Apparel stocks span a wide range. There are huge names that top exchange listings and middle performers that rarely draw attention. For companies in both camps, though, Covid-19 came as a shock. Though e-commerce boomed, discretionary spending took a substantial hit, so even apparel brands pegged as top buys at the start of 2020 are having to reposition themselves in hopes of recovering from consumer spending decreases. It's a challenging situation, but brands that can find a way to make the current market work to their advantage have an opportunity to thrive.
Casual versus formal β The great divide
While a few luxury brands, those in the ranks of Louis Vuitton (MIL:LVMH, Financial), for example, are typically strong performers, most top apparel stocks are mid-range or athletic brands that succeed on their broad appeal and large market share. Such economic accessibility is valuable for keeping apparel stocks in play at the best of times β they're not tech companies or industrial giants, after all β and such affordability is even more important during a recession; there's limited demand for more expensive clothing and, with remote work, less need for office wear like blazers. As the economy bounces back, then, signs suggest that casual and athletic brands will have a significant advantage over their formal and professional counterparts.
Stocks to watch
In keeping with the argument that casual and athletic brands are likely to rebound more quickly with increased consumer spending, Columbia Sportswear (COLM, Financial) has already emerged as a value investor pick. Indeed, with strong working capital, no long-term debt and a ratio well exceeding the industry median, this Portland, Oregon-based brand is one to watch. In a similar vein, experts have also flagged Under Armour (UA) and Foot Locker (FL) as stocks likely to take off as consumer spending recovers.
Strong strategy pivots
While many athletic wear brands are performing well on the strength of their primary products, other stocks are making a comeback on the strength of supplementary acquisitions or their specific retail model. Lululemon Athletica (LULU, Financial), for example, recently acquired fitness tech brand Mirror β and with it, entry into the growing home fitness sector. While the market for $100 leggings may not be as robust as it was in a year-over-year comparison, there's plenty of demand for fitness equipment among remote workers, and that alone is enough to bolster the company's stock performance.
Acquisitions aren't the only thing supporting the struggling apparel sector right now. Brands like Stitch Fix (SFIX, Financial) that were e-commerce exclusive even before the pandemic may have taken a slight hit from decreased spending early on, but didn't have to contend with a drop in in-store spending. All e-commerce brands also have access to a more robust data pool for adapting their sales strategy, giving such companies an additional advantage. For example, Stitch Fix recently introduced a direct-buy option to supplement its styled boxes, and is using this approach to attract new customers.
Stores on the outs
Even as a substantial number of apparel stocks are bouncing back with the rest of the economy, a number of other stores are in much more tenuous positions. Among the worst performers are department store chains like Macy's (M, Financial) and Kohl's (KSS, Financial) that can't make up foot traffic in online sales; according to its first-quarter 2020 report, Kohl's generates 76% of its sales in stores. Fast fashion purveyors like Urban Outfitters (URBN), whose styles are obsolete within months, are also struggling under current market conditions. Recalling, however, that Forever 21 went under shortly before the pandemic hit, similar brands may have already been in a precarious position, but whether its peers will be able to make up for lost time and revenue remains to be seen.
Covid-19 has fundamentally altered how people shop and has tanked established names like Lord & Taylor, Brooks Brothers and even revered housewares purveyor Sur La Table, and those changes may last for years to come. It's up to retailers to find ways to expand their offerings or services in ways that meet shoppers' changing demands if they want to steady their stock prices and build a business model for this new future.
Disclosure: I do not own any of the stocks mentioned in this article.
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