In recent years, few apparel stocks have been decent stocks to buy. Independent manufacturers like Columbia Sportswear (NASDAQ:COLM) and V.F. Corporation (NYSE:VFC) have held up reasonably well. But even those names have underperformed most consumer stocks, and apparel retailers for the most part have done much worse.
That’s particularly true for mall-heavy names. That space has seen a number of bankruptcies this decade, and many more are likely on the way. Even category leaders like Gap (NYSE:GPS) and L Brands (NYSE:LB) have seen their share prices plunge. With brick-and-mortar traffic still negative and mall real estate investment trust pricing in more pressure, the declines in that category can and likely will get worse.
All that said, there are decent apparel stocks to buy out there, and even some with a significant indoor mall presence. These three names all have strong bull cases, albeit for very different reasons. What they share in common is that they look like opportunities that potentially are obscured by the overall negative (and justified) sentiment toward the sector.
Apparel Stocks to Buy: The Children’s Place (PLCE)
The Children’s Place (NASDAQ:PLCE) is one of those mall-based retailers whose stock has struggled of late. Shares are down by nearly half from 2018 highs, and have declined over 40% just in the past twelve months. After the declines, PLCE stock is cheap, but at 11x forward earnings, not amazingly so compared to other apparel stocks at the moment.
But there are three reasons to see the declines as overdone. First, The Children’s Place is mall-heavy, but it’s quickly and sharply reducing that exposure as leases expire. Those store closures shouldn’t have as big an impact on revenue as an investor might expect, given that The Children’s Place has developed an impressive e-commerce business. Online sales were 29% of the total in the second quarter, up 2.4 points from the year-prior period.
Second, current earnings (and likely those next year) are taking a hit from the second bankruptcy of rival Gymboree. Gymboree’s store closings flooded the market and forced The Children’s Place to lower pricing as a result. That headwind will fade, and The Children’s Place has acquired some of that company’s assets, which should drive growth in fiscal 2020 (i.e., next year) and beyond.
Finally, profit margins should expand. The company is investing behind the business, but those investments should fade next year as well. Same-store sales can get back to positive territory (as they had been for several years before recent quarters) as well.
The bear case for mall retailers is that the news is only going to get worse. But for The Children’s Place, that doesn’t look like the case. Lower spending and better sales can improve profits, while the loss of a key rival should be a long-term tailwind. Despite those positives, PLCE is valued like just another mall stock, but I believe it’s better than that.
Boot Barn (BOOT)
The obvious worry with Boot Barn (NYSE:BOOT) is valuation. BOOT stock trades at nearly 24x 2019 consensus earnings-per-share estimates. That’s not necessarily a huge multiple by the standards of the market, but it certainly is for an apparel retailer.
And investors have not done well paying growth multiples for apparel stocks (or most consumer stocks outside of tech). Under Armour (NYSE:UA, NYSE:UAA) is one obvious example, with Duluth Holdings (NASDAQ:DLTH) another one closer to Boot Barn’s target blue-collar/middle-class/rural demographic. It’s not just value stocks that have struggled in that category; save for Lululemon Athletica (NASDAQ:LULU), investors looking for growth stocks to buy in apparel have also been disappointed.
But the argument for BOOT is that it is much closer to LULU than to DLTH. It’s a clear leader in the Western wear and work wear categories. Private-label brands are growing. So is the women’s business. Like Lululemon, Boot Barn has room for more growth via store openings, and a healthy e-commerce business.
There still seems to be a multi-year opportunity ahead for Boot Barn. Same-store and new-store sales can drive revenue growth. Private-label penetration will help margins. Although 24x is a big multiple for an apparel play, many investors thought a mid-20s price-to-earnings multiple was too high for LULU as well.
Lands’ End (LE)
There’s seemingly no shortage of reasons to avoid Lands’ End (NASDAQ:LE). At 20x next year’s earnings, LE stock hardly looks cheap. The company’s long association with Sears Holdings (OTCMKTS:SHLDQ) no doubt tarnished the Lands’ End brand. And, as noted, apparel stocks across the country have real risk.
But there’s actually an interesting case for LE stock below $12. Sears no doubt did some damage to the brand. But despite that association, the loss of “shop in shops” at Sears locations, and a disastrous turnaround effort earlier this decade, overall revenue has held up reasonably well. Lands’ End seems to have a committed customer base, to whom it’s marketing more effectively under CEO Jerome Griffith, who took over in 2017.
Valuation doesn’t look necessarily attractive on a P/E basis, but it can improve. Margins remain thin and debt is somewhat high, particularly for the category. Modest profit improvements and reduced debt (and interest expense) can move earnings per share significantly higher in the next few years.
Here, too, there are risks. A macroeconomic downturn could interrupt the turnaround. Lands’ End is opening stores which adds lease expense and commitments, and risk. And it simply may be that margins will stay low, rather than recovering as hoped.
That said, in a space where turnaround efforts are oft-discussed but rarely successful, Lands’ End has a chance for material improvement, and LE stock has a chance at big upside.
As of this writing, Vince Martin is long shares of The Children’s Place and Gap Inc.