Business Tough, But Stocks Rebounding for Fashion Companies (2024)

Business is tough, but stocks are coming up — welcome to the topsy-turvy world in which publicly traded fashion companies live.

While the two themes seem to be pushing the industry in opposite directions, investors are actually taking into account last year’s funky weather and the West Coast port disruption, as well as current valuations. As a result, they’re betting (and they always have to bet one way or the other) that the only direction for shares to go is up.

“My thesis is that investors recognize that sales have improved (and so have margins) since fiscal yearend. They also know that the odds of having worse weather for holiday ’16 than in ’15 are one in 100,” said retail expert Jan R. Kniffen, chief executive officer of Kniffen Worldwide Enterprises. “So, since the ‘bad news’ is out, the water seems safer. I actually told my clients that all of the vendors and all of the retailers were buys, but only after the news was out. That proved prescient.”

U.S. retailers just weighed in with 2015 results and generally painted a dark picture of an industry in flux, coping with the digital revolution, a port dispute that gummed up supply lines and cold-weather gear hanging on the racks as holiday shoppers sweated-out unusually warm weather.

Consumer companies are expecting more pain this year, with slow wage growth holding back shoppers even as lower gas prices leave them with some more spending money.

Seventy-four percent of consumer discretionary companies in the S&P 500 have projected negative earnings per share for the first quarter of 2016, according to FactSet. All told, 119 companies out of the S&P 500 have issued EPS guidance for the quarter, with 93 negative forecasts and 26 positive.

The fashion and retail firms that have talked down the coming year vary from higher-end players like Ralph Lauren Corp. to the mass department store chains like Kohl’s Corp. Several European players brought up currency issues as they discussed their outlooks for the year. Kering SA is said to expect volatility in the short term due to currency fluctuations and an unsettled economic environment, while Salvatore Ferragamo wrote of the geopolitical environment affecting elements of the luxury sector.

In its recent earnings statement, Hermès wrote, “sales growth in 2016 could be below the medium-term goal of 8 percent revenue growth at constant exchange rates due to the economic, geopolitical and monetary uncertainties around the world.”

Looking ahead to its fiscal fourth-quarter ending April 2, Ralph Lauren said it needed to clear out end-of-season inventories. It expects revenues for the three months to be flat to down 2 percent. The company also projected that foreign tourist traffic would continue to be pressured. Lauren’s stock is down 27 percent to $95.55 over the past year, but has risen almost 4 percent in the past month.

Kohl’s said revenues for the current fiscal year could range from down 0.5 percent to up 0.5 percent as the company clears out inventory. Kohl’s wants to reduce inventory by 10 percent in each store by 2017 and is also trimming its store fleet. The retailer’s stock is off 38 percent to $45.93 for the past 12 months and down 1.6 percent for the past month.

“I don’t think [retailers] really have any idea how much resources they need to devote to their businesses and how quickly they can turn it into earnings,” said Jay Silver, a managing director at professional services company CBIZ Inc. “Retailing is so different. How do you drive that to the bottom line?”

Silver pointed out that the e-commerce change has occurred so quickly and is so dramatic that retailers are struggling to adapt to the change. Implementing a digital strategy is expensive and disrupts the company’s financial statements.

But investors who want to get in early on a good thing are starting to buy into fashion.

The 100-issue WWD Global Stock tracker has dropped by more than 4 percent over the past year, but is bouncing back. The group is up almost 3 percent for the past month, with 67 stocks advancing and 33 declining.

In Europe, companies with a strong e-commerce presence have performed the best. In the past month, Burberry Group plc has popped more than 11 percent to 13.22 pounds, or $18.17, and made a nice comeback considering it has declined by 27 percent for the past year. The new Yoox Net-a-porter Group is up 3 percent in the past month to 26.43 pounds, or $29.53, capping off a rise of 21 percent for the past year.

Among American retailers, it was the downtrodden that performed the best. in the past month, adding to the 41 percent stock gain over the past year to trade at $31.41. J.C. Penney Co. Inc. exploded with a 30 percent increase in the past month and has made a 36 percent gain for the year.

“The bad news is priced in,” said Deborah Weinswig of Fung Business Intelligence Centre. “I think the story out there is stronger than it’s been in a while.”

Weinswig pointed out that the coming comparisons will be easier as retailers go up against last year’s port strike and the terrible weather in the early part of 2015.

The first quarter of 2015 was colder than normal and the wettest since 2011, according to Planalytics. The rain continued into the second quarter, turning the period into the wettest in 20-plus years, negatively hitting store traffic.

Weinswig also sees a lot of sentiment around mergers and acquisition activity and expects the industry could see further consolidation. “We could see capacity taken out of the market and fewer stronger players,” she said.

Analysts at Wells Fargo noted that store traffic has picked up, with the month-to-date traffic for March proving to be relatively solid.

“Following a choppy start to the year, retail stocks have regained momentum, as better-than-feared numbers, relatively inexpensive multiples and fairly stable outlooks have all helped the group go through a meaningful re-rating over the past month,” the analysts said.

Wells Fargo also found that only one-third of the retail group was more promotional than last year. The rest were either the same or less promotional. They pointed out that investors are particularly fond of off-price brands like TJX Cos. Inc. and Ross Stores Inc. Beauty names like Ulta Salon, Cosmetics & Fragrance Inc. and Sally Beauty Holdings Inc. are also big favorites.

The markdown days for fashion stocks might be coming to an end.