The development of several coronavirus vaccines recently and hope around their effective and speedy deployment next year has fostered some bullishness in the stock market over the past month. Several analysts and investors believe that this year's tech rally will shortly expand into other sectors that were impacted by the pandemic. As such, Goldman Sachs (GS) Analyst Alexandra Walvis has analyzed the apparel sector and reported that she expects the apparel space will rebound next year as many more people begin to emerge from their locked-in lives, venturing out beyond their homes for work and play.
As the coronavirus pandemic swept across America this year, many apparel retailers were forced to close their stores; they were also impacted by precipitous fall off in consumer spending on discretionary items. According to the U.S. Census Bureau, clothing and clothing accessories industry sales plummeted 91.6% in April to $2.9 billion, compared to December 2019’s $34.5 billion.
However, a steady recovery in consumer spending has taken place in recent months even amid the crisis, and sector sales at the end of third quarter totaled $17.76 billion. Though that figure is still 48.6% down versus 2019, it is considered an excellent indicator of the industry’s resilience.
Here are three apparel stocks that have been upgraded by GS: Levi Strauss & Co (LEVI), Ralph Lauren Corporation (RL) and PVH Corp. (PVH). Let’s have a closer look at each.
Levi Strauss & Co (LEVI)
LEVI is one of the world's largest brand-name apparel companies and a global leader in jeans wear. The company designs and markets casual wear and related accessories for men, women, and children under several brands. Its products are sold in more than 110 countries worldwide through a combination of chain retailers, department stores, online sites, and a global footprint of approximately 3,000 retail stores and shops-in-shops.
LEVI received a double upgrade from GS, which raised its rating from “Sell” to “Buy” with a price target of $23.00 per share. The firm said “LEVI has delivered on several initiatives since the emergence of the COVID-19 pandemic and importantly the company has seen an acceleration in growth in its e-commerce business which is now profitable. As we look ahead, we see an attractive risk/reward as LEVI shifts sales to the DTC channel and continues to diversify its U.S. wholesale business to higher-growth partners, driving stronger sales, margins, and returns.”
LEVI reported top-line sales of $1. billion for its fiscal third quarter ended August 2020. This represents a 27% decline year-over-year. This was due to reduced traffic and store closures. The company’s global digital revenues grew nearly 50% compared to the same period in the prior year, however, contributing 24% to its revenues, which doubled versus the prior year. Adjusted EPS came in at $0.08, representing a significant decline from the year-ago value of $0.31.
LEVI is elevating its already iconic brand by investing in digitization. The company is accelerating its growth by cultivating new distribution channels for its fast-growing direct-to-consumer business. As a result, the consensus EPS estimate for next year stands $0.12, indicating a year-over-year growth of 758.3%.
LEVI closed yesterday’s trading session at $20.33, representing a5.4% gain year-to-date. The stock is up 18.6% in the last six month and is currently trading at just 4.3% below its 52-week high of $21.24.
It is no surprise that LEVI is rated a “Strong Buy” in our POWR Ratings system. It also has an “A” in Trade Grade, Buy & Hold Grade and Peer Grade, and a “B” in Industry Rank.
Ralph Lauren Corporation (RL)
RL is a global leader in the design, marketing, and distribution of premium lifestyle products in North America, Europe, Asia, and internationally. The company offers several products and brands primarily in five categories: apparel, accessories, home, fragrances, and hospitality.
GS went for a two-notch upgrade for RL to a “Buy” rating with a target price of $141, based on confidence in the company's digital channels and management's new brand initiatives. GS’ report said, “While we remain guarded on underlying brand momentum, we acknowledge several management initiatives to elevate the brand and believe RL will benefit from an inflection in the overall apparel category. In addition, we view RL as a key beneficiary of the direct to consumer and Digital channel shift detailed in this note."
RL delivered net sales of $1.2 billion in its second quarter ended September 2020, as demand in China returned to pre-COVID growth rates. Though this level of sales implied a 30% year-over-year decline, the company’s average unit retail sales increased 26%, driven by brand elevation and favorable geographic and channel mix shifts. RL’s adjusted EPS came in at $1.44, compared to the year-ago value of $2.55.
In September, RL announced steps to accelerate its Next Great Chapter plan to deliver sustainable long-term growth and value creation, which includes establishing a simplified global organizational structure and rolling out enhanced technology platforms to support the company's global operations. Moreover, the market expects EPS to increase 331.8% next year.
RL has lost 15.6% year-to-date to close yesterday’s trading session at $98.90. The stock is already up 27.4% in the past month and is currently trading at just 5.6% below its 52-week high of $104.76.
Under our POWR Ratings, RL has been accorded a “B” rating for Trade Grade and Industry Rank. Within the 65-stock Fashion & Luxury industry, it is ranked #26.
PVH Corp. (PVH)
PVH operates as an apparel company that designs, markets, and retails men's and women's clothing and accessories in the United States and internationally. The company operates through six segments – Tommy Hilfiger North America, Tommy Hilfiger International, Calvin Klein North America, Calvin Klein International, Heritage Brands Wholesale, and Heritage Brands Retail.
PVH was elevated to “Neutral” from “Sell” by GS, with a new price target of $102. The firm believes that “PVH has accelerated its strategic initiatives during the pandemic, including scaling digital direct-to-consumer margins and realizing real cost savings, which will benefit the company going forward.”
Revenues for the last reported third quarter ended November 30, 2020 declined 18% year-over-year to $2.12 billion. The company’s revenue from digital channels grew 36%, with sales from its directly operated digital commerce businesses up 70% compared to the prior-year period. Non-GAAP EPS came in at $1.32, compared to the year-ago value of $3.10.
In its third-quarter letter to shareholders, PVH noted “It is clear where we are winning with the consumer – in our international businesses, across our digital channels, and with casual assortments – and we increasingly are shifting our business towards these channels and categories.” In line with its progress here, the market expects EPS to rise 441.6% next year.
PVH closed yesterday’s trading session at $41.33, with a year-to-date gain of 7.5%. The stock had hit a high of $35.23 earlier this month. PHM is up more than 52.6% in the past six months.
According to the POWR Ratings, PVH is a “Buy.” It also has an “A” for Trade Grade, and a “B” in Buy & Hold Grade, Peer Grade and Industry Rank. In the 65-stock Fashion & Luxury Industry, it is ranked #17.
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LEVI shares were trading at $20.68 per share on Tuesday morning, up $0.35 (+1.72%). Year-to-date, LEVI has gained 8.33%, versus a 15.65% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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