Apparel Stocks - A World Of Pain

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Includes: AEO, ANF, BEBE, BKE, BOSSY, CATO, CHS, COLM, CPRI, CRI, CTRN, DLTH, FRCOY, GES, GIII, GIL, GOOS, GPS, HBI, IDEXY, JILL, JWN, LB, LEVI, LRENY, LULU, MRPLY, NXGPY, PLCE, PVH, RL, ROST, SCVL, TJX, TLYS, UAA, UNF, VFC, VNCE, XRT
by: BOOX Research
Summary

Performance and valuation ratios analyzed for 75 apparel retailers and manufactures with a market cap above $100 million.

Key trends and developments in industry.

Outlook for group including discussion on select stocks.

While there isn't a specialty industry ETF dedicated to the apparel store brands and manufacturers, that's probably a good thing since investors in the underlying stocks have been getting crushed. The returns for May were abysmal and widespread between large and small caps based on a combination of weak earnings across the group, poor company-specific news and the impact from rising tensions in the ongoing U.S.-China trade dispute. Indeed, many of these companies have exposure to China either as a sales market or through key suppliers. The broader theme, however, is that this is a continuation of the long-feared "retail apocalypse," with apparel companies in particular struggling to adapt to changing consumer spending habits with widespread closing of brick and mortar stores in a shift to e-commerce. This article highlights the recent performance and group valuation metrics for the industry.

Apparel Stocks Performance

The YCharts equity screening database identifies 121 stocks with an industry classification of either Apparel Stores or Apparel Manufacturing traded on U.S. exchanges among the U.S. and foreign companies. The list is further narrowed by only considering stocks with a market cap above $50 million.

Performance of 75 Largest Apparel Stocks. Source: data YCharts/ table author

May was a particularly weak month for the group which has been extremely volatile over the past year. 65 out of these 75 stocks had a negative return for the month. The average return for the group in May was negative 13%. Over the past year, the average stock is down 19.1% and an even worse 35% off from the respective 52-week high.

Weak sentiment was reinforced with disappointing earnings releases with a trend of declining sales and poor same-store sales trends from some of the major retailers.

Gap, Inc. (GPS) which includes brands like Old Navy and Banana Republic fell 28.4% in May following a poor earnings result where the company reported comparable store sales fell 4% against expectations of a 1.5% drop. The company sees comparable sales down in the single digits compared to prior guidance that it would be flat.

PHV Corp. (PVH), the apparel manufacturer of multiple brands including Calvin Klein and Tommy Hilfiger with a market cap of $6.4 billion, reported earnings and revenue roughly in line with consensus. Still, the weak guidance and comments by the CEO added to negativity across retail space.

Looking ahead, the volatile and challenging macroeconomic backdrop has continued into the second quarter, with particular softness across the U.S. and China retail landscape.

The tie-in of the operating weakness with the macro events from China was a theme repeated by many management teams. Abercrombie & Fitch Co.(ANF) was among the biggest losers, down 42.1% in May, with the company announcing the closures of flagship stores in international cities. The company is having some traction in the U.S. with same-store sales up 4% but down 4% in its international segments.

Canada Goose Holdings Inc. (GOOS), the premium winter wear manufacturer and retailer is one stock I was previously bearish on but was nevertheless surprised by the 30% drop on an otherwise fairly consistent earnings report. GOOS is now down 53% from its 52-week high. The company is posting some of the fastest growth among any consumer goods stock, with revenues up 25% in the last quarter and an envious EBITDA margin of 27%. Nevertheless, it appears the market finally gave a consideration to its valuation which approached 13x sales as recently as December of last year. GOOS has made an expansion into China, opening a retail location and distribution center. The market seems to be punishing stocks that have so much as any apparent exposure to the region.

Discount retailers TJX Companies (TJX) and Ross Stores, Inc. (ROST) may be beneficiaries of the widespread brick and mortar store closures in the industry; both stocks are among the few winners over the past year, up 13.3% and 12.1%, respectively. TJX and ROST are bucking the trend in apparel stores with positive sales and positive comparable same-stores-sales over many quarters. ROST Q1 earnings release in May was in line with expectations but the market reacted less favorably to year-ahead guidance that was below consensus.

Let us not forget J.Jill, Inc. (JILL), the worst performer down a massive 73.6% in May. The company has a history going back to 1959 but only launched its IPO in 2017. Despite reporting a profitable Q1 with $4.3 million in earnings on $176 million of revenue, both numbers represented a larger-than-expected drop compared to last year and the company issued poor guidance for the year ahead. As with many of the smaller specialty stores, declining sales at JILL appears to be based on what can be described as weak brand momentum as customers look for values at the larger discount stores with more selection. This was my conclusion when I looked at The Cato Corp. (CATO) in a recent article. The stock fell 18.3% in May.

Apparel Stocks Valuation Metrics

Performance of 75 Largest Apparel Stocks. Source: data YCharts/ table author

Considering the large declines over the past month, it is likely investors are looking to pick up some bargains. Indeed, a number of companies now screen well with a combination of low valuation multiples. From the list above among the large caps, The Gap, Inc., L Brands Inc. (LB), and Hannesbrands Inc.(HBI) appear interesting value picks at face value including attractive dividend yields. L Brands with a P/E multiple of 9.9x, 0.5x price to sales, EV/EBITDA 6.3X, and a dividend yield at 8% (5.3% forward yield given recent cut) should pop up on many radars.

At the other end, TJX and ROST have something of a quality premium attached to their multiples based on a P/E of 21x associated with their leadership positions. ROST and TJX have been posting decelerating same-store sales in recent quarters, suggesting saturated growth in otherwise mature markets. I previously wrote a bearish article on ROST highlighting that despite the still positive growth and market consolidation, valuation appears stretched with the stock priced beyond perfection in my opinion.

If you're familiar with my writings you'll know I'm more of a 'cup half empty' kinda guy. I'll be cautious before jumping into any of these, considering they could very well end up as a classic value trap. Typically, deeply discounted multiples suggest skepticism within the market of the company's outlook. I believe the implied bearishness overall is justified given ongoing trends in the industry coupled with emerging weakness in the macro environment. A lesson in recent years is that very few of these apparel brands and retailers with declining sales have been able to recover lost customers. The potential for lower earnings going forward will simply make the depressed multiples "catch up" to the lower stock price.

Conclusion

The data above could represent a good starting point for further research and analysis. At the time of writing I expect further downside weakness in the group over the near term but acknowledge there should be some good opportunities to get a future winner at a good price. The most important factor I consider in analyzing these apparel stores and manufactures is "brand momentum;" how well is the company connecting with customers, and are they being able to differentiate themselves in the fiercely competitive industry. Clothing brands that are able to maintain a loyal following will survive this cycle.

Disclosure: I am/we are short CATO, ROST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.