The market sell-off has created some incredible bargains in certain industries. With consumers shifting their spending away from goods to services as inflation heated up last year, top apparel brands saw their sales and profits tumble. But this means the inevitable recovery in retail shopping could send beaten-down apparel stocks back toward their previous highs.
Shares of VF Corp. (VFC +5.95%) and Farfetch (FTCH +0.00%) are currently trading about 74% and 93% off their all-time highs. Here's why investors can confidently pull the trigger on these absurdly cheap stocks.
Key Data Points
VF Corp.
VF Corp. had a rough outing last year, with revenue through the first nine months of the year down 2%. Elevated inventory levels and slowing retail spending were major headwinds. But this obviously doesn't reflect poorly on VF's brands. The company owns The North Face, Timberland, Vans, JanSport, and the popular streetwear brand Supreme, among others, which are very capable of growing much faster.
In the three years leading up to the pandemic, VF Corp. grew revenue at an annualized rate of 16% per year. The challenges in the economy last year knocked it off course, but management is implementing a strategy to accelerate growth over the next few years.
Management is shifting more resources to its most attractive opportunities. This involves cutting the dividend payment to shareholders to boost free cash flow and exploring the sale of non-essential assets, on top of lowering costs.
The company's international growth has been much stronger than growth in the Americas region, which is a sign of its potential. For example, while Vans revenue fell 13% year over year last quarter, sales in Europe and Asia (excluding China) were up. The recovery in China's economy is a catalyst for more growth in the near term.
Moreover, VF's outdoors brands should lead the stock higher. The North Face and Timberland were the strongest-performing brands last year. This reflects consumers' appetite for spending more time on activities coming out of the pandemic, and it has helped the company maintain positive top-line growth in a challenging economic environment.
Clearly the retail environment won't always be this weak. Consumers will be out shopping in full force eventually. Meanwhile, investors can buy VF shares at a bargain price-to-earnings multiple of about 11.75 based on this year's earnings estimate.
OTC: FTCH
Key Data Points
Farfetch
Farfetch is another top apparel stock that is offering a once-in-a-decade buying opportunity. Think of it as the Shopify of the luxury goods market -- a roughly $1 trillion industry, according to Bain. Farfetch operates an e-commerce marketplace, along with several services to help brands grow their business, including marketing and customer service solutions. The company generates most of its revenue by retaining a commission on the transactions completed between buyers and sellers.
Farfetch had a mixed year. Revenue reached a record, growing 12% year over year on a constant-currency basis. But the deceleration in gross merchandise value (GMV) and higher operating costs are primarily what caused the stock to collapse to new lows.
Management guided for improving growth in 2023 as it passes the previous year's headwinds and launches new partnerships with leading department store Neiman Marcus Group and top luxury brand Ferragamo. And Farfetch reached an agreement last year with Richemont and Symphony Global that will see Yoox Net-a-Porter and Richemont adopt Farfetch's platform solutions.
The recent partnerships are huge wins. Farfetch is positioning itself as the leading marketplace and technology solutions provider for luxury brands and boutiques. It's good to see a nearly 50% increase in the marketplace's total value of goods following its partnerships with top brands. A growing selection of goods naturally attracts the largest customer base, and Farfetch appears to have momentum on this front.
With management guiding for positive growth and free cash flow in 2023, the stock could be poised to rebound off these lows. The stock is currently trading at less than 1 times trailing revenue, which is less than half the market average.
