3 Promising Retail Stocks to Watch

By Markets Fool.com

As it goes in the fashion industry, one day you're in vogue and the next you're out. This makes choosing winning apparel stocks a difficult task for even the most seasoned investors. Fortunately, we are here to help. Find out below why Hanesbrands , Urban Outfitters , and Carter's are three promising apparel stocks to watch this year.

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Cashing in on the activewear trend
You may be surprised to see a purveyor of underwear on this list of up-and-coming stocks to watch. However, Hanesbrands deserves the attention, not only for its impressive run (shares are up more than 20% year-to-date), but also because the company is well-positioned to capitalize on the fashion trend of "athleisure wear."

Source: The Motley Fool.

Backed by a growing portfolio of brands that include familiar names such as Maidenform, L'eggs, Wonderbra, and Gear for Sports, Hanesbrands is unlocking fresh growth today by putting a greater emphasis on activewear. The company's activewear business saw net sales increase 8% in fiscal 2014, with sales of its Champion brand climbing more than 20% in the period. Moreover, Hanesbrands' activewear segment generated record profits for the second straight year in fiscal 2014.

The company's ability to masterfully integrate acquired businesses is another noteworthy strength. Hanesbrands has enjoyed tremendous success, for example, with past acquisitions such as Maidenform, which contributed $491 million in net sales last year. The company's latest acquisition of collegiate apparel retailer Knights Apparel could further boost operating profit in the years ahead.

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Hanesbrands agreed to purchase Knights Apparel in an all-cash deal valued around $200 million or roughly eight times fiscal 2015 EBITDA. Looking ahead, smart acquisitions and the company's growing dominance in the activewear category could fuel earnings growth for many years.

Well-rounded is the new black
Urban Outfitters is a triple threat thanks to its trio of popular brands, which in addition to its namesake business include Anthropologie and Free People. Investors pushed the stock to the high end of its 52-week range earlier this month after Urban Outfitters' revenue in the fourth-quarter topped $1 billion for the first time in the company's 39-year history. Total net sales increased as much as 12% year-over-year to a record $1.01 billion.

The company's comps or same-store sales were also praise-worthy in the period. In fact, same-store sales increased 18% at Free People during the fourth-quarter, while Anthropologie saw comps climb 6% and 4% at Urban Outfitters. While 4% for the company's namesake brand may not seem like a lot, it marks a significant improvement over the third-quarter in which comps sank 7% at Urban Outfitters.

Source: The Motley Fool.

Same-store sales are an important metric for evaluating retail stocks because it measures sales growth at stores open for more than a year. This thereby gives investors an idea of how well the business is operating at existing locations.

The company will need to focus on its Urban Outfitters business going forward as that is currently its weakest link. Nevertheless, the latest earnings results were certainly encouraging. In the near-term, the stock should benefit from strong trends out of its Anthropologie and Free People segments, while management focuses on strengthening its Urban Outfitters brand.

Kid approved. Investor friendly
With a market cap of just $4.85 billion, Carter's is the smallest of the three apparel stocks discussed here. However, impressive quarterly results, strong demand for its products, and international growth make it a stock to watch in the year ahead. As the largest seller of branded baby and children's apparel, Carter's is a market leader in this niche space today.

The company finished fiscal 2014 with a bang -- delivering record profitability and its 26th consecutive year of revenue growth. This is particularly impressive for a retail apparel stock as the sector continuously faces fickle consumer tastes. During the fourth-quarter, Carter's saw growth across all of its business segments with sales climbing more than 15% in its Carter's retail division, 10% growth in its wholesale business, 17% for its OshKosh brand, and a sales bump of more than 8% for its international segment.

Despite the impressive results thus far, investors could see the stock move higher from here as Carter's continues to offer its customers a near-unbeatable value. Additionally, investors should see margins expand in the quarters ahead thanks to Carter's e-commerce business. The company posted comparable online sales growth of 18.3% in the fourth-quarter, with Carter's direct-to-consumer business now its fastest growing segment.

Shop it to me
The retail industry is extremely competitive and prone to wild swings in consumer tastes and fashion trends. However, companies with strong balance sheets and niche appeal should do well despite ongoing challenges in the retail environment. As outlined above, Carter's, Urban Outfitters, and Hanesbrands are all well positioned to continue growing earnings and revenue in the year ahead, which is why I believe they are worthy of investors' attention today.

The article 3 Promising Retail Stocks to Watch originally appeared on Fool.com.

Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends Carter's and Urban Outfitters. The Motley Fool owns shares of Carter's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.