From the start, 2024 promised to be a tough year for fashion stocks.
Inflation has made life more expensive, interest rates have risen and geopolitics look even more turbulent – from conflicts in Ukraine and Gaza to tense elections in Europe and now the US.
More from WWD
The passion for artificial intelligence and big tech has helped lift the stock market – the S&P 500 is up 16.5 percent this year to 5,555.74, with AI specialist Nvidia up more than 150 percent – but fashion stocks globally have been decidedly mixed.
There were stylistic outliers, both positive and negative.
Shares of Abercrombie Fitch & Co. rose 83.1 percent to $161.53 as CEO Fran Horowitz’s seven-year effort to revitalize the chain paid off.
On the other hand, old Wall Street powerhouses like Nike Inc., which fell 31.9 percent to $73.40, have shown cracks in their armor and are now fighting back with consumers and investors.
Analysts and retail experts expect the mixed performance of retail stocks to only become more unclear for the rest of the year.
A stressed consumer
“It’s a tough space,” said Ike Boruchow, an analyst at Wells Fargo. “The consumer backdrop is not ideal.”
In addition to facing familiar economic pressures, consumers are shifting from goods to services and moving closer to a post-pandemic normal.
It is a normal phenomenon that apparently has not become fashionable anywhere.
“European wholesale is going through exactly what U.S. wholesale was going through a couple of quarters ago,” Boruchow said, citing a difficult period of declining sales. “China, no matter how you look at it, it’s bad. It’s not going nearly as well as most of our global brands thought it would. And that’s a major growth driver for these companies. Look at the last couple of articles we’ve seen on China, whether it’s Levi’s or Nike. China is a problem.”
While there are some “quirky brands that are struggling or outperforming,” Boruchow described fashion retail as “a slow, stagnant industry today that is likely to get worse before it gets better.”
The election equation
In the US, the drama of the presidential election, from the attempted assassination of former President Donald Trump to the last-minute emergence of rival Vice President Kamala Harris, is diverting attention from everything else.
“You have an election year, which is going to be the most polarizing year ever,” Boruchow said. “We’ve done work that shows that in a typical election cycle [the softlines space] will see a 150 to 200 basis point slowdown in revenue trends in the second half compared to the first half.
“Whatever we think is happening now, the election this year means it’s going to slow down by 1 or 2 points,” Boruchow said. “People are not focused on spending money. They’re sitting on the couch. They’re picking their poison: They’re watching MSNBC or they’re watching Fox and they’re totally focused on the election and the news cycle, and they’re not spending money.”
In the US, that distraction could be the big trend coloring everything from the explosive growth of denim and premium running to the weaker department stores.
There are also other X-factors: shipping in the Red Sea, the price of containers, last-mile logistics, and the possibility of post-election trade policy changes, among many others.
First half vs. second half
While BMO analyst Simeon Siegel said the first half of the year was “a story of execution and winners and losers” in the stock market, that story has now changed.
“We are now, at least for the time being, back to a macro story and thinking about themes like tariffs, interest rates and elections,” Siegel said.
Investors must decide how much risk they want to take on a turnaround like Under Armour Inc. and how much they want to pay for an already highly valued but stronger company like off-pricer TJX Cos. Inc., he said.
The risk/return of turnarounds
If you are the daredevil type who likes to take risks, there are certainly options.
Siegel said Under Armour, which is being reshaped by founder Kevin Plank as CEO again and is looking to do more with less, has an “interesting risk-reward” and the brand is not as “dead” as many think.
But for such bets you need strong faith and a strong stomach.
“Turnarounds, if they work, can be powerful stories for stocks,” Siegel said. “And turnarounds, until they work, are seen as garbage cans. The trick and the skill is to look for a business that has downside protection and upside potential with heavy lifting that’s not impossible.”
According to consultant Michael Prendergast, managing director of Alvarez & Marsal’s consumer and retail group, the companies that have achieved the best share prices, such as Abercrombie, have a number of similarities.
“One is branded excellence, whether that’s maintaining their brand or evolving their brand, or really focusing on aligning their brand with modern customer demands,” Prendergast said. “And then the second thing is that most of these companies are operationally excellent and have a consistent belief and commitment to operational excellence.
“That sounds very elementary, but I think in both areas, branding and operations, it’s about a long-term commitment to excel in both areas,” he said.
A good example is Abercrombie Fitch & Co.
“It’s absolutely no surprise,” Prendergast said. “They’ve been through a long, multi-year reinvention process, both of their brand and their products. They’ve done a fantastic job and now they’re reaping the rewards.
“You look at someone like Ralph Lauren Corp., they’ve done the same thing,” he said. “They’ve had a long-term mission to go after businesses with high margins, lower volume growth, and it’s paid off.” Lauren’s shares rose 16.8 percent to $167.01.
But in fashion, that kind of focus is difficult.
“It’s a market where you live and die by your last sale,” Prendergast said. “It’s a very conflicting situation. How do you, in turn, focus on a long-term strategy?”
It’s a change that Under Armour, which everyone seems to be talking about, is trying to implement.
“I loved Kevin Plank’s announcement when he stepped down after the last quarter, because that’s a multi-year strategy,” Prendergast said. “He put all his cards on the table, it was ugly and clearly they got hurt in a big way from an equity standpoint. But he basically laid out a long-term plan and said, ‘Here’s where I’m unhappy with the business. Here’s where I want to take it. Here’s where we’re going transparently and we’re marching toward it.’ I have every confidence that he’ll do that.”
Looking for an investment theme
As investors bet on a turnaround, marvel at ailing giants, admire Abercrombie’s comeback, Walmart Inc.’s attempts to take on Amazon or the high-priced discounters, they’re looking for the next big theme in the stock market.
Like the fashion world, the stock market has trends, with shareholders focusing on one type of company or investment philosophy, driving up the price of those stocks, and then moving on to another. And there has been no shortage of stock market darlings in recent years.
“It felt like the sectors were driving the movement in stocks,” said consultant Matthew Katz, a managing partner at SSA & Co. “Everyone was talking about this barbell where luxury and discount were really moving, and in the middle there were a lot of problems. Then there was some talk about the real digital darlings, and then it was the big conglomerates, multi-branded companies, and then it was the combination of direct-to-consumer branded and store-based retailers.”
But Katz said a look at the stock market this year showed that companies with each of these characteristics were among both winners and losers.
Part of that has to do with the trends that Wall Street has picked up and rolled back in the search 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 about isolation versus global cooperation,” Katz said. “There’s ongoing conflict in the world. Supply chains are difficult. Travel could be impacted.”
It’s a world where, as Katz said, “Agility is important. Flexibility with capital and money to do the things you want to do when you see the opportunity, that’s always been a strategy, but it doesn’t work unless you have the agility to pivot.”
The Best of WWD