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Why Apparel Retail Stocks Were Moving Higher Today

By Jeremy Bowman - Apr 9, 2020 at 2:52PM

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Another financing plan from the Federal Reserve further soothed retail investors.

What happened

Stocks were gaining today after the Federal Reserve announced another rounding of funding to help shore up the economy. The central bank said it would provide $2.3 trillion in loans, including $600 billion as part of its Main Street Lending Program, designed to support small and medium-sized businesses with up to 10,000 employees and up to $2.5 billion in revenue.

Investors saw the announcement as a bullish sign for the recovery, and sent stocks up broadly. Hard-hit retailers were among the biggest winners, as the Fed helped assuage fears of potential bankruptcies and mass store closures. As of 12:21 p.m. EDT, today's winners included Under Armour (UAA 3.64%) (UA 3.08%), which was up 7.9%; Foot Locker (FL 5.47%), which had gained 12.1%; Urban Outfitters (URBN 8.10%), which was 7.7% higher; and Ralph Lauren (RL 0.94%), which rose 8%. At the same time, the S&P 500 was up 1.9%.

A blurry image of people walking through a shopping mall

Image source: Getty Images.

So what

The Fed's announcement came after retailers announced broad furloughs and layoffs in recent weeks, as they've been forced to close stores and conserve cash. This morning, the Department of Labor also announced that 6.6 million Americans had filed for unemployment last week, meaning that more than 16 million workers have gone on unemployment in the last three weeks, a sign that the economy is still in free fall even as the Fed helps prop it up. Investors seem willing to ignore the surge in employment, as they've been encouraged by the slowdown in the spread of the coronavirus.

On April 3, Under Armour said it would extend its store closures until further notice, and that it plans to furlough employees at its stores and 600 of its corporate staff on April 12. It will also cut executive compensation, and it withdrew its guidance for the first quarter and the full year. Nonetheless, the stock has gained since the announcement, amid signs showing growth in new coronavirus cases slowing, and as Congress has promised increased rescue financing in addition to the Fed's announcement today.

Foot Locker said on March 17 it would close its stores in North America and Europe, and also withdrew its guidance. Shares have followed a similar trajectory to Under Armour's, rising in recent days on the same optimism that Under Armour saw. Of its $8 billion in revenue last year, $1.3 billion came from its digital channel, meaning the business isn't entirely shut down during the pandemic.

Urban Outfitters also said last week that its stores would remain closed until further notice, and on April 1 it furloughed a substantial number of employees for 60 days. In order to protect its financial position, the company is suspending hiring, bonuses, and merit raises, and reducing capital expenditures by $100 million and borrowing $220 million, among other steps.

Finally, Ralph Lauren, which has also closed all of its stores, said it would furlough store employees on April 11 and slash executive compensation. It's also paused capital expenditures and made efforts to adjust inventory according to current demand. Like the other three stocks, Ralph Lauren is trading down about 30% since the coronavirus sell-off began.

Now what

It's clear that the near term will be difficult for the apparel industry: Store closings severely impact the business. However, even once stores reopen, consumers may be reluctant to visit them if they don't feel safe -- or if, as some have suggested, safety measures like temperature checks are put in place.

Investors should expect the sector to move on news about the virus and efforts to stabilize the economy, as the first step in reopening the economy is stopping the spread of COVID-19. Though initial fears about possible bankruptcies in the industry seem to have passed, these companies still face steep challenges ahead.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Urban Outfitters, Inc. Stock Quote
Urban Outfitters, Inc.
$22.02 (8.10%) $1.65
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$9.67 (3.64%) $0.34
Ralph Lauren Corporation Stock Quote
Ralph Lauren Corporation
$101.16 (0.94%) $0.94
Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
$29.86 (5.47%) $1.55
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$8.71 (3.08%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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