs shoes feature Croslite material, a proprietary, revolutionary technology that gives each pair of shoes the soft, comfortable, lightweight, non-marking and odor-resistant qualities that Crocs fans know and love.” And since Crocs began in 2002, the company has sold more than 600 million pairs of shoes.
In late April, it released fiscal 2020 first quarter results. EPS of 22 cents missed analysts’ estimates. A year ago, EPS had been 33 cents. Revenue was $281.16 million for the quarter ended March 2020. In Q1 2019, revenue had come at $295.95 million.
At the time, management said, “Many of the 367 company-operated stores as well as many partner stores and wholesale customers’ stores were closed at some point during the first quarter and many remain closed today… We expect revenue declines to continue in our retail and wholesale channels as “social distancing” practices remain in effect. Further, we expect a larger decline in revenues in the second quarter of 2020”
The company is next expected to report earnings later in July, when analysts are likely to pay detailed attention to revenue as well as outlook for the rest of the year. As a result, the stock may be volatile around the date.
Crocs’ brand strength got a recent thumbs up when Susquehanna analyst Sam Poser reiterated a “buy” rating and increased the price target to $43. Year-to-date the shares are down around 14%. I’d look to add CROX shares to a long-term portfolio, especially if the price dips toward $30.
This popular apparel stock definitely deserves further due diligence.
Lululemon Athletica (LULU)
Vancouver, Canada-headquartered Lululemon designs and retails a range of athletic and leisure (“athleisure”) apparel and accessories. The company has a dedicated customer base and its products sell for a sizable premium. In 2019, its “business grew by strong comps in both stores (+10%1 ) and digital channels (+35%).”
It primarily conducts business through two channels: company-operated stores and direct to consumer. At the end of fiscal 2019, Lululemon had 491 stores in 17 countries. Like many other retailers, the group closed stores starting mid-March. Its direct-to-consumer segment includes the net revenue generated from its e-commerce website, other country and region specific websites, and mobile apps.
On June 11, the group released financial results for the first quarter of fiscal 2020. Net revenue was $652.0 million, a decrease of 17% compared to the first quarter of fiscal 2019. However, despite the overall decline, direct-to-consumer net revenue increased 68%. And direct-to-consumer net revenue represented 54.0% of total net revenue compared to 26.8% for the first quarter of fiscal 2019. What these metrics overall showed that despite store closures, its loyal customer base continued to shop online.
During the quarter, Lululemon Athletica repurchased 0.4 million shares of its own common stock at an average cost of $172.68 per share. CEO Calvin McDonald said, “We are learning more every day about our guests – how they enjoy interacting with us online and what makes them comfortable as stores reopen. Our strong digital business demonstrates the strength of our guest connection and the long-term opportunity to create further Omni experiences going forward.”
Management noted that as of early May, it started opening stores in line with local guidance. At the time of the quarterly report, 295 of its company-operated stores were open. Nonetheless, the group did not provide detailed financial guidance for fiscal 2020.
Then on June 29, the retailer announced that it was buying home fitness start-up Mirror, which has an interactive workout platform that features live and on-demand classes. This acquisition is likely to be a stepping stone to become a technology company as internet-connected workouts may increasingly become the norm.
Although a second wave of the pandemic may delay store openings, the company’s fundamentals remain strong. YTD, the shares are up around 31%. Thus there may be some short-term profit-taking in LULU stock in July which would make it even more attractive for long-term investors.
I’d rate it high on my list of apparel stocks to buy.
TJX Companies (TJX)
TJX Companies is a leading off-price apparel and home fashions retailer in the U.S. and worldwide. In the U.S., the businesses under group include TJ Maxx, Marshalls, HomeGoods, HomeSense, Sierra. Outside the U.S., the brands are Marshalls, HomeSense, TK Maxx, and Winners.
In late May, TJX Companies released earnings for the first quarter of fiscal 2021. Net sales were $4.4 billion. Net loss for the first quarter was $887 million and loss per share was 74 cents. The results were worse than what analysts were expecting.
During the quarter, the company had shareholder distributions of approximately $480 million. This included its fourth-quarter dividend and first-quarter buyback prior to suspending both dividends and buybacks for the time being. Management also reduced fiscal 2021 capital expenditure plan from $1.4 billion to a range of $400 to $600 million. As a result of various financial actions taken, the group ended the quarter with $4.3 billion in cash.
At the time of the earnings release, more than 1,600 of its stores worldwide had been reopened. According to the company, “initial sales overall have been above last year’s sales across all states and countries for the over 1,100 stores that have been reopened for at least a week.” The retailer believed almost all of its stores in the U.S. and worldwide could be reopened by the end of June.
YTD, the shares are down 15%.
Investors looking for appealing apparel stocks may consider investing in TJX stock, especially if the price goes below $50.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
