These 3 Apparel Stocks Are Fit for a Comeback

Key Points

• Digital sales now account for almost 40% of The Gap's overall revenue.
• Abercrombie & Fitch is focusing on digital marketing and social selling to attract Millennial and Gen Z customers.
• Twelve of thirteen analysts called Burlington Stores stock a buy after its Q3 update.

The U.S. apparel market is forecast to contract 2% this year. Not bad considering the myriad of challenges facing clothing manufacturers and retailers. Ongoing supply chain disruption, higher materials costs and inventory build-ups have weighed on the industry in 2022.

Thankfully, apparel investors may not lose their shirts for much longer.

Fewer logistics issues and moderating inflation are part of a more comfortable outlook for clothing companies. According to Statista, apparel industry volume will increase 9.7% next year as product availability and demand improve. Over the next five years, apparel market sales are forecast to grow 3.6% annually. 

The bullish outlook and recent quarterly earnings releases have several apparel stocks trending higher in recent weeks. And since many were hemmed in half from their 2021 peaks, the road to recovery remains a long one. Here are a few of the names worth trying on for sizable gains.

Why is The Gap Stock Going Up? 

The Gap, Inc. (NYSE: GPS) has almost doubled from its September 2022 low and has finished higher in 10 of the last 11 trading days. The momentum kicked into high gear after the retailer posted better-than-expected Q3 sales and profits. The double beat was driven by demand for more formal attire as Americans returned to the office and in-person social engagements. Dresses, woven tops and pants are flying off the shelves again. 

Banana Republic is again a strength for the company after notching 8% sales growth last quarter. The relaunch of work clothing drew more people to the stores. Old Navy and fitness-apparel arm Athleta also delivered growth while the flagship Gap business had flat sales due to soft kids clothing demand. 

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

Despite management anticipating a ho-hum holiday shopping season, Gap shares gapped up on the report. This tepid outlook has undoubtedly contributed to Wall Street’s skepticism around the stock’s surge — but makes the retailer an intriguing contrarian play heading into 2023.

What is Abercrombie & Fitch’s Growth Strategy?

Abercrombie & Fitch Co. (NYSE: ANF) gapped up in heavy volume last week on the heels of an impressive top and bottom line beat. Although both sales and earnings declined year-over-year, encouraging demand trends and ample inventory for holiday shoppers have investors lining up for a comeback.

Six months removed from a major plunge, the casual clothing company is re-establishing credibility due to strength in its core Abercrombie brand and progress with its ‘2025 Always Forward’ initiative. While omnichannel growth is a popular buzz phrase, the real reasons to invest are prospects for improved profitability. 

By the end of fiscal 2025, management is targeting an 8% operating margin compared to the 2% to 3% expected this year. Longer term, it sees operating margin expansion beyond 10% as cost savings kick in and global recognition of Abercrombie and Hollister broadens.

Abercrombie & Fitch has been one of the best clothing retailers when it comes to building out its online presence. Higher margin digital sales account for roughly half of all sales and are poised to be an even bigger part of the business going forward. Digital marketing and social selling hold the key to attracting Millennial and Gen Z customers. 

Burlington Stores Had a Bad Q3…Why Did the Stock Go Up?

Burlington Stores, Inc. (NYSE: BURL) is on the move despite a disappointing Q3 performance that included a 17% decline in same-store sales. The off-price retailer has yet to capitalize on the macro environment but believes it will attract bargain shoppers in 2023. Burlington touts prices on coats and other apparel that are as much as 60% below the competition. 

The upbeat outlook combined with positive peer earnings reports has pushed the stock back to the $200 level for the first time in six months. However, given the weak sales and margin pressures, the stock is now a ‘show me’ story with little room for error. 

To build off the fortunate momentum, Burlington Stores must demonstrate that its ‘2.0 Off-Price strategy’ is working. The key component here is communicating a better message to consumers about the value the stores offer. Keeping the merchandise assortment fresh and inventory management will also be important but at the end of the day, effective marketing campaigns and word of mouth must drive stronger customer traffic.

Unlike The Gap and Abercrombie & Fitch, Wall Street loves Burlington Stores. Twelve of thirteen analysts called the stock a buy after the Q3 update. Proof of execution is needed here but this discount clothing retailer could be a good fit for the current economy.