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  1. Home
  2. / Investing
  3. / Stocks

Misery Loves Company Aplenty Among Apparel Retailers

Apparel merchants as a group are seeing their stocks perform terribly so far in 2019, with only a handful in positive territory.
By JONATHAN HELLER
Aug 21, 2019 | 10:00 AM EDT
Stocks quotes in this article: CATO, TJX, ROST, BOOT, ASNA, TLRD, GPS, URBN, LB, AEO, JILL

I've been fascinated by the plight of retail for quite some time, but the numbers may be more astounding than you might think. I'll be taking apart various retail segments from time to time in future columns, but wanted to start with apparel, which may be in a depression, let alone a bear market.

In a simple screen, I searched for apparel retailers with market caps in excess of $50 million and with operations based in the U.S. Many of the 26 qualifiers are smaller names, but even some of the bigger players among them have been damaged. Year-to-date, the 26 names are down an average of 24%, while the S&P 500 (up 17%), Russell 2000 Index (up 12%) and Russell Microcap Index (up 6.5%) are all in positive territory. Think about that for a minute; apparel retailers as a group are being outperformed by the S&P 500 by 4100 basis points year to date.

Just four are in positive territory: Cato Corp. (CATO) (up 0.2%), TJX Companies (TJX) (up 17%), Ross Stores Inc.   (ROST) (up 26%), and the big winner, Boot Barn Holdings (BOOT) (up 79%). Boot Barn recently reported first-quarter earnings that were much better than expected, yet even its shares have shown some strain in the recent market volatility and are down 15% since late June. BOOT currently trades at 15x next year's consensus earnings estimates.

Ascena Retail Group (ASNA) (down 89%), which includes such brands as Ann Taylor, LOFT, dressbarn, Lane Bryant and Justice, is the worst performer. Shares closed at $0.28 on Tuesday and markets are clearly communicating that the equity is worthless and bankruptcy may be on the horizon. The company ended its latest quarter with $101 million in cash and $1.34 billion in long-term debt.

Tailored Brands Inc. (TLRD) (down 66%), which operates Men's Wearhouse and Jos. A Bank, among others, is the second-worst performer. Tailored Brands got a temporary boost on Monday after announcing the sale of its corporate apparel business for $62 million, but the gain did not hold up and shares closed the day down 8%.

The plight of Ascena Retail Group and Tailored Brands may tell the tale for others in the sector; we may see bankruptcies and asset sales as companies attempt to stay afloat in a sector dominated by changing consumer tastes, the 800-pound gorilla known as online shopping, and uncertainty surrounding tariffs.

The bigger names among this group are also hurting. Gap Inc. (GPS) (down 34%), Urban Outfitters Inc. (URBN) (down 37%), L Brands Inc. (LB) (down 20%), and American Eagle Outfitters Inc. (AEO) (down 18%) have all been treated poorly by the markets. Expectations also remain fairly low for each as measured by their forward price-to-earnings (P/E) ratios: GPS, URBN and LB all trade for less than 8x next year's consensus estimates, while AEO is at about 9x.

However, Ross Stores, the largest name on the list, is enjoying a fairly solid year as the second-best performer.

J. Jill Inc. (JILL) (down 47%), is another name in a precarious position, falling off a cliff following the release of first-quarter earnings in May. There were some insider purchases in June that got the market semi-excited about the company, shares of which are down more than 80% since its 2017 initial public offering (IPO). J. Jill currently trades for about 4x next year's consensus estimates.

This situation within apparel retail is downright ugly and ripe for consolidation via bankruptcies and asset sales. The wild card here is a solution to tariffs, which might push some of these names higher, but it's unclear when that overhang will be lifted.

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At the time of publication, Heller had no positions in the stocks mentioned.

TAGS: Investing | Stocks | Apparel | Consumer | Retail | China | Real Money

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