Apparel-focused businesses took a big hit in the second quarter. Unlike retailers that sell staple products like groceries and cleaning supplies, many of these chains were forced to close their doors for several weeks during peak COVID-19 social distancing efforts in places like the U.S. and Europe.
These consumer shopping shifts are likely to pressure traffic in the industry well into 2021, but that doesn't mean there aren't good stock buys in this niche. Below, we'll highlight a few apparel giants that could deliver impressive returns to investors willing to hold through some of the expected volatility ahead.
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1. TJX Companies
TJX Companies (TJX -0.49%) is the owner of the TJ Maxx, Marshalls, and Home Goods franchises, and through 2019 the off-price retailer has enjoyed 23 consecutive years of sales growth. That streak will end this year, given that pandemic store closures pushed revenue down by over 50% last quarter.
The brand won't stay down for long. TJX Companies came into the crisis period boasting its traditional range of impressive operating and financial metrics. Its value focus has helped it steal market share from full-price rivals, leading to a $10 billion increase in its annual sales base in the four years ended in 2019. The cash-generating strength of the business is clear from the fact that the retailer has raised its dividend in each of the last 24 years.
That's another streak set to end in 2020. However, investors who believe TJX Companies will return to its pre-pandemic strengths should consider buying this stock before that rebound is in the books.
2. lululemon athletica
It's too late to take advantage of lululemon athletica's (LULU -0.20%) 40% stock price slump in early March. But don't let that rebound rally scare you away from this high-performing apparel seller.
Lululemon has demonstrated its ability to grow sales and consistently expand profitability over the last five years, mainly by releasing popular athleisure products to yoga fans. There are at least two other big reasons to be excited about its growth potential. First, there's lululemon's international expansion that gives it plenty of room to boost global share toward levels that rivals like Nike (NYSE: NKE) already enjoy.
Image source: Getty Images.
Second, lululemon is targeting new, broader demographics outside of its core female niche. The company has already succeeded in areas like outerwear while building a bigger menswear segment. Continued wins in these areas, made easier by TJX's stellar e-commerce platform, could power many more rallies in this stock over the next few years.
3. Target
If the off-price and athleisure niches seem too risky for your portfolio, consider diversifying into Target (TGT -0.49%). The retailer generates roughly 20% of sales from its apparel segment, with beauty and health products contributing an additional 25%. Home furnishings, consumer electronics, and groceries round out the rest of its major niches.
The fact that its stores remained open through the pandemic allowed it to protect its growth streak, and potentially accelerate sales gains in recent months. We'll find out through its earnings report on Aug. 19 whether comparable-store sales increased much above the 1% uptick investors saw in the fiscal first quarter.
Target's multi-channel platform is the real reason to like this stock, as consumers seem to love the combination of a physical store presence in their neighborhoods, plus ultra-quick fulfillment options like same-day delivery. These assets likely drove surging sales gains and rising profitability in the pandemic-influenced selling months of May and June. And those positive retailing trends aren't likely to disappear even after the COVID-19 threat abates.
