What happened

Apparel stocks had a rough week this week, with several industry players falling between 7% and 12% as of early Friday morning, according to data provided by S&P Global Market Intelligence.

That slump compares to a flat performance for the wider market and came from concerns about the scale of the pandemic rebound ahead. Those worries struck many stocks that are tied to the COVID-19 recovery trade, but apparel specialists were among the hardest-hit.

Here's how a few standout stocks fared through the market close on Thursday evening:

  • American Eagle Outfitters (AEO 5.11%) fell 7%.
  • Revolve Group (RVLV) dropped 8%.
  • Gap (GAP 4.91%) fell 7%.
  • Designer Brands (DBI 4.94%) declined 12%.
Three shoppers sit on a bench at an outdoor mall.

Image source: Getty Images.

So what

Each of these stocks had rallied through the first six months of the year as investors bet their businesses would soar during plunging COVID-19 case levels. The optimism was based on hard data, too. Designer Brands said in late May that it had just returned to profitability as Q1 comparable-store sales jumped 52%. American Eagle Outfitters was similarly bullish in its early June announcement of a 31% dividend hike following record first-quarter sales. "Our brands are stronger than ever," CEO Jay Schottenstein said.

Still, a mix of profit taking and new concerns over a weaker post-pandemic rebound had Wall Street feeling more cautious about these rallying stocks. 

Now what

COVID-19 cases remain elevated in some markets, and the new Delta variant of the virus is spreading more readily in countries with lower rates of vaccinations. Another round of costly retailing restrictions is a major concern for that reason. Localized outbreaks might be enough to slow the pace of recovery for some of these booming apparel businesses.

But the long-term outlook is just as bright as it was last week. Gap credited booming digital sales growth as a key factor in its recent demand spike, despite rising traffic at its stores. That success has been shared by most industry peers, meaning they should continue growing swiftly through any additional COVID-19 restrictions.

And major selling markets like the U.S., China, and Europe appear to be less susceptible to the type of widespread outbreaks that would lead to shutdowns. Their populations have benefited from wide access to vaccines in 2021.

The bullish thesis for fashion specialists like Revolve Group remains intact, even if sales growth trends are bumpy over the next few months. Investors likely haven't seen the last attack of volatility for these stocks, which have all trounced the market so far in 2021 even after this week's pullback. But it will take a significant economic shock to derail their rebound hopes.