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Forget L Brands, Buy These 4 Retail Apparel Stocks Instead

Zacks

The retail landscape has been witnessing a sea change in shopping trends. With customer focus gradually shifting to online shopping, store and mall traffic has been hit hard. Retailers are now concentrating more on enhancing their omni-channel capabilities, optimizing store fleet and restructuring activities.

Moreover, steady job additions and gradual wage acceleration are undoubted signs of economic recovery. These are playing a crucial role in raising buyers’ confidence. We expect this positive sentiment to translate in to higher consumer spending that may help rev up sales.

Among the host of industries that builds up the overall Retail-Wholesale sector, we are focusing on Retail – Apparel and Shoes industry, which occupies top 34% (91 out of 265) position. Despite being placed in top 34% position, there are certain underperforming stocks in the industry that are limiting the overall growth potential of the industry.

Among these, L Brands, Inc. LB is one such stock which is struggling to find space in the investors’ good books due to dwindling top and bottom-line results along with disappointing comparable store sales (comps) performance. Year to date, this Zacks Rank #5 (Strong Sell) stock has witnessed a sharp decline of 36%.


What’s Giving L Brands a Tough Time?

L Brands continues to face short-term challenges due to its decision to exit the swimwear category, which according to analysts have failed to generate desired results. A look at the company’s performance in fiscal 2017 unveils that net sales declined 7% and 5% in the first and second quarter, respectively.

Maintaining the same chronological order, we note that earnings per share fell 44% and 31%, respectively. Moreover, the second quarter marked the fourth straight quarter when the top line fell short of the Zacks Consensus Estimate.

Further, comps have also been witnessing a sharp decline in the past ten months. This specialty retailer of women’s intimate and other apparel, beauty and personal care products reported 2% drop in comps for the five-week ended Sep 30, 2017 following declines of 4%, 7%, 9%, 7%, 5%, 10%,13%, 4% and 1% in August, July, June, May, April, March, February, January and December, respectively.

Investor sentiment was further hurt after the company trimmed fiscal 2017 guidance, when it reported second-quarter fiscal 2017 results. Management projects earnings in the band of $3.00-$3.20 per share for fiscal 2017, down from the previous guidance of $3.10-$3.40. This was also below the fiscal 2016 earnings of $3.74 and fiscal 2015 earnings of $3.99. Moreover, the company anticipates the fiscal third-quarter earnings in the range of 25-30 cents, compared with prior-year quarter earnings of 42 cents.

Well it is quite apparent from above introspection that L Brands is having a tough time. But it nowhere suggests that the industry is devoid of gems.

4 Prominent Picks

Here, we have highlighted four stocks in the Retail – Apparel and Shoes space for investors on the basis of favorable Zacks Rank and sturdy fundamentals. Not only this, these stocks have outperformed the industry that has gained 3.4% in the past three months.

Abercrombie & Fitch Co. ANF, a specialty retailer of premium, high-quality casual apparel for men, women, and kids is a solid bet. Shares of this Zacks Rank #1 (Strong Buy) company has witnessed a sharp gain of 47.2% in the past three months and also has a VGM Score of A. Moreover, the company has an impressive long-term earnings growth rate of 14%.

Zumiez Inc. ZUMZ, a mall-based specialty retailer of action sports related apparel, footwear, equipment and accessories, flaunts a Zacks Rank #1 and has a VGM Score of B. Moreover, the company’s shares which have surged 46.5% in the past three months, has an impressive long-term earnings growth rate of 18%. In the trailing four quarters, it has reported better-than-expected earnings with an average beat of 27.1%.

Investors can bank on The Gap, Inc. GPS, a premier international specialty retailer, which carries a Zacks Rank #2 (Buy) and also has long-term earnings growth rate of 8%. The company registered an average positive earnings surprise of 9.3% in the trailing four quarters and has a VGM Score of A. The company’s shares have gained 32.5% in the past three months.

We also suggest investing in American Eagle Outfitters, Inc. AEO, a retailer of apparel and accessories. The stock has amassed return of about 20% in three months and has a long-term earnings growth rate of 8.7%. The Pittsburgh, PA-based company has delivered an average positive earnings beat of 3.4% over the trailing four quarters.

Moreover, the company has a VGM Score of A and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

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