Things are looking rather glum for apparel stocks in the wake of a lackluster earnings season.
Consumers are spending less on discretionary purchases, and retailers are taking note. Many apparel companies—including
Under Armour
(ticker: UAA) and
Ross Stores
(ROST)—lowered their projections for the next few quarters and warned of a sales slowdown ahead.
The pessimism has taken a toll on retail stocks. The
SPDR S&P Retail ETF
(XRT) is up just 1.5% this year, underperforming the
S&P 500
‘s 12% gain.
But for those willing to sort through the recent wreckage, there are still opportunities to be found at varying levels of risk, wrote Simeon Siegel, analyst at BMO Capital Markets.
Siegel points to
T.J. Maxx
parent company
TJX
(TJX). TJX beat earnings expectations and grew same-store sales at a faster rate than analysts expected. While the company provided weak second-quarter guidance, it raised its fiscal-year projections. TJX is also the only off-price retailer with gross margins above prepandemic levels, Siegel notes.
Barron’s made the case in favor of buying TJX earlier this year, arguing that the company’s budget-friendly offerings should resonate with shoppers grappling with inflation. At a 21.5 price to earnings ratio, the stock currently trades a sliver below its historical average of 22.8.
For those with a risk-on appetite,
Capri Holdings
(CPRI) could be a good bet, Siegel wrote. Not because the company’s last earnings report gave investors much to celebrate—it didn’t—but rather because its cheap valuation presents a good entry point for a stock he believes has room to outperform in the long run.
Capri stock is down 35% this year, and changes hands at six times forward earnings, below its average multiple of nine and well below its peers. Competitor
Tapestry
(TPR), for instance, changes hands at 10.1 times forward earnings. Capri is also a standout within Siegel’s area of coverage, with gross margins gaining over five percentage points over the past four years even as sales fell by roughly one percentage point during the same period.
Other cheap apparel stocks the analyst highlighted were
Nordstrom
(JWN),
Victoria’s Secret
(VSCO), and The North Face parent company
VF
(VFC), which all trade below 10 times forward earnings. Siegel has a Market Perform rating on
Nordstrom
and VF, and an Outperform rating on
Victoria’s Secret.
Write to Sabrina Escobar at [email protected]
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