4 Textiles – Clothing Stocks to Watch Despite Industry Headwinds

Rising inflationary pressures and supply chain disruptions are a concern for several players in the Zacks Textile – Apparel industry. High SG&A costs affect many companies, especially because of the high freight and logistics costs.

Nevertheless, the efforts to boost the retail and digital business, along with strong efforts to improve the brand, continue Lululemon Athletica Inc. LULU, Columbia Sportswear Company COLM, Guess what?, Inc. GES and Gildan Activewear Inc. GIL well positioned for profit.

About the industry

The Zacks Textile – Apparel industry includes companies and lifestyle brands that manufacture, design, distribute, source, market and sell apparel, footwear and accessories for men and women. These include fashion clothing such as dresses, pants, skirts, shorts, shirts, jackets, blouses and knitwear, as well as intimate clothing such as underwear and shapewear. The industry also includes companies that provide clothing for healthy lifestyles and athletic activities, such as yoga, running, and exercise, just to name a few. Some companies also deal in fitness-related accessories such as gloves, bags, headgear and sports masks. The participants in the sector operate through direct-to-consumer (brick-and-mortar and online), wholesale and license distribution channels. Most players operate through retail stores and digital networks in the United States and internationally.

4 trends shaping the future of the textile and clothing industry

Costs concern: Textile garment companies are faced with rising input cost inflation, which continues to weigh on their profits. Several companies are grappling with supply chain disruptions due to prolonged COVID-related factors, congestion in ports and reduced air freight capacity. Ongoing supply chain problems are causing delays and increasing freight costs. Incidentally, players in textile clothing continue to witness higher SG&A costs. Higher marketing costs and higher investments in improving retail and digital operations have driven up SG&A costs. The impact of lower demand due to inflation and lower discretionary spending is also a major concern for payers. A challenging and competitive labor market is also a concern. These factors threaten the margins of companies.

International exposure carries risks: Due to their international presence, Textile Clothing companies are exposed to unfavorable currency movements. Political turmoil, such as turmoil related to current geopolitical events and associated sanctions, restrictions or other responses, could affect the performance of companies. Several players are confronted with the consequences of the war in Ukraine, including supply chain and regulatory hurdles.

Improved store traffic, solid digital trends: Players in textile clothing are capitalizing on the importance of physical retail and the ease of online engagement. Businesses in the space are witnessing an uptick in physical sales, driven by an increase in traffic as consumers return to stores to shop. Textile apparel players are focused on investing to improve the shopping experience. The growing tendency of consumers to shop online has brought e-commerce to the forefront for players in the textile apparel industry. The companies in the space have invested in improving ecommerce sites, upgrading mobile apps, improving payment systems, linking online and store operations, and increasing fulfillment capabilities. Online shopping, in-store pickup and curbside delivery options are gaining momentum for many industry players.

Brand-building efforts: Efforts to strengthen brands through marketing strategies, licensing deals, buyouts and alliances are likely to continue to support textile apparel players. New product launches are an important part of the growth of textile apparel players. Companies in the space regularly improve their products through innovation to stay competitive and respond to changing consumer preferences. The pandemic pushed the comfortable casual wear category, which has worked in favor of active wear providers.

Zacks Industry Rank Gives Gloomy Outlook

The Zacks Textile – Apparel industry is housed in the broader Zacks luxury goods sector. The industry currently holds a Zacks Industry Rank #233, placing it in the bottom 7% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, the average of the Zacks Rank of all member stocks, indicates a robust near-term outlook. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of Zacks-ranked industries is the result of negative aggregate earnings prospects for the participating companies. Looking at revisions to aggregate earnings estimates, analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of May 2022, the industry consensus estimate for the current fiscal year has fallen by 9.6%.

Let’s take a look at the industry’s performance and current valuation.

Industry versus broader market

The Zacks Textile – Apparel industry outperformed the broader Zacks Consumer Discretionary sector, while it underperformed the S&P 500 composite over the past year.

The sector declined 35.8% over this period compared to the broader sector’s 40.3% decline. The S&P 500 is down 14.6% over the same period.

One year price performance

Current valuation of the industry

Based on the annual price-to-earnings (P/E) ratio, commonly used to value consumer durables, the sector is currently trading at 11.43X compared to the S&P 500’s 16.59X and the sector’s 21.07X.

Over the past five years, the sector has traded as high as 32.1X, as low as 9.98X and at the median of 18.06X, as the chart below shows.

Price-earnings ratio (past 5 years)

4 Textiles – Clothing stock to keep an eye on

lululemon: The yoga-inspired sportswear company is benefiting from strong momentum in its business, driven by a favorable response to its products. Lululemon is eager to respond to growing online demand through accelerated investment in e-commerce. The company Zacks Rank #2 (Buy) leverages its stores to facilitate omnichannel capabilities, including in-store buying online and in-store shipping.

The Zacks Consensus Estimate for Lululemon’s taxable earnings per share (EPS) for 2022 is up 4.6% in the past 30 days to $9.87. LULU’s stock is up 2.4% in the past six months. Lululemon has forecast earnings per share growth of 20% over three to five years. You can see the full list of current Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: LULU

Columbia Sportswear: The designer, marketer and distributor of outdoor, active and everyday lifestyle clothing, shoes and accessories currently holds a Zacks Rank #3 (Hold). Columbia Sportswear is capitalizing on its strategic priorities, such as investments in demand creation, to increase brand awareness. It remains committed to improving the consumer experience and its digital capabilities across all networks and regions.

The Zacks Consensus Estimate for Columbia Sportswear’s 2022 EPS has remained unchanged for the past 30 days at $5.18. Shares of COLM have fallen 22.8% in the past six months. Columbia Sportswear has forecast EPS growth of 8.1% over three to five years.

Price and Consensus: COLM

Guess?: The Zacks Rank #3 company designs, markets, distributes and licenses lifestyle collections of clothing and accessories. guess? has benefited from its solid digital business. The company is on track to make progress with its customer-centric initiatives, including omnichannel capabilities, advanced data analytics and customer segmentation.

Guess?’s commitment to six key strategies also bodes well. These include organization and culture, functional capabilities, brand relevance to three key consumer groups (heritage, millennials and generation Z customers), customer focus, brilliant products and international footprint. The Zacks Consensus Estimate for Guess?’s fiscal 2023 EPS is up nearly 4% in the past 30 days to $2.63. The share of GES has fallen by 26.2% in the past six months.

Price and Consensus: GES

Gildan Activewear: The manufacturer and seller of various clothing products benefits from the strength in its Activewear category. Gildan Activewear is reaping the benefits of its back-to-basic strategy. Focus on supply chain improvements and cost savings bodes well for GIL.

The Zacks Consensus Estimate for Gildan Activewear’s 2022 EPS has remained unchanged for the past 30 days at $3.10. GIL’s stock has fallen 19.4% over the past six months. The company Zacks Rank #3 has an expected earnings per share growth of 9% over three to five years.

Price and Consensus: GIL

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