Apparel Retail: Investing Essentials

Apparel retailers know how to stock shelves, but they can also stock investments.

Aug 5, 2014 at 3:10PM

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Unless you happen to be smitten with wearing your lucky shirt every single day, you're going to need clothing. The apparel retail industry is there to provide fashionable solutions. 

Whether it's a matter of catering to basic garment needs -- especially in areas where seasonal weather changes mandate different types of clothing at different times of year -- or to the nature of fickle fashion that drives consumers to update their wardrobe to keep up with trendy styles, clothing retailers are armed with racks and shelves of solutions.

What is the apparel retail industry?

There is no shortage of apparel retailers at malls, shopping centers, and even stand-alone storefront locations. There also seems to be no shortage of customers. Clothes get worn out, torn, or stained beyond reasonable repair. But more often than not, shoppers are drawn just by the sense of getting something new as they tire of wearing the same thing or give in to new fashion styles.  

Plenty of department stores, drugstores, and discount retailers sell a high volume of apparel alongside their other merchandise. Even a local museum gift shop or convenience store may offer clothing items. However, for the sake of narrowing the niche's focus, let's concentrate only on the chains that rely primarily on clothing and related wearable accessories to earn a buck. 

How big is the apparel retail industry?

The apparel retail market appears likely this year to ring up nearly $1.3 trillion in revenue worldwide, according to sector researcher MarketLine. It probably isn't a surprise to see women's wear account for 51% of the sales, with menswear and clothing for children making up the balance of the market. 

The largest publicly traded apparel retailers tend to be chains that specialize in selling recognized brands at discounts. TJX -- the parent company of T.J. Maxx and Marshalls -- rang up $27.4 billion in sales in fiscal 2014. Ross Stores also tops $10 billion in annual sales. However, these large chains also sell some general merchanidse including housewares and even toys.

However, many of the popular mall chains are also publicly traded. Some of those larger retailers include Gap, Abercrombie & Fitch, and American Eagle Outfitters

How does the apparel retail industry work?

The basics of apparel retailing are pretty easy to grasp. Chains have buyers who reach out to the textiles industry, stocking up on either proprietary fashions or brand-name designs. As investors, separating the winners from the losers isn't as simple as checking out what's working at the local mall.

A popular metric used in evaluating apparel retail chains is same-store sales, or comps. Measuring the average year-over-year growth or decline in sales at established locations is a way to gauge a concept's popularity. 

There usually isn't a positive when a company reports negative same-store sales, but let's not assume that positive comps can't be a negative. Many public chains release comps on a monthly basis, but investors can't rely on same-store sales growth figures alone. A spike in comps can be the handiwork of a chain marking down its older inventory. The registers will be ringing, but margins will contract and earnings will be challenged. 

Another thing for investors to watch is inventory. You don't want to see inventory levels growing substantially faster than sales. It's a sign that the racks are starting to fill up with aging merchandise, and inventory-clearing markdowns may be in order. 

One final metric that is often used in weighing retailer stocks is sales per square foot. As the term implies, this gauge divides sales by a chain's square footage to determine the average sales generated during the course of a year for every square foot of space. Higher is better, naturally, and makes a concept more attractive to a potential landlord.

What drives the apparel retail industry?

Fashion is fickle, and it's no surprise to see storefronts at the local mall change over the years. Chains falter, and sometimes they don't bounce back.

The growing popularity of online retail has also been a threat and an opportunity. Most brick-and-mortar chains sell their wares through the Internet, but it's hard to compete with the cost advantages of Web-exclusive merchants. This leaves the majority of apparel retailers relying on product exclusivity, the social nature of mall outings, and the allure of instant gratification.

Despite the whims of trendiness and the dot-com challenges, a sufficient number of leading retail apparel chains are growing their comps and expanding their reach to make this a viable industry for investors.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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