How Will Europe's Woes Impact U.S. Apparel Sellers?

It's not easy to pick winners in the apparel retail segment, and not just because stock picking in general is a challenge. The real issues are that companies that may hit the mark in one year frequently can't keep it up for long, and while shifts in fashion may not be too big a problem for shoppers, they're a challenge for long-term investors.

In this segment from MarketFoolery, host Chris Hill and senior analyst Seth Jayson consider the current challenges facing U.S. clothing brands and retailers, the way both higher- and lower-end brands have been finding success, and how Europe factors into the equation.

A full transcript follows the video.

This video was recorded on Dec. 18, 2018.

Chris Hill: Let's talk about fashion. This has come up a few times in this month alone on this show. Apparel retail is a tough business in general. It's tough for investors to get right for extended periods of time. I feel like, in any given 12-month period, any number of stocks have done well. But over, say, a five-year period, they're trailing the market. When you look at apparel retail, fashion retail right now, what stands out to you?

Seth Jayson: I was reading a story on Bloomberg. It made me really wonder what's going on right now in the U.S. A lot of retailers and fashion retailers are doing OK. They're doing better than they have for some time. In the few years leading up, Europe was helping out those that had significant global operations. Then, we had a bifurcated market. Some of the higher-end companies were doing well. Think of a Lululemon. Meanwhile, some of the cheaper companies were going crazy, doing well selling lower-end stuff.

This article on Bloomberg was about ASOS, a company a lot of people in the U.S. won't have heard of. They do $3 billion or something in sales last year.

Hill: ASOS?

Jayson: Yeah. Internet clothing. I didn't know much about them. A U.K. company. They issued just a doozy of a "we ain't doing so great" statement last week. I thought it was really interesting. "Oh, there's that Brexit thing hitting the U.K." Turns out, that's not really the case. Sales in the U.K. were alright. It's Germany and the rest of the continent over there that are really hurting them.

That made me wonder, what do we make of this? This company sells low-end, cheap clothes on the internet. It's tough to make money doing that. We saw good results from H&M, which is familiar to shoppers and investors in the U.S. because they do well here. They actually had good sales numbers not long ago.

I'm really wondering where things are going to shake out. Under Armour is trying to sell a lot overseas. Depending on some European business, still primarily U.S. They're stinking it up lately, and they're premium. Lululemon, the stock's down, but the sales have been going well. They don't do a whole lot in Europe. They're U.S., Canada, and Asia.

If you're in some of these companies, you probably want to examine what is going on, pay attention to what's going on with European apparel and European fashion. If you're in something like Guess, you're more exposed to that. How's a company like Deckers going to be doing in the shoes segment? Or, one we may be talking about next, Skechers. Not to get too far ahead of ourselves.

Hill: Spoiler alert.

Jayson: One of the problems with the ASOS numbers was that there was a big drop in branded shoe sales in the E.U. This was an alarm bell for me because I had assumed that Europe was continuing to chug along OK. For a couple of companies right now, clearly it's not.