Apparel Stocks: 1 To Avoid, 1 To Watch And 1 To Buy

Key Points

• G-III Apparel is a deep value, but this value is a trap with no dividend. 
• Ralph Lauren is a leader but may be susceptible to the wealth effect. 
• V.F. Corporation's chart shows the worst is priced in, and the analysts see a 50% upside at their range's midpoint. 

Apparel stocks aren’t a haven for investors, but not all stocks in this group are equal. While discretionary names are going to take a hit this year due to the declining outlook for earnings and tightening economic pressure put on by the Fed, some will pay steady dividends and they all trade at reasonable valuations. Blue chip names like Ralph Lauren NYSE: RL and V.F. Corporation NYSE: VFC are among the most attractive, while G-III Apparel NASD: GIII is the least. 

G-III Falls On Mixed Results 

G-III Apparel didn’t have a terrible quarter, with revenue growth of 14%. Still, the results are tepid relative to the analysts' expectations, and performance relative to expectations is what moves markets. The revenue outperformed by more than 100 basis points, but that strength was offset by weaker than expected margin and a miss on the bottom line. Mixed results are 1 thing, but bottom-line weakness can not be ignored, given the guidance for 2023. The company expects weakness in Q1 but for sales to gain strength throughout the year.

This outlook has the Q1 revenue target well below the consensus figure, but the FY is slightly stronger. The caveat is that margin will continue to be a problem, and full-year earnings guidance is also well below the Marketbeat.com consensus figure. 

G-III is the most profound value and a value-oriented sector, but this is a trap. The stock trades at 5X its earnings compared to 10X and 11X for VFC and RL, but it pays no dividend. The company is well-capitalized but uses its cash flow in other ways. A buyback plan exists, but no repurchases were mentioned in the Q4 release. Regarding the chart, G-III Apparel may have hit bottom, but that bottom is yet to be confirmed. With no dividend and a chance for lower prices, this stock is one to avoid, although the analysts still see about 26% upside for share prices. That could change now that the 2023 earnings guidance is in. 

Ralph Lauren Is An Apparel Stock To Watch 

Ralph Lauren reported a much better period with strength on the top and bottom lines and guidance for growth. The news sparked a round of analyst upgrades and price target increases that have supported the stock until now, but there is a growing risk. The company was pointed out to have a high risk of feeling an above-average sting from the wealth effect. The wealth effect postulates that consumer spending increases as the value of equities and real estate move higher and contracts when they fall. In the case of Ralph Lauren and other high-end brands, the boost from stimulus spending was market-leading, and the pullback from its passing could also be market-leading.

Ralph Lauren pays an attractive dividend and trades at only 13X its earnings, offering investors yield and value. The dividend is yielding about 2.7%, with shares trading at $112, and it is relatively safe even if there is a significant pullback in consumer spending. The company is paying out less than 40% of its earnings, and the balance sheet is in great shape, so there are no red flags. This is one to watch until there is more clarity on spending habits. 

V.F. Corporation: The Dividend Cut Was Priced In 

V.F. Corporation surprised some with its recent dividend cut, but the chart shows that the move was priced into the market. The stock has drifted lower since the cut but looks overextended, and analysts support the name. Management called the cut “right-sizing” due to its previously high payout ratio and the uncertain outlook for 2023. The new payout is about 50% of the EPS projection, and EPS growth is on the table for F2024. 

Several analysts have come out to shift their rating or price target since the Q4 release and dividend cut, but the takeaway is that no real change to the consensus took place. The analysts rate this stock a Hold for its high (still, even with the cut) 5.6% dividend yield and low 10X earnings valuation. They see it trading about 50% higher than now, and even the low price target assumes the stock is fairly valued, so significantly lower prices are unlikely.