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3 Likely Winners in the Apparel Retailing Boom

By Demitri Kalogeropoulos - Apr 20, 2021 at 12:30PM

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The recovery in this industry could be epic over the next year.

Many retailing stocks were hit hard during the pandemic. Unlike big-box peers that were deemed essential, clothing sellers had to shut down most of their stores during COVID-19 lockdowns. These customer traffic restrictions continued into early 2021 even as the global vaccine rollout gained steam.

But there's a rebound in sight. Recent retailing estimates from the U.S. Census Bureau showed that apparel sales jumped in March, rising 18% compared to February and doubling compared to a year earlier. Let's look at why Nike (NKE -1.00%), TJX Companies (TJX 0.34%), and Target (TGT 0.81%) are all set to benefit from this retailing boom.

1. Nike

In mid-March, Nike announced a surprise sales slump that helped push the stock lower for 2021 even as the market sets new highs. Revenue fell 1% in the period that ended in late February, marking a jarring change from the prior quarter's 7% increase.

A young woman sitting on a couch with an open laptop on her lap and a credit card in her left hand

Image source: Getty Images.

Nike executives said at the time that the drop had nothing to do with demand, which appeared to be robust. The chain simply had some shipping challenges related to COVID-19 that should be resolved rapidly, they predicted.

A quick return to growth in the U.S. in March should help Nike report sharply higher sales this year. But the better news for investors is that profit margin is rising thanks to increasing prices and a higher proportion of e-commerce sales. These trends should all contribute to great returns for shareholders as the pandemic threat fades.

2. TJX Companies

Off-price retailing giant TJX Companies was heading into the pandemic with the wind at its back. It had steadily gained market share over the prior decade and was set to become a Dividend Aristocrat with its 25th consecutive payout raise on the way in 2020. COVID-19 derailed those trends, mainly thanks to prolonged store shutdowns.

TJX has since restored its dividend, but investors are still waiting for that growth rebound. Comparable-store sales fell 3% in the fiscal fourth quarter, a period during which 13% of its global store base was closed.

Reopenings and improving demand could have sales quickly returning to normal levels over the next few months. The retailer should also get a big boost from its home furnishings offerings, as sales in this niche are booming. Look for CEO Ernie Herrman and his team to sound an optimistic tone on these points in the next earnings report in late May.

3. Target

Few retailers capitalized on consumer demand shifts during the pandemic as well as Target did. The retailer captured billions of dollars in additional market share by leaning on its omnichannel selling platform and quickly changing merchandising strategies as consumers first demanded essentials before loading up on premium products like home furnishings and electronics.

An apparel boom might add more fuel to the fire. The clothing segment accounted for almost 19% of Target's business before the pandemic scrambled demand trends in 2020 and pushed it down to 16% of sales. A sharp rebound in 2021 would support another year of impressive sales gains. And Target's many exclusive brands will allow it to capitalize on the increased store traffic.

It's likely that any retailing rebound will be bumpy, and so each of these stocks is in for a bumpy few quarters. But the businesses entered the pandemic with strong momentum and are poised to exit the crisis with even better operating results.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$101.18 (-1.00%) $-1.02
Target Corporation Stock Quote
Target Corporation
TGT
$142.38 (0.81%) $1.15
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
TJX
$56.04 (0.34%) $0.19

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

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