A Foolish Take: Apparel Stocks Face Tough Headwinds in 2017
You've probably noticed that many apparel retailers are dumping their merchandise at steep discounts, shuttering their stores, or simply disappearing. Several major retailers -- including Aeropostale, The Limited, and American Apparel -- all filed for bankruptcy over the past year.
To understand what happened, let's look at the comparable-store sales (or "comps") growth of several major apparel retailers in 2016. Comps growth measures the year-over-year sales growth of stores open for at least year, which gives us an idea of how well their maturing stores are holding up.
Data source: Company quarterly reports. Chart by author.
As this chart illustrates, many apparel retailers are struggling to post single-digit comps growth. This is mainly attributed to two key factors. First, fast-fashion retailers like H&M, Zara, and Forever 21 are rotating their products faster and selling them at lower price tags. Second, stiff competition from e-tailers is causing mall traffic to plummet.
Apparel retailers are trying to counter those declines by closing stores, mimicking fast-fashion strategies like rapid product rotation and analytics-driven design choices, and investing heavily in e-commerce channels. Several companies are also expanding smaller growth brands, like American Eagle Outfitters' (NYSE: AEO) Aerie and Tailgate, to offset weaker growth at their older core brands.
Many apparel stocks now have low valuations and high dividend yields due to the industrywide sell-off, but investors should exercise caution. This industry will likely remain a perilous minefield until more weak players are driven from the market.
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Offer from The Motley Fool: The 10 best stocks to buy nowMotley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*
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Leo Sun owns shares of American Eagle Outfitters. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.