Investors often overlook fashion stocks in favour of technology companies. This is a mistake: the best apparel companies show very strong and stable growth. This is a highly competitive market and margins can be low, but it’s still possible to find gems that yield over 50 per cent a year. Read on to find out the best fashion stocks you should be watching.
What’s in store for fashion stocks in 2020
An average consumer buys 60 per cent more clothes now than in 2005. The apparel industry grew by 4.5 per cent in 2019 and is expected to expand by 5 per cent more in 2020. E-commerce acts as one of the main growth drivers, as well as sustainable and environmentally-friendly goods.
Though the market as a whole is growing, the situation varies widely across different segments. For instance the sales of bags and shoes are falling – so you won’t find any companies from this niche on our list. By contrast, off-price retail chains, athleisure and luxury are all doing well.
The US-China tariff war was a major source of uncertainty in 2019, with many fashion brands relying on imports from China. In the next few months, the coronavirus will set the mood for the apparel market.
The TJX Companies (TJX)
TJX is the leading US off-price retailer. It sells high-quality apparel at low prices across its store chains TJMaxx, Marshalls, HomeGoods, and others. The company's 2019 results exceeded expectations, with sales up 6 per cent at $39 billion. TJX has also raised its annual dividend for 23 years straight. In 2019, TJX share price grew by 36.5 per cent, outperforming the S&P500.
TJX uses a bulletproof business model: since its discounted offers change all the time, customers keep coming back to the store to check for the new deals. Most of the apparel comes from other retailers’ unsold inventory, so TJX doesn't need to rely on imports. This means it actually benefited from the US-China trade war, when many other retailers were hit by import tariffs.
Should you buy TJX? Following impressive growth in 2019, TJX also looks like one of the best fashion stocks to buy in 2020. With its sales growing every year for the past 23 years, TJX doesn't show any signs of decline. Moreover, since it's mostly active in North America, the ongoing coronavirus outbreak is unlikely to affect it negatively.
Lululemon Athletica burst onto the apparel scene like a comet. In Q3 2019, the lifestyle, fitness and yoga retailer saw its year over year sales increase by 17 per cent and revenue by 23 per cent, beating analysts’ expectations. The market was bullish about LULU stock all through 2019, with the price growing by 90 per cent.
The US still accounts for most of Lululemon's sales, but its international business has grown by 35 per cent in 2019, especially in China, where online sales increased by 60 per cent in Q3. The retailer's holiday sales were particularly strong, with a 480 per cent increase over average daily figures. In fact, the holiday performance was so strong that on January 13, 2020, the company raised its revenue forecast for Q4. As a result, the share price jumped to an all-time high of $245.18.
Should you buy LULU? Lululemon's stock is rather expensive at the moment, but it’s still on most analysts’ lists of the top fashion stocks. The retailer is expanding its menswear lines and launching new beauty products. The company's five-year plan also includes increasing its international sales fourfold. Overall, one can expect a sustained growth in profits, even though operating expenses are getting higher.
Nike (NYSE: NKE)
Nike started with a runner and a coach from the University of Oregon selling sneakers out of the back of a car. Today, it’s the world’s most valuable apparel brand, with an annual revenue of over $35 billion.
2019 was a strong year for Nike. For Q2, the company reported an 11 per cent year-on-year increase in gross profits and 10 per cent higher revenues. The growth was fuelled both by bricks-and-mortar store sales (with a 23 per cent increase in China) and by online sales. 2020 began equally well, with the NKE share price reaching an all-time high of $104.58 on January 21.
Should you buy NKE? Nike isn't a cheap stock, which can be a problem for some investors. At the time of writing, the price was down to $96.3, or 8.5 per cent higher than its average 52-week price. However, this is still 8 per cent lower than on January 21.
The current dip could present a buying opportunity. However, one should consider the potential impact of the coronavirus crisis in China. Since China is the main growth region for Nike, the outbreak can hit sales hard, at least in Q1 2020. Once this risk is priced in by the market, the share price may fall further, making NKE one of the most attractive fashion stocks to invest in.
The world's largest luxury company is much more than clothes. LVMH's offerings run the full gamut of premium products: fashion (Louis Vuitton, Christian Dior, Marc Jacobs, Fendi), jewellery (Bvlgari), watches (Chaumet, Hublot), spirits (Moët & Chandon, Hennessy), perfumes (Givenchy, Guerlain), and retail (Sephora) – 75 brands in all.
Thanks to this diversification, the company's performance remains strong even under the conditions of uncertainty. On January 28, 2020, the company announced record results for 2019. The full-year report reveals that overall revenue increased by 15 per cent and net profit by 13 per cent. Fashion in particular is booming with a 20 per cent rise in revenue.
Sales growth is reflected in the share price, which rose by 59.5 per cent in 2019, from $58.46 to $93.27. In 2020, the price peaked on January 17 at $97.18.
Should you buy LVMH? In late January 2020, LVMH price slid down 10 per cent from its January 17 peak. The drop is mostly due to the coronavirus fears: China is one of the key markets for luxury goods. However, the virus is unlikely to affect LVMH's business in other countries. As for China, the sales can rebound once the outbreak is contained. Overall, the current dip could be an interesting buying opportunity.
The top fashion stocks on our list yielded their investors between 30 per cent and 90 per cent in 2019. In 2020, fashion companies still have great potential, even if they aren't as exciting as hi-tech stocks. After all, people will never stop buying clothes – even during virus outbreaks and trade wars.
Contributor: Alisa Orlova