This year's holiday season is likely to be one of wardrobe replenishment.
That hypothesis is rooted in two notions. First, with the outcome of Election Day looming over Black Friday and the rest of December like a dark cloud, consumers are likely to approach holiday shopping with a degree of caution.
If Hillary Clinton gets elected, people will probably be fearful of higher taxes, more regulations and greater monthly health care costs. On the other hand, if Donald Trump comes out of nowhere and wins, people will be concerned of an outbreak of global chaos.
Hence, that means consumers will be loath to put big-ticket purchases such as large-screen TVs, appliances and new computers on credit amid concern about not being able to pay off the bills in the first half of 2017 (think worries of potential job losses, higher living costs, etc.). But they may very well use a year of solid stock-price and hourly wage gains to finally replenish their closets for a much lower cost than buying a $1,500 flat-screen or new Apple (AAPL) watches for each member of the family. (Apple is part of TheStreet's Action Alerts PLUS portfolio.)
Also, keep in mind that last year was a brutal year for apparel manufacturers and those selling their wares, such as Macy's (M) , thanks to Mother Nature's wrath. December through February was the warmest winter on record, according to the National Oceanic and Atmospheric Administration (NOAA). Looking at temperatures averaged across the lower 48 states, NOAA found the U.S. was five degrees warmer than the 20th-century average. What that left was an abundance of winter jackets and sweaters sitting on sales floors that led to profit-busting markdowns, which hurt everyone from Macy's to Under Armour (UA) . (Under Armour is part of TheStreet's Growth Seeker portfolio.)
This writer is no side contributor to the Farmer's Almanac, but it's reasonable to expect a colder winter this year that spurs need-based buying, seeing as much of it wasn't done in 2015. I'm talking about buying a new $99 North Face fleece -- V.F. Corp.-owned (VFC) brand -- this year after making do with an older one last year, perhaps even a new pair of Timberland boots (also via V.F. Corp.). Clothing only lasts so long, after all, and there are already a good number of fresh styles coming to market this winter, from what I have seen, that may entice folks. The Farmer's Almanac official forecast for 2016-17 calls for a very cold winter in the Midwest, Mid-Atlantic, Northeast and New England, as well as some cold fronts possibly reaching as far south as Florida. Bring on the new jackets and hats.
So, having exposure to some apparel makers into year's end will likely prove to be a wise decision. Sticking with a favorite here, American Eagle Outfitters (AEO) , continues to offer a good risk-reward. At about 12.8x estimated forward earnings and dividend yield of 2.8%, one can gain access not only to a play on the macro dynamics listed above, but also a couple of favorable sector themes. Toss in the fact American Eagle's shares have pulled back the past month due to macro uncertainty, and the name looks that much more attractive.
Sector Themes
Denim is back: Consumers are back out there buying denim, in large part due to new fabrications (stretch, for example), the need to buy denim after a year of holding back, and new tops trends that make it hard not to also add a pair of new jeans in the basket. American Eagle remains the destination for teens and young adults to buy jeans with a host of new technologies on display, all for reasonable price points.
Major competitor has died: Tons of Aeropostale stores are going to hold closing sales soon (if not doing so already). While that may hurt short-term sales for American Eagle, what it means is that Aeropostale could just flat out run out of inventory well before Christmas. That could leave American Eagle as one of the few destinations in the mall for parents to buy trendy, well-made wares for their kids. Moreover, it means American Eagle Outfitters will likely be the gift-card destination for many, which should help boost sales in January. Aeropostale won't be around in many cases, so there is no reason to buy a gift card for someone.
Aerie is hot: The sales that American Eagle's intimates chain Aerie has put up this year have been mind-boggling. It has been a true market-share-gain story from L Brands' (LB) Victoria's Secret brand. The momentum should easily continue into the holidays, especially in light of the aforementioned replenishment theme.
