These 3 clothing stocks are ready for a comeback

The US apparel market is expected to contract 2% this year. Not bad considering the myriad challenges faced by apparel manufacturers and retailers. Continued supply chain disruption, rising material costs and inventory accumulation weighed on the industry in 2022.



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Fortunately, apparel investors may not lose their shirts any longer.

Fewer logistical problems and moderate inflation are part of a more comfortable outlook for apparel companies. According to Statista, apparel industry volume will grow 9.7% next year as product availability and demand improve. Over the next five years, sales in the clothing market are expected to grow by 3.6% per year.

The bullish outlook and recent quarterly earnings releases have driven several apparel stocks higher in recent weeks. And as many have been halved from their 2021 highs, the road to recovery remains long. Here are some of the names worth trying out for huge gains.

Why is the Gap Stock going up?

The Gap, Inc. (NYSE: GPS) nearly doubled from its September 2022 low and finished higher on 10 of the past 11 trading days. Momentum kicked into high gear after the retailer posted better-than-expected third-quarter sales and profits. The double beat was driven by demand for more formal attire as Americans returned to the office and to in-person social engagements. Woven dresses, tops and pants are once again flying off the shelves.

Banana Republic is once again a force for the company after posting 8% sales growth last quarter. The relaunch of workwear brought more people into stores. Old Navy and fitness apparel arm Athleta also saw growth while flagship Gap business saw flat sales due to demand for soft children’s clothing.

The main reason investors get excited about The Gap is e-commerce. Digital sales are up 55% from pre-pandemic levels and 5% from a year ago. At a time when online shopping is slowing, The Gap’s e-commerce growth shows that consumers are finding value in products. Digital sales now account for nearly 40% of overall revenue.

Although management is anticipating a ho-hum holiday shopping season, Gap shares have deviated from the report. This lukewarm outlook has no doubt contributed to Wall Street’s skepticism of the stock surge – but makes the retailer an intriguing contrarian game heading into 2023.

What is Abercrombie & Fitch’s growth strategy?

Abercrombie & Fitch Co. (NYSE: ANF) dug in big volume last week on the heels of an impressive up and down rhythm. Although sales and profits have declined year over year, encouraging demand trends and abundant inventory for holiday shoppers are keeping investors coming back.

Six months from a major plunge, the casualwear company is restoring credibility on the strength of its core Abercrombie brand and progress on its “2025 Always Forward” initiative. While omnichannel growth is a popular buzzword, the real reasons to invest are the prospects for improved profitability.

By the end of fiscal 2025, management is targeting an operating margin of 8% versus 2% to 3% expected this year. Longer term, he expects operating margin to grow beyond 10% as cost savings materialize and Abercrombie and Hollister’s global recognition expands.

Abercrombie & Fitch has been one of the top apparel retailers when it comes to building its online presence. Higher-margin digital sales make up about half of all sales and are poised to make up an even larger share of the business in the future. Digital marketing and social selling is the key to attracting millennial and gen-z customers.

Burlington stores had a bad third quarter…Why did inventory go up?

Burlington Stores, Inc. (NYSE:BURL) is on the move despite a disappointing Q3 performance that included a 17% drop in same-store sales. The off-price retailer has yet to capitalize on the macro environment, but believes it will lure shoppers at bargain prices in 2023. Burlington is touting prices for coats and other apparel that are up to 60% lower than competition.

The upbeat outlook combined with positive earnings reports from peers took the stock back to the $200 level for the first time in six months. However, given weak sales and margin pressures, the title is now a show-me story with little room for error.

To capitalize on this lucky momentum, Burlington Stores must demonstrate that its “Off-Price 2.0 strategy” is working. The key element here is to communicate a better message to consumers about the value offered by stores. Freshness of merchandise assortment and inventory management will also be important, but ultimately effective marketing campaigns and word of mouth must drive more customer traffic.

Unlike The Gap and Abercrombie & Fitch, Wall Street loves the Burlington Stores. Twelve of thirteen analysts called the action buy after the third quarter update. Proof of execution is needed here, but this discount clothing retailer might be a good fit for today’s economy.

GAP is part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and led by entrepreneurs.

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