It was clear from the start that 2024 would be a tough year for fashion stocks.
Inflation has made life more expensive, interest rates have risen and geopolitics look even more unstable – from conflicts in Ukraine and Gaza to edge-of-your-seat elections in Europe and now the US
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Interest in artificial intelligence and big tech has helped lift stock markets – the S&P 500 is up 16.5 percent year to date at 5,555.74, while AI specialist Nvidia is up more than 150 percent – but fashion stocks were notably mixed globally.
There were examples of style that stood out, both good and bad.
Abercrombie Fitch & Co. shares rose 83.1 percent to $161.53 as CEO Fran Horowitz’s seven-year effort to restructure the chain bore fruit.
Meanwhile, longtime Wall Street stalwarts like Nike Inc., which fell 31.9 percent to $73.40, have developed chinks in their armor and are now battling to make a comeback with consumers and investors.
Analysts and retail experts say the mixed performance of retail stocks is likely to get even more complicated over the rest of the year.
A Stressed Consumer
“It’s a tough space,” Wells Fargo analyst Ike Boruchow said. “The consumer environment is not ideal.”
Shoppers are not only grappling with familiar economic pressures, they are also shifting their spending from goods to services and generally returning to a post-pandemic normal.
There is a normality that does not embrace fashion very much, almost nowhere.
“European wholesale appears to be going through the same thing that U.S. wholesalers started going through a couple of quarters ago,” Boruchow said, referring to a difficult period in which sales have been falling. “China is bad, no matter how you look at it. It’s not playing the way most of our global brands think it is. And that’s a significant growth driver for these companies. Just look at the last few readings we’ve done on China, whether it’s Levi’s or Nike. China is a problem.”
Boruchow described fashion retail as “a slow, stuck-in-the-mud industry today that’s probably going to get worse before it gets better,” even though there are “some unique brands that are struggling or not performing well.”
The Selection Equation
In the US at least, the drama of the presidential election, from the attempted assassination of former President Donald Trump to the last-minute surge of his likely opponent, Vice President Kamala Harris, is a distraction from everything else.
“This is going to be your most polarizing election year ever,” Boruchow said. “In a typical election cycle, [the softlines space] The second half will see a 150 to 200 basis point slowdown in revenue growth compared to the first half.
“So no matter what we think is happening right now, this year’s election is going to slow down by 1 or 2 points,” Boruchow said. “People are not focused on spending money. They’re sitting on their couches. Pick your poison: They’re watching MSNBC or Fox and they’re completely focused on the election and the news cycle, and they’re not spending money.”
In the U.S. at least, this distraction could be the top trend, affecting everything from the boom in denim and premium apparel to the weakness in department stores.
Beyond that are other X-factors: shipping in the Red Sea, the price of containers, last-mile logistics, the possibility of post-election trade policy changes, and more.
First Half and Second Half
While BMO analyst Simeon Siegel said the first half of the stock market was “a story of execution, winners and losers,” that story has now changed.
“Right now, at least for now, we’re back to a macroeconomic story and thinking about themes like tariffs, interest rates and elections,” Siegel said.
Investors need to decide how much risk they are willing to take on a turnaround like Under Armour Inc. and how much they are willing to pay for a company that is already very valuable but stronger like TJX Cos. Inc., he said.
Risk/Reward of Returns
If you are a risk-taker and a daredevil, of course you have options.
Under Armour, which has been reimagined by founder Kevin Plank as CEO and aims to do more with less, has an “interesting risk-reward” ratio, Siegel said, adding that the brand is not as “dead” as many people think.
However, such bets require both strong faith and a strong stomach.
“Turnarounds, when they work, can be strong stories for stocks,” Siegel said. “And turnarounds, until they work, are seen as dumpster fires. The trick and skill is to look at a business that has downside protection and upside potential with not-impossible heavy lifting.”
Consultant Michael Prendergast, managing director of Alvarez & Marsal’s consumer and retail group, said top stock performers like Abercrombie have some things in common.
“The first is branded excellence, whether it’s protecting their brand, advancing their brand, or really focusing on aligning their brand with the modern demands of the customer,” Prendergast said. “And then the second thing is that many of these companies are operationally excellent and have a consistent belief and commitment to operational excellence.
“It sounds so simple, but I think you have to have a long-term commitment to excellence in both areas, branding and operations,” he said.
A great example of this is Abercrombie Fitch & Co.
“It’s certainly not surprising,” Prendergast said. “They’ve been going through a long-term, multi-year reinvention process, both of their brand and their product. They’ve done a great job and they’re now reaping the benefits.
“When you look at someone like Ralph Lauren Corp., they did the same thing,” he said. “They were looking for a long-term approach to go after higher-margin businesses, lower-volume growth, and it worked.” Lauren’s stock rose 16.8% to $167.01.
But that kind of focus is hard to come by in fashion.
“This is a market where you live and die by your last sale,” Prendergast said. “It’s a very contradictory situation. How do you focus on the long-term strategy?”
This is a change that Under Armour is trying to make that is on everyone’s lips.
“I loved the announcement that Kevin Plank made when he left the business after the last quarter, because this is a multi-year strategy,” Prendergast said. “He laid all his cards on the table, it was ugly, and they obviously got hurt punishingly for it from a stock perspective. But he basically laid out a long-term plan on the table and said, ‘Here’s where I’m not happy with the business. Here’s where I want to take it. Here’s where we’re going transparently, and that’s where we’re headed.’ I have complete confidence that he’s going to do that.”
I am looking for an investment theme
As investors bet on recoveries, wonder about troubled asset giants, marvel at Abercrombie’s comeback, Walmart Inc.’s efforts to compete with Amazon or high-flying low-pricers, they will be watching for the next big stock market theme.
Like fashion, there are trends in the stock market where stockholders follow a particular company or investment idea, increase the price of those stocks and then move on to another stock, and there are plenty of stocks that have been popular on the stock market in recent years.
“It felt like the sectors were driving the movement in the stock,” said Matthew Katz, a managing partner at consultant SSA & Co. “Everybody was talking about this barbell where luxury and discount were really moving and there were a bunch of issues there. Then there was a little bit of talk about the real digital favorites, and then there would be the big companies, the multi-brand businesses, and then there would be a combination of direct-to-consumer branded and store-based retailers.”
But Katz said that in this year’s stock market sweep, companies with each of these characteristics were among both winners and losers.
Part of that has to do with trends that Wall Street has caught on to and abandoned in its quest for growth, and part of it has to do with today’s world.
“There’s uncertainty about the weather, there’s uncertainty about the market, there’s uncertainty about housing, there’s uncertainty between isolation and global cooperation,” Katz said. “There’s ongoing conflict in the world. Supply chains are difficult. Travel could be impacted.”
As Katz says, “Agility is key. Having the flexibility with capital and cash to do the things you want to do when you see the opportunity has always been a strategy, but if you don’t have the agility to pivot, it doesn’t work.”
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