The consumer discretionary sector is expected to shine over the next two quarters. The sector is supported by consumer health and labor market strength and expected to produce above-average earnings growth this year and next. The consensus estimate for earnings growth this year is about 6.7% and that accelerates to 12.7% next year, good enough for 2nd and 4th place relative to the 11 S&P sectors.
Apparel is a tricky segment of the consumer sector; trends are fleeting, the consumer fickle, and margins are tight. For those with the right stuff, business is good. The right stuff includes mass appeal, widespread availability, and are not tied to one category. What this means is that these companies may sell their product through branded stores but they are not limited to them. You will find brands from both these companies in stores ranging from Wal-Mart (WMT) and Target (TGT) to high-end department stores like Macy's (M)
The two companies I am highlighting both own a stable of widely respected brands ranging from kids to adult fashions, covering men and women's wear, in all categories of apparel. In addition, these stocks offer a dividend, pay a safe distribution, and have an expectation for dividend increases.
A Brand For All Seasons, Activities, And Occupations
VF Corporation (VFC) - V.F. Corporation engages in the design, production, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products for men, women, and children in the Americas, Europe, and the Asia-Pacific. It operates through four segments: Outdoor, Active, and Work. There used to be a Jeans segment but that was recently spun off.
The spin-off, Kontoor Brands, encompasses the Lee, Wrangler, and Republic brands. Brands still within the VFC fold include but are not limited to North Face, Timberland, Smartwool, Jansport, Dickies, Eastpak, and Vans.
VF Corporation has produced solid YOY revenue growth for the past seven quarters although it has slowed from high double to mid-single-digit levels. Looking forward growth is still expected although the numbers, ex-Jeans, won't be comparable. That said, full-year 2019 guidance is calling for 15%-17% EPS growth despite the expected drop in revenue.
The dividend, at least from the growth perspective, is the most attractive in the apparel space. The company has been raising its distribution for over 40 years, the payout ratio is an acceptably low 57%, and the 5-year average growth rate is above 15%. The yield is about 2.5% at today's share prices which is more than a half percent above the average S&P 500 yield.
The average analysts rating is a strong buy/outperform and is based on 25 ratings. The average price target is just above $94 which is an 11.75% gain from today's prices, not counting any dividends or increases. The only bad news is that most analysts have lowered their EPS targets in the last 90 days. The silver lining is that the flurry of downgrades is due to the spinoff of Kontoor Brands so doesn't have the sting it could.
A Lifestyle Brand You Can Live With
Oxford Industries (OXM) is an apparel company making money with more than just clothes. The company offers men's and women's sportswear and related products under the Tommy Bahama brand; women's and girl's dresses and sportswear, scarves, bags, jewelry, and belts, as well as footwear and children's apparel under the Lilly Pulitzer brand; and men’s shirts, pants, shorts, outerwear, ties, swimwear, footwear, and accessories, as well as women and youth products under the Southern Tide brand.
The company also licenses the Tommy Bahama brand across retail categories, operates 190+ Tommy Bahama and Lilly Pulitzer branded stores, about 35 Tommy Bahama outlet stores, and 17 Tommy Bahama restaurants.
Revenue growth over the past five years has been a bit erratic but generally positive and often robust. Most of the negative revenue growth is during 2016 when the entire market was in contraction and that is offset by double-digit growth in the quarters that followed. This year looks like it will be a challenge in terms of revenue and earnings growth but the long-term forecast is positive. The company's guidance and consensus estimates are both calling for mid to high single-digit EPS growth over the next three years.
Oxford Industries doesn't have the history of dividend growth that comes with VF Corporation, 9 years versus 45 years, but it makes up for the difference in other areas. The five-year average growth rate is near 15% and comes with an ultra-low 32% payout ratio that at least gives the company room to raise the distribution in futures years. The yield is a bit low relative to its peers, about 2.15% at today's prices, but growth, health, and consistency of payment mitigate that.
These Stocks Both Have Risks
These stocks both have risks. The number one is their international business and their exposure to the trade war and tariffs. The trade situation is having an adverse effect on revenue and earnings growth for companies with exposure to revenue streams outside the U.S.
- According to Factset, companies with more than 50% of their revenues coming from outside the U.S. saw their EPS fall double digits while the average S&P company saw EPS decline only -0.4%.
Oxford Industries does a lot of business outside the U.S. That business is centered in Asia-Pacific, including China, but most of it is in Australia. To date, Australia has not felt the sting of Trump's protectionist trade agenda so the impact of trade relations may not be as large.
VF Corp does even more business internationally, enough to break out it by International and China categories, about 45% of total revenue. The good news is that, in the last report at least, the results were positive. The company reported +5% revenue growth in the International category led by +17% growth in China. Looking forward there may be some weakness in these categories.
The Bottom Line
The bottom line is simple. The consumer discretionary space is expected to produce solid earnings growth over the next six quarters, some apparel companies are well positioned to benefit from consumer trends, and two of them (VF Corp and Oxford Industries) pay a healthy dividend with expectation for future increases. If you are a dividend growth investor, a dividend investor, or a growth investor, and you are looking for a consumer stock for your portfolio either of these could make a fine addition.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.