Zacks Industry Outlook Highlights Levi Strauss, The Gap, Abercrombie & Fitch and American Eagle Outfitters

For Immediate Release

Chicago, IL – May 29, 2024 – Today, Zacks Equity Research discusses Levi Strauss & Co. LEVI, The Gap, Inc. GPS, Abercrombie & Fitch Co. ANF and American Eagle Outfitters, Inc. AEO.

Industry: Shoes & Apparel

Link: https://www.zacks.com/commentary/2280016/4-stocks-to-watch-amid-promising-retail-apparel-shoes-trends

The outlook of the Retail - Apparel And Shoes industry is nothing short of promising, driven by a convergence of factors reshaping the landscape. The surge in the millennial population, accompanied by rising disposable income and increased internet accessibility, has created a fertile ground for the industry's expansion.

This growth is further bolstered by the continuous release of affordable fashion lines, supported by aggressive branding efforts, catering to the evolving tastes of consumers. The synergy between brand awareness, personalized product offerings and the expanding realm of digitization ensures that consumers have access to an ever-expanding array of fashion choices.

Retailers have been focusing on superior product strategy, the advancement of omnichannel capabilities, prudent capital investments and greater customer reach. Backed by these initiatives, companies like Levi Strauss & Co., The Gap, Inc., Abercrombie & Fitch Co. and American Eagle Outfitters, Inc. are better placed.

About the Industry

The Retail - Apparel & Shoes industry encompasses the manufacturing, distribution and retailing of clothing, footwear and accessories. The industry is influenced by various factors, including fashion trends, consumer spending habits, economic dynamics and seasonal variations. Companies within the industry range from global apparel giants to domestic brands, each targeting specific market segments.

The industry presents both opportunities and challenges. On one hand, it demands continuous product innovation, brand distinctiveness and effective marketing to attract customers. On the other hand, fierce competition and price sensitivity pose hurdles. Technological advancements and the rise of online retail have revolutionized the industry, with consumers increasingly seeking convenience and personalized shopping experiences.

4 Key Trends to Watch in the Industry

Consumers' Willingness to Spend: The performance of the retail industry is closely tied to consumers' purchasing power. Despite a challenging economic environment, consumer spending — a critical driver of the economy — has shown resilience due to robust hiring and wage growth. In April, the U.S. economy added 175,000 jobs, contributing to this positive trend.

Additionally, a slight easing of inflation provided further relief. According to the U.S. Census Bureau's monthly retail sales data, sales at clothing and clothing accessories stores increased 1.6% in April from the previous month and 2.7% year over year.

Brand Enhancement, Capital Discipline: Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products and enhancing digital and data analytics capabilities. The launch of newer styles, customization options and refreshed store environments enables them to woo shoppers.

Efforts to enhance the brand portfolio via marketing strategies, buyouts, innovations and alliances are likely to keep supporting players in the space. The companies have been taking steps to strengthen their financial position. They have been making every move, from managing the inventory and closing underperforming stores to optimizing capital expenditures and enhancing operational efficiency.

Diversification & Digitization Key to Growth: With the change in consumer shopping patterns and behavior, companies have been playing dual in-store and online roles. They are building omnichannel capabilities, implementing loyalty and marketing programs, enhancing supply chains and offering faster delivery options such as doorstep delivery, curbside pickup and buy online, pick up in-store. Simultaneously, companies are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. To meet consumer preferences and the growing trend toward online shopping, companies have been replenishing shelves with in-demand merchandise and increasing investments in digital technologies.

Pressure on Margins to Linger: The industry is quite fragmented, with companies vying for a bigger slice of the pie on attributes, such as price, products and speed to market. To address these, a significant number of players in the industry have been investing in strengthening their digital ecosystem and delivery capabilities. While these endeavors bolster sales, they entail high costs.

Apart from these, higher marketing, advertising and other store-related expenses might compress margins. Of late, the industry participants have been dealing with product cost inflation. Nonetheless, companies have been focusing on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and adopting effective pricing policies.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Retail - Apparel And Shoes industry is a group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #83, which places it in the top 33% 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 encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry's position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group's earnings growth potential. Since the beginning of March 2024, the industry's earnings estimate has risen roughly 4%.

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 vs. Broader Market

The Zacks Retail - Apparel And Shoes industry has outperformed the broader Zacks Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.

The industry has advanced 49.8% over this period compared with the S&P 500's growth of 26.1%. Meanwhile, the broader sector has risen 27.4%.

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 16.74X compared with the S&P 500's 21.1X and the sector's 22.1X.

Over the last five years, the industry has traded as high as 34.12X and as low as 7.51X, with the median being at 12.98X.

4 Stocks Worth Considering

Gap: The company demonstrates resilience and positive momentum in its financial performance. The company's strategic efforts, including significant cost savings, have strengthened its financial position. Market share gains in key brands like Old Navy and Gap highlight successful product strategies. With disciplined expense control, strong cash generation and a focus on brand revitalization, Gap stands out as a promising player.

This specialty apparel company delivered a trailing four-quarter earnings surprise of 180.9%, on average. Shares of this Zacks Rank #1 (Strong Buy) company have surged 151.6% in the past year. You can see the complete list of today's Zacks #1 Rank stocks here.

Levi Strauss & Co.: The company's strategic initiatives, including the emphasis on direct-to-consumer channels, innovative product offerings and targeted marketing efforts, have resulted in notable market share gains in both men's and women's categories. Additionally, Levi's has effectively managed costs through Project Fuel, which aims to streamline operations and drive efficiencies. Additionally, promising trends in key markets, such as the United States and Asia, further underscore the potential for continued operational excellence and profitability.

The Zacks Consensus Estimate for Levi Strauss' current fiscal sales and EPS suggests growth of 2.9% and 15.5%, respectively, from the year-ago reported figure. This renowned brand-name apparel company, a global leader in jeanswear, has an average trailing four-quarter earnings surprise of 16.4%. Shares of this Zacks Rank #2 (Buy) company have surged 64.9% in the past year.

Abercrombie & Fitch: The company's ability to adapt, innovate and connect with customers positions it for a prosperous future. The company's regional operating model, with a focus on the Americas, the EMEA and the APAC, provides a solid foundation for global expansion. Its strong brand portfolio, operational efficiency and regional strategy make it an attractive investment opportunity as it continues to navigate and thrive in the evolving retail landscape.

This leading, global, omnichannel specialty retailer of apparel and accessories for men, women and kids delivered a trailing four-quarter earnings surprise of 715.6%, on average. The Zacks Consensus Estimate for Abercrombie & Fitch's current financial-year sales and earnings suggests growth of 6.4% and 24.2% from the year-ago period. Shares of this Zacks Rank #2 company have surged 401.4% in the past year.

American Eagle Outfitters: The company's efforts to rationalize inventory and contain costs are paying off. The strong performance of key brands like American Eagle and Aerie, coupled with expansions into premium and activewear segments, indicates potential for growth. The introduction of new store designs and online enhancements demonstrates a commitment to improving the customer experience.

The Zacks Consensus Estimate for American Eagle Outfitters' current fiscal sales and EPS suggests growth of 3.3% and 13.2%, respectively, from the year-ago reported figure. AEO has a trailing four-quarter earnings surprise of 22.7%, on average. Shares of this Zacks Rank #3 (Hold) company have surged 115.4% in the past year.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance  for information about the performance numbers displayed in this press release.

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Abercrombie & Fitch Company (ANF) : Free Stock Analysis Report

American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report

The Gap, Inc. (GPS) : Free Stock Analysis Report

Levi Strauss & Co. (LEVI) : Free Stock Analysis Report

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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.

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