It's been about six months since I last discussed the performance of the stocks of branded vs. unbranded apparel manufacturers and retailers.
That column was a follow-up to a previous column last year in which I discussed the pattern that was developing of the unbranded manufacturers and retailers outperforming the branded ones. This was indicative of the lack of wage and job growth, especially in the 25- to 44-year-old demographic, that was driving consumers to forgo pricier branded apparel and allocate those discretionary funds into unbranded apparel and other areas.
Those other areas are very important from an economic standpoint because the majority are in low-multiplier things like health care expenses, insurance premiums and utilities. These areas must be purchased by necessity and are thus funded with disposable income.
What's left after those necessities are funded is called discretionary income, and that's what is used to pay for everything else, service consumer debt and fund savings.
The germane point is that as the funding requirements of necessities increase, the money available for discretionary spending decreases and consumers have to make tough choices about how to allocate those reduced available dollars.
The pattern that began to emerge over the past few years of shifting money away from expensive brand-name clothing to less-expensive unbranded clothing has continued over the past six months, as is apparent in the relative performance of stocks in both groups.
In that time, the performance of the branded retailers has been bizarre, with no collective trend, and extremes of minus 31% to positive 24%.
-- L Brands (LB) +12%
-- Abercrombie & Fitch (ANF) -28%,
-- Aéropostale (ARO) -31%
-- American Eagle Outfitters (AEO) +19%
-- Express (EXPR) +16%
-- Gap (GPS) -4%
-- Ascena Retail Group (ASNA) +12%
-- Urban Outfitters (URBN) +4%
-- Chico's FAS (CHS) +7%
-- Ann (ANN) +24%
-- Ralph Lauren (RL) -28%
-- PVH (PVH) -15%
The performance of the unbranded retailers, on the other hand, with the exception of Wal-Mart (WMT), has continued to exhibit the collective upward trend that's been in place for the past few years.
-- TJX Companies (TJX) +7%
-- Ross Stores (ROST) +14%
-- Burlington Stores (BURL) +24%
-- Costco (COST) +3%
-- Target (TGT) +11%
-- Wal-Mart -10%
-- Amazon.com (AMZN) +29%
The differences between the two groups are starkly evident in their relative performances of the past two years, wherein nine of the 12 branded retailers are down in double-digit percentages, one is down about 6% and only two are positive.
Of the seven unbranded retailers discussed here, one is up over 100% in the past two years, five are up in double-digit percentages, and only Wal-Mart is about unchanged.
Given the lack of wage and job growth that continues to be evidenced in the economic reports, coupled with the increasing costs of necessities and the decreasing rate of growth in retail sales that has resulted from it, the probability is that the trend of the unbranded apparel manufacturers and retailers outperforming the branded ones is likely to continue.
However, there's a bit of a conundrum that arises from the performance of the branded apparel companies vs. the broader universe of consumer-goods retailers I wrote about two days ago in the column "Retail: Sales Are Down but Stocks Are Up."
Of these three general groups -- branded apparel, unbranded apparel and consumer-goods retailers -- the unbranded apparel companies have greatly underperformed.
What appears to be occurring is that consumers, when forced with the necessity of how to allocate shrinking discretionary funds, have decided that the economic utility gained from a designer clothing label is less than the utility gained by way of substituting with a less expensive non-designer label.
For many of the consumer-goods companies discussed in the previous column, however, there is not an easily available substitute, which leaves the consumer with having to either purchase or forgo.
Complicating the matter further is that aggregate retail sales figures imply that consumers are not deciding to purchase goods for which there isn't an easily available substitute and are forgoing purchases.
That implies that the negative performance of the branded apparel companies is more in line with economic and consumer reality than is the positive performance of the consumer-goods retailers.
The bottom line is that it is probable that the trend of ubranded retailers outperforming branded retailers will continue and that the broader base of consumer-goods companies should begin to exhibit this same trend by reversing their positive performance of the past year.