Apparel stocks have been so hit or miss in the last few years that I can't blame anyone for taking a pass from them. But right now they are all hit and you can't really pass them up.
That's my takeaway from the parade of retail earnings we have seen: almost every stock in the apparel group is a buy, except, oddly, the one area that had been hot -- accessories, namely handbags. It seems as if you can't give those away, as people who are wallowing in Coach (COH), Kate (KATE) and Kors (KORS) know all too well.
Now some of the apparel companies have been strong from ages. Take Under Armour (UA). Earlier this spring the sports apparel company reported a terrific quarter in every fashion. But UA doesn't trade with the apparel cohort. It trades with the high-growth, high-multiple contingent. Its stock fell as if it were a cloud, internet e-commerce or biotech company. The rollover was, frankly, absurd. The plummet from $62 to $46 beginning in March and ending with a tripe bottom in May was just plain hideous.
Yet the company just kept delivering and when Under Armour reported another solid quarter in July, after the high-multiple swoon was over, the stock took off like a rocket, as it should have in March, and has kept climbing since. The bounce from $46 to $72 has been breathtaking and even though it is now one of the most expensive stocks that I follow at 49x earnings with a $15 billion valuation, I expect the terrific performance to continue. Yes, I would, cowardly, only buy it on a pullback, but when you get pullbacks most people are too scared to pull the trigger. Don't be.
But Under Armour, up 66%, is more the exception than the rule. The group's been struggling and struggling, for one particular reason: there's been too much inventory all across the board. That's why these last few weeks were so eye-opening. One after another, we heard from retailers that are talking about having less inventory than they thought. Kohl's (KSS), Nordstrom (JWN), JC Penney (JCP), Macy's (M), they all had lean inventories.
That's why people shouldn't have been all that shocked about the good quarter from PVH (PVH). The plurality of stores that sell Calvin Klein and Tommy Hilfiger, the two signature brands, had lean inventories. That was the tell for PVH. In fact, it was the heritage brands, especially the Van Heusen and Izod retrial stores that disappointed, not the department store sales.
Manny Chirico, the CEO of PVH, said the same when he nailed the quarter. Commenting that while Tommy Hilfiger reported an 18% earnings increase, a blazing hot number, he also said "the other positive news coming out of the quarter is that inventories, our inventories AS WELL AS OVERALL INDUSTRY-WISE INVENTORIES, at retail are clean and back in balance as we enter September."
That's huge, people. Huge.
In PVH's case, there's even better news. The big spend for Calvin Klein, necessitated by the horrendous shape of Warnaco -- which PVH bought for $2.9 billion in 2012 -- will soon be behind them. This is going to allow cash to build and the balance sheet to revert to tip-top shape. That's what many of the analysts, including the regrettable hold-to-sell call from Merrill Lynch Friday, don't seem to get. If Manny could stop being distracted by the need to fix up Calvin Klein, then he can turn on the jets. I think he can now do that, particularly because the most challenged part of CK, the jean wear and underwear collections, have turned positive.
There's other positive news too, namely that the raw cost ingredient of cotton has truly cratered. PVH made a huge number of terrific sourcing moves when cotton was off the charts high to try to save money. Now it's got the cheaper sourcing, the cheaper cotton and the better sales, which allows for gross margins to expand and earnings surprises to occur. I am very excited about this stock here and wish the trust owned more of it.
We can, however, extrapolate what's going on at PVH to VF Corp (VFC). Now VFC, unlike PVH, has been far more consistent with earnings, which is why it hit a 52-week-high last week. But I am thinking that this stock, with a pretty strong emphasis on denim and huge cotton expenditures, might surprise when it reports in late October. If you think, as many do, that winter's going to be a cold one, you could get the added boost of North Face, a consistent winner even when the weather's not in its favor.
But there are two other stocks that keep popping up as being the most exciting in the apparel industry right now, Skechers (SKX) and Deckers (DECK). The former is up 87% because it is excelling in casual wear pretty much everywhere worldwide and it has more momentum than any other company in the apparel business. While I have been a champion of the stock for ages, I think the move can continue unabated. Don't worry; it, too, has its dips. Momentum players should jump into them whenever they occur.
Finally, I think that the tipping point has occurred for Deckers. Lots of people have given up on Deckers, because they think it is a tired one-trick pony, Uggs.
I don't blame people for feeling this way. The company has relied far too long on this one brand and even as it has its strength, the Deckers story had become one of wool costs and winter weather.
What I think people are missing, and what I heard from the CEO, Angel Martinez, last week, is that Deckers -- which changed its name from Deckers Outdoor to Deckers Brands -- is truly a multi-dimensional company now. Not unlike what Martinez did to Reebok during his stay there.
Reebok had been a small sneaker company until aerobics took off and Martinez designed a shoe specifically for aerobics. What a homerun that was. Just a classic example of coming up with a shoe to take advantage of an unmet need. As someone who rode the Reebok wave from the single digits to $100, when I hear that the same man who invented the shoe that truly created a powerhouse company has a new unmet need that he's filling, the yoga shoe, I don't debate the proposition. I just want to buy it.
Reebok didn't stand still with just the aerobic shoe. Martinez then created the Rockport shoe, which met the need for dress with casual comfort. He's doing that now with the men's version of Uggs, a full dress line that is, as Martinez told me, the first new casual upscale shoe in ages and one that could become THE shoe for when you get home and when you want to go out. As someone who wears Skechers on that basis, I'm not as certain. But Skechers is targeting my age group, and Martinez is targeting the age group of Tom Brady. I bet he wins, although Brady sure didn't this weekend.
Just like Reebok, though, Martinez doesn't want just a couple of ways to win. He's also rolling out a runners' shoe, Hoka, that's taking the running world -- if I can judge from reading runners magazines -- by storm. Its claim to fame? People with bad knees who have left the running world have been able to get back in the game, including Angel, who was a competitive runner. What I like about the runners' shoe in particular is that the company itself is making NO medical claims whatsoever. All of the evidence is from social media; individual former runners and those runners that run ultra marathons who are always worried about losing their knees to surgery.
That's who we trust.
So from low inventories to new categories and unmet needs to lower raw costs, to almost solidly domestic customers, I think this apparel group is just about as good as it gets right now. It's a high beta group; always has been. But it's got everything going for it right now.
I feel that with many groups you are trying to step in front of a freight train. With this group, you are riding one.