The coronavirus pandemic put the final nail in the coffin of many apparel retailers, including J.C. Penney, Neiman Marcus, and Lord & Taylor, which plans on liquidating its stores as soon as possible. The average shopping mall is in trouble too because of its ties to clothing stores.
The U.S. Census Bureau says clothing and accessories sales plummeted 89% in April compared to last year, following a 52% plunge in March when many stores were still open.
It's clear being deemed nonessential was damaging, if not fatal, to many apparel retailers, but that doesn't mean investors should avoid all clothing companies. The three stocks below should be on your radar.
Although Levi Strauss (NYSE:LEVI) derives most of its revenue from physical retail stores, whether its own or from its retail partners, it does have a growing e-commerce business that generates about 15% of its top line.
That means the denim maker's business was likely in tumult along with the rest of the industry, though investors should give it a pass during this period. Where some apparel retailers were in trouble even before the crisis, Levi Strauss is only temporarily depressed. Its brand is synonymous with denim, and its jeans remain as popular as ever. The company boasts more affordable offerings compared to high-end competitors like True Religion, which recently declared bankruptcy.
Levi reported first-quarter organic sales growth of 6%, but that was for the period ending in late February, before COVID-19 was declared a pandemic. However, the outbreak's effects were already negatively impacting its Asia business -- to the tune of $20 million -- according to management's estimates. The coming quarter will encompass the full force of the crisis, but now that stores are reopening, Levi should be able to pick up again where it left off.
It likely will have realized a need to further build out a digital presence, though its direct-to-consumer business grew 13% year over year in the first quarter. Look for that number to spike, and with a brand as iconic as Levi Strauss, there shouldn't be any long-term risk to its business.
The move toward athleisure wear was already strong before the COVID-19 outbreak, but the trend accelerated even more during the pandemic as working from home became the new norm. That trend should remain relevant well after the crisis passes, and lululemon athletica (NASDAQ:LULU) will benefit as businesses rethink office-based operations.
The athleisure wear leader is scheduled to report earnings on Thursday, June 11. Although its sales were undoubtedly hurt by the mandated closure of its stores, it still maintained a functional e-commerce business that offset some of those headwinds.
One analyst, John Kernan at Cowen, thinks the market is underestimating Lululemon's strengths and is forecasting online sales surged 60% in the quarter. Its physical stores are even expected to perform better than the market thinks, and the analyst foresees the athleisure wear specialist's earnings outstripping the consensus for several years. He says Lululemon is not beyond producing $1 billion a year in free cash flow (FCF) and supporting a $50 billion market cap (the stock trades at around $41 billion as of this writing and produced approximately $390 million of FCF in the past year).
The apparel retailer's stock is up over 130% from its March lows, but consumer trends favor Lululemon's continued ascent.
Another offshoot of the pandemic was the extra inventory retailers were stuck with since they couldn't open their doors to sell it. This led Gap and other apparel retailers to cancel and refuse shipments from their vendors. Suppliers in Bangladesh, China, Vietnam, and elsewhere saw their inventory begin piling up.
This presents a unique opportunity for off-price clothing retailers like TJX Companies (NYSE:TJX) to buy high-quality merchandise at a discount. Although the timing of the purchases must be made with care as the company's own stores have been closed, and its e-commerce record is spotty (the T.J. Maxx brand has had one for years, while Marshall's just launched one last September). Overall, the quality and quantity of its future inventory has ballooned, and this still represents a potential windfall.
As CEO Ernie Herrman noted last May, "Historically, disruptions in the marketplace have created off-price buying opportunities for us."
The retailer's stock has recovered more than 75% from its year-to-date bottom, but it still trades about 10% below where it was before the outbreak. Its real opportunity for growth lies in the remainder of 2020 and beyond.