Many apparel retailers withered over the past decade as shoppers shunned malls, clothing sales shifted online, superstores broadened their apparel departments, and fast fashion chains carved up the market. Many aging retailers also struggled to keep pace with shifting consumer tastes.
That decline, which was part of the "retail apocalypse" that crushed many brick-and-mortar retailers, deepened throughout the pandemic as many retailers closed their stores. Well-known brands like J. Crew, Aldo, Brooks Brothers, and Lord & Taylor all joined that long list of bankruptcy protection filings over the past year.
Faced with those secular headwinds, investors might decide to avoid apparel stocks altogether. However, at least three apparel retailers remain resilient, and they could continue generating big gains this year: lululemon athletica (NASDAQ:LULU), Nike (NYSE:NKE), and American Eagle Outfitters (NYSE:AEO).
Lululemon's stock soared nearly 40% over the past 12 months, and the yoga and athletic apparel retailer only experienced a minor slowdown during the pandemic. Its revenue declined 17% year over year in the first quarter of 2020 as it temporarily closed its stores, but turned positive again in the second and third quarters.
As a result, Lululemon's revenue rose 4% year over year in the first nine months of 2020, and analysts expect its revenue to rise 9% for the full year and another 26% in fiscal 2021.
Lululemon continues to grow, for three reasons. First, it maintains its premium brand appeal by charging high prices and rarely offering discounts. Second, it builds its brand awareness with community events like free yoga classes. Third, it continues to expand its direct-to-consumer channel -- which includes its e-commerce platform and brick-and-mortar stores -- to boost its margins and reduce its dependence on wholesale retailers.
That's why Lululemon reiterated its commitment to its "Power of Three" plan last quarter. That plan, which was introduced in 2019, aims to generate double-digit-percentage annual revenue growth through the end of 2023 by doubling its men's revenue, doubling its digital revenue, and quadrupling its international revenue.
Analysts expect Lululemon's earnings to dip 7% this year, mainly due to pandemic-related expenses, but rebound 47% in fiscal 2021. Based on those estimates, Lululemon still trades at less than 50 times forward earnings -- which is a reasonable price for a retailer with so many irons in the fire.
Nike's stock also rose nearly 40% over the past 12 months for similar reasons as Lululemon's: Its slowdown was brief, its direct-to-consumer sales remained robust, and it maintained its premium brand appeal.
Nike's revenue dipped 4% in fiscal 2020, which ended last May, as its earnings dropped 36%. Most of the damage occurred in the fourth quarter when store closings reduced its revenue 38% year over year.
But Nike reopened most of its stores in the first quarter of fiscal 2021, and its revenue rose 4% year over year in the first half of the fiscal year. Its earnings also increased 11% as it reined in its operating expenses.
Nike is still growing at a faster clip than its main rivals Adidas (OTC:ADDYY) and Under Armour (NYSE:UA) (NYSE:UAA). Adidas' revenue fell 20% year over year in the first nine months of 2020 (which matches the calendar year) as its earnings plunged 83%. UA's revenue also declined 20% year over year in the first nine months of 2020 as it posted a net loss.
Analysts expect Nike's revenue and earnings to rise 16% and 89%, respectively, for the full year. They expect its revenue and earnings to grow another 11% and 28%, respectively, in fiscal 2022.
Those are impressive growth rates for a stock that trades at 35 times forward earnings. Nike's forward yield of 0.8% probably won't attract many income investors, but its low payout ratio of 54% gives it ample room for future dividend hikes.
3. American Eagle Outfitters
AEO's revenue declined year over year throughout the first three quarters of 2020. It anticipates a low-single-digit-percentage decline in the fourth quarter, and analysts expect its revenue to dip 13% for the full year with a net loss.
Those numbers look dismal, but AEO's stock price still surged nearly 60% over the past 12 months, for three reasons. First, Aerie -- its smaller lingerie and activewear brand -- generated double-digit-percentage sales growth over the past two quarters following a slight dip in the first quarter of 2020.
Aerie's growth is giving AEO's namesake brand more time to recover. AEO expects Aerie's annual revenue to surpass $1 billion this year, which would equal more than a quarter of its total projected sales, and it plans to aggressively expand the banner with new stores.
Second, AEO's online sales accounted for 45% of its top line in the first nine months of 2020. That growth partly offset its loss of brick-and-mortar traffic throughout the crisis. Lastly, AEO reinstated its dividend in December. That confident move, which gives the stock a forward yield of 2.4%, indicates it isn't headed off the same cliff as other mall-based retailers.
Assuming the pandemic passes, analysts expect AEO's revenue to rise 19% in fiscal 2021 as it returns to profitability. Based on that forecast, AEO still looks cheap at less than 17 times forward earnings.