Shoes & Apparel Outlook Robust on Growing Fitness Trends
The Zacks Shoes and Retail Apparel industry comprises companies that design, source and market clothing, footwear and accessories for men, women and children, under various brand names. The product offerings of these companies mostly include athletic and casual footwear, fashion apparel and active-wear, sports equipment, bags, balls, as well as other sports and fashion accessories.
These companies showcase their products through their own branded outlets and websites. However, some companies also distribute products via other retail stores, such as national chains, online retailers, sporting goods stores, department stores, mass merchandisers, independent retailers and catalogs.
Here are the three major industry themes:
- The industry players are witnessing a steady rise in revenues, given the ongoing endeavors to bring new styles to market. This allows companies to grab more of full price sales and reduce markdowns. Quick product innovation plays a key role in bolstering the sales graph of shoes and apparel makers, as participants create a niche in the market by keeping pace with changing fashions. Further, the athletic wear section of the industry is benefiting from increasing health awareness and indulgence in fitness activities, which has given rise to the athleisure trend. This has led to a boom in footwear sales, with sneakers gaining the spotlight. Apart from growing interest in fitness across the globe, we expect footwear sales to continue benefiting from customization options provided by biggies like NIKE and Adidas (ADDYY).
- Most industry participants are aggressively bolstering their digital and e-commerce capacities, though investments in differentiated retail concepts, mobile apps, dotcom and digital partners to stay put in a fiercely competitive environment. Additionally, efforts to speed up deliveries through investments in supply chain and order fulfillment avenues provide an edge in the market. Simultaneously, companies are investing in renovation and improved checkouts as well as mobile point-of-sale capabilities to make stores attractive. These efforts to enhance guests’ experience through multiple channels have been contributing significantly to improve traffic and transactions both in stores and online. Moreover, a steady U.S. economy with a tightened labor market, rising disposable income and an upbeat consumer environment provide the right background for the growth of this customer-focused industry through this year.
- Despite the top line gains, we continue to be concerned about the bottom-line performance due to escalated costs, mainly reflecting higher SG&A expenses, as well as increased production costs and supply-chain investments. Notably, these companies incur higher demand creation expenses due to increased involvement in global brand campaigns and key sports events, which are crucial for gaining market share. Moreover, the participants’ continued investments in innovation, data and analytics, and new capabilities to speed up the aforementioned digital transformation results in higher operating costs, causing SG&A expense to rise. These apart, adverse currency rates due to a strong U.S. dollar are hindering the earnings potential of overseas operations. Altogether, these headwinds will continue to be a threat to margins and bottom-line performance of the industry participants.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Shoes and Retail Apparel Industry is a 13-stock group within the broader Zacks Consumer Discretionary Sector. The industry currently carries a Zacks Industry Rank #71, which places it in the top 28% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has increased 1.1%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Shareholder Returns
The Zacks Shoes and Retail Apparel industry has outperformed both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively gained 23.4%, the Zacks S&P 500 composite and the Zacks Consumer Discretionary sector have rallied 15.5% and 14%, respectively.
One-Year Price Performance
Shoes and Retail Apparel Industry’s Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing Consumer Discretionary stocks, the industry is currently trading at 24.81X compared with the S&P 500’s 18.12X and the sector’s 19.59X.
Over the last five years, the industry has traded as high as 26.48X, as low as 18.63X and at the median of 23.2X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
We believe there is significant growth potential for the stocks in the Shoes and Retail Apparel industry due to growing consumer interest for a healthy lifestyle and rise in athleisure clothing trend. Additionally, increasing innovation to launch newer styles, customization options, digital expansion and refreshed store environments are among the few aspects likely to poise the industry for continued growth. Furthermore, a strong economy, with rising consumer spending, will benefit stocks in this consumer-driven industry.
We have two stocks in the Zacks Shoes & Retail Apparel universe currently sporting a Zacks Rank #1 (Strong Buy) and one stock carrying a Zacks Rank #2 (Buy). Additionally, we suggest two more stocks with Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s have a look at them.
NIKE Inc. (NKE): The stock of this Beaverton, OR-based designer, manufacturer and marketer of athletic footwear, apparel, equipment and accessories, and services for men, women and children worldwide, has risen 23.4% over the past year. The Zacks Consensus Estimate for current-year EPS has been unchanged in the past seven days. The company currently carries a Zacks Rank #1.
Price and Consensus: NKE
Deckers Outdoor Corporation (DECK): The stock of this Goleta, CA-based provider of footwear, apparel and accessories for casual lifestyle and high performance activities has climbed 26.7% over the past year. The Zacks Consensus Estimate for current-year EPS has been stable in the past 30 days. The company carries a Zacks Rank #1.
Price and Consensus: DECK
Steven Madden, Ltd. (SHOO): The stock of this Long Island City, New York-based company has surged 39% in the past year. The consensus EPS estimate for the current year has remained unrevised over the past 30 days. Currently, the company carries a Zacks Rank #2.
Price and Consensus: SHOO
Rocky Brands, Inc. (RCKY): The stock of this Nelsonville, OH-based company has surged 11.1% in the past year. The consensus EPS estimate for the current year remained unrevised over the last 30 days. Currently, the company carries a Zacks Rank #3.
Price and Consensus: RCKY
Skechers U.S.A. Inc. (SKX): The stock of this Manhattan Beach, CA -based company has gained 49.2% in the past year. The Zacks Consensus Estimate for current-year EPS has remained unchanged in the past seven days. The company holds a Zacks Rank #3 at present.
Price and Consensus: SKX
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.