What happened

Clothing retail stocks climbed higher on Monday, as the COVID-19 infection rate in the U.S. shows a slight decline. That news fueled cautious optimism that life, and in this case the apparel retail sector, could soon return to normal. Among today's rising stocks are American Eagle Outfitters (NYSE:AEO), Urban Outfitters (NASDAQ:URBN), and Capri Holdings (NYSE:CPRI), which closed up roughly 8%, 2%, and 12%, respectively.

Clothing stocks have been so beaten down in 2020 that any sliver of hope is enough to send them at least a little bit higher. All three of these companies have lost to the market average over the last year and year-to-date.

AEO Chart

AEO data by YCharts

So what

On March 14, Urban Outfitters made the call to close all of its retail locations. American Eagle and Capri Holdings followed suit three days later. This obviously led to massive drops in revenue, requiring these companies to take cost-cutting action.

Indeed, the entire clothing industry has struggled with stores closed. According to the Census Bureau, clothing and clothing accessories stores have been hit harder than any other retail sector. Data shows overall sales in March declined 50% from March 2019. The negative trend accelerated in April with a whopping 89% year-over-year plummet. These losses are even worse than the losses in car sales and food-service. 

Apparel sales could be set to rebound now. Many U.S. states are laying out guidelines for reopening, and it's something companies are eager to do. As of May 19, 40% of Urban Outfitter stores were reopened, with more planned to open between then and the first week of June. Capri Holdings only has around 15% of U.S. locations reopened, but hopes to have most open by July. Similarly, some American Eagle locations are operating again. 

Even with stores reopening, there's always the lingering fear that new coronavirus outbreaks could shutter brick-and-mortar stores again. After all, there's still no coronavirus vaccine. However, the rate of new coronavirus cases over the weekend was lower than the peak infection rate.

A hand draws an upward arrow on a graph.

Image source: Getty Images.

Now what

It's not blue skies and smooth sailing yet for Urban Outfitters, American Eagle, and Capri Holdings. These companies are tasked with the ongoing challenge of inventory management. Clothing isn't like many other retail categories -- clothes go out of style and change with the season. Fail to sell the product, and you could be forced to offer discounts to move inventory. And even if you manage your stock well, competitors may offer special pricing to move their poorly managed inventory, making your merchandise look pricey by comparison.

In its earnings call for the first quarter of fiscal 2021, Urban Outfitters provided an inventory update. It said that by the end of Q1, its retail segment inventory was down 18%. It was able to reduce inventory even though sales were down by taking decisive action to curtail new supply. Considering how long stores were ultimately closed, it was the right move.

Good inventory management is part of the reason investment firm Wedbush likes American Eagle stock. Today it called it a good coronovirus-recovery stock to buy. Its own data shows the company is positioning itself well for when schools reopen this fall -- an important season for clothing companies.

To be sure, properly managing supply is difficult even in normal times. Fashion retailers are often plagued with too much inventory. This will be an ongoing area of concern until well after things have returned to normal.

Shareholders of American Eagle will get an up-to-date glimpse very soon. The company reports results for the first quarter of 2020 on Wednesday.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.