Given that we're in back-to-school season, it is somewhat timely that Textile-Apparel Manufacturing appeared on my radar screen. The group has a strong revisions ratio, a sign that positive estimate revisions significantly outnumber negative revisions.
Behind the positive revisions are relatively better forecasts. Last week, Maidenform (MFB) and Warnaco Group (WRC) both raised their full-year EPS guidance. The week prior, True Religion (TRLG) gave a brighter forecast, while Polo Ralph Lauren (RL) predicted a less severe decline in sales than many had expected.
The revisions are notable because they suggest that business conditions are not as bad as feared. Since stocks are valued based on future profits, any increase in earnings estimates should lead to higher stock prices. In the case of the aforementioned stocks, several analysts have raised profit forecasts - a positive change.
Revisions Are Relative
Though the trend in earnings estimate revisions is good, it needs to be taken in context. The revisions imply that brokerage analysts may have been too pessimistic, not that business is strong. The economy contracted last quarter and the sales numbers reflect this.
TRLG had the best performance, experiencing 12.4% growth in sales. The improvement came from the company's consumer direct business. In contrast, U.S. sales fell 19.8%.
MFB reported sales growth of 5%, but once again, the devil is in the details. The growth was driven by a specialty retailer and off-price retailers. Department store, national chain stores and mass merchant channel sales were off.
RL and WRC said sales fell. Currency fluctuations hurt both companies, as did overall economic weakness.
Nonetheless, sales topped expectations. This implies that business held up better-than-feared.
What The Revisions Mean
It's easy to understand why analysts would have been overly pessimistic. Cash-strapped consumers have curtailed their spending, hurting sales. This, in turn, has led to lower demand for apparel.
The question is whether the analysts were too pessimistic? The positive revisions signal that they were. Since stocks are valued based on their future earnings potential, any increase in consensus estimates should result in higher price targets.
MFB and RL are both Zacks #1 Rank ("strong buy") stocks. TRLG and WRC are Zacks #2 Rank ("buy) stocks. As such, they should outperform the S&P 500 over the next 1-3 months. However, the stocks are not without risk and investors should consider the prevailing economic conditions when looking at these stocks.
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