It has been an abysmal year for apparel retailers—for obvious reasons. Even if you did manage to keep your job, all you need for a Zoom call is an unstained shirt (pants totally optional). Deemed “non-essential,” retailers closed locations around the nation as Covid-19 spread.
Clothing Retailers Were the Hardest Hit in the Industry
The forced closures and the lack of demand have led to some bankruptcies in the industry. The latest to file for bankruptcy protection was the longtime menswear retailer Brooks Brothers, which was forced to permanently close 51 stores and now seeks a buyer. The company, established in 1818, followed the footsteps of apparel retailers like J. Crew Group, Inc. and J. C. Penney Company, Inc., (OTC: JCPNQ) which both filed for bankruptcy in May. J.C. Penny was delisted from the New York Stock Exchange in May and now trades over-the-counter at around 25 cents per share.
For April, retail spending plunged to a record 16.4%, according to data from the U.S. Census Bureau. Clothing stores were hit the hardest as sales in the sector tumbled nearly 79% compared with March. However, with the economy starting to reopen midway through the second quarter, sales at clothing stores for June surged to a whopping 105.1% month-on-month, as people finally had enough of their old stinky clothes.
Now, stocks in the apparel sector have been trying to play catch up to their opening year trading levels; but still, most companies remain down significantly year-to-date.
Macy’s Net Loss Parade
One apparel retailer that has been crushed this year is Macy's, Inc., (NYSE: M) as its shares have lost more than half its this year. Things have gone so poorly during the pandemic for the department store chain that some have wondered if the company will join Brooks and J. Crew in filing for bankruptcy.
In the first quarter, the company posted a staggering $3.58 billion in losses with sales nearly cut in half to $3.02 million. To reduce costs, Macy’s said it would slash 3,900 corporate jobs, which represents 3% of its workforce. Under the move, Macy’s expects to save around $365 million through the layoffs in fiscal 2020 and $630 million on an annualized basis.
The company also went ahead to raise an additional $4.5 billion in financing. Even though Macy’s chief executive officer Jeff Gennette has said he does not expect another total shutdown of its stores, Brian Sozzi, Editor-at-Large for Yahoo Finance! questioned if they would be able to survive another round of closures.
“This company lost over $3 billion. And the real black eye is a $3.1 billion impairment charge on their assets, likely because they are expecting just less sales, less profits over the next 5 to 10 years,” he said on Yahoo Finance's, On the Move.
He added, “But the real concern is this-- if you get more closures across the country, as you're seeing, and we're seeing sales start to slow in those areas where there are closures, investors are wondering rightly, can Macy's survive a second wave of COVID-19? And that is just definitely a major risk to the stock.”
Given all the uncertainties and the possibility of bankruptcy, you should avoid this stock for now even if it falls to penny stock trading. As of May 2, Macy’s had $1.52 billion in cash and cash equivalents with $18.58 billion in total liabilities and shareholders’ equity.
Nordstrom to Landlords: We Are Only Paying Half Our Remaining Rent in 2020
Another apparel firm that has been clobbered by the coronavirus crisis is Nordstrom, Inc. (NYSE: JWN). Like Macy’s, Nordstrom has watched its shares lose more than half its value this year. As retail sales started to rebound, Nordstrom stock started to pick in June, but that turned out to be short-lived. After hitting a high of $24.94 per share on June 5, Nordstrom’s stock has gone back crashing down to trading in the $14 to $16 per share range.
(Yahoo Finance!: JWN)
The luxury department store chain watched revenue fall 40% year-over-year to $2.03 billion on a loss of $2.33 a share in the quarter ending May 2. The results missed analysts’ expectations, as they were looking for a $1.17 per share loss on revenues of $2.27 billion. To conserve cash, Nordstrom reportedly fired 6,000 workers last month and said in May that it was permanently closing 16 stores.
The Seattle-based company told its landlords that it will only pay half of its rent that’s due for the remainder of 2020, according to a letter from the President of Stores Jamie Nordstrom.
“We are modifying our rent payments until January 2021, at which point we'll fully reconcile our payments," a Nordstrom spokesperson told Retail Dive in an email earlier this month.
If you’re a shareholder in Macy’s or Nordstrom, make sure you stack up on some Tylenol, because there’s likely more pain on the way. If you are a landlord well, better stack up on something stronger.
Shares of Nordstrom are down more than 65% YTD.
Yeesus Saves The Gap?
While it hasn’t been too pretty this year for The Gap, Inc., (NYSE: GPS) its stock is now starting to show some signs of life. The stock has been on the move since early May, as the economy started to reopen leaving investors more bullish on the global clothing and accessories retailer. San Francisco-based Gap shares have now rallied nearly 83% to date from its close on May 13.
Its first-quarter report in early June that revealed net sales for Gap Global were down 50% year-over-year. Despite this, reopening was going better than expected. According to CEO Sonia Synga, Gap had more than 1500 stores now open, anticipating that the “the vast majority” would be in open in June. CFO Kartina O'Connell told analysts in a conference call that reopened locations were generating sales at roughly 70% the pace of last year. Not bad for the apocalypse.
While its stock has been volatile following its first-quarter financials it took a leap after announcing that it struck a deal with Kanye West and his YEEZY brand. After the news. Gap stock jump from $10.16 per share to above $12 per share
Earlier this month, Wells Fargo analyst Ike Boruchow spoke with Gap’s management. A big takeaway he found was over the Gap’s brand of women’s activewear Athleta and noted that Gap thinks that division can double its revenue if it expands past the U.S.
“They believe Athleta can continue to thrive on the Gap platform given the brand’s healthy channel profile (50% online), international opportunity (likely with a franchise model), and underpenetrated store count in North America,” Boruchow said.
Citing Gap’s Athleta, the Yeezy partnership, as well as other aspects, Boruchow reiterated an "Overweight" rating and slapped a $19.00 per share price target. While Gap is likely in for another rough quarter, it could start to rebound soon after that.
That said, I would wait until the stock falls in the range of $10 to $11 per share before buying.
It is also important to note that Gap is being sued by multiple landlords for not paying rent. In response, Gap countersued one of its landlords Brookfield Property Retail Inc. and claimed it didn’t owe any more rent based on the terms of its leases.
TJX's Encouraging Rebound Makes it a Buy
Another apparel retailer that has been benefiting since mid-May is TJX Companies, Inc. (NYSE: TJX). Despite a turbulent fiscal first quarter, TJX said it was starting to see “very strong sales” during its initial reopening in May. At the time TJX, which operates T.J. Maxx, Marshalls, and HomeGoods, had reopened more than 1,600 of its approximately 4,500 stores globally.
Since falling to a low of $32.72 per share in March, the stock is now up by 58%. However, shares of TJX have traded sideways in the last month.
(Yahoo Finance!: TJX)
But that hasn’t stopped analysts from being sanguine on the TJX’s so-called “off-price” model or products that are available at favorable prices.
“The rebound at TJX has meaningfully outpaced department stores, which we see as a long-term secular share donor to offprice, a phenomenon we expect to continue at an accelerated pace as the sector consolidates more rapidly as a result of COVID-driven disruption (discussed in-depth in our upgrade here),” Jefferies analyst Janine Stichter wrote.
She added, “Further, TJX traffic remains on the upswing, while department stores have stagnated.”
Stichter also noted the traffic of the company’s T.J. Maxx, Marshalls, and HomeGoods continued to rebound back towards pre-coronavirus levels. She now has a buy rating on TJX with a price target of $65 per share. Currently, even at its stagnant trading levels, I feel comfortable with a buy at $52 per share. Of course, it isn’t out of trouble just yet, but I expect TJX to rise from its levels by the close of the year.
Chinese Fashion Retailers Look to Make an Ever-Glory(ous) Ruhnn
For our investors interested in taking a look at some Chinese firms, a couple to keep an eye on are fashion apparel retailers Ruhnn Holding Ltd. (Nasdaq: RUHN) and Ever-Glory International Group, Inc. (Nasdaq: EVK).
At the height of March Covid-19 concerns, retail revenue of clothing, shoes, hats, and knitwear in China plummeted to 68.9 billion yuan, down 55% from January and February, according to data from Statista.
So it’s not a surprise to why Ruhnn’s revenue slipped 4% year-over-year to $33.2 million in the fourth quarter ending March 31. The Hangzhou-based company, which sells its products to consumers through its key opinion leader (KOL) online stores announced a share repurchase program of up to $15 million in June.
Under the plan, Ruhnn said it intends to fund the buybacks from its existing cash balance. While it gained after the news, shares of Ruhnn have been extremely volatile over the past month. The stock has mostly traded from anywhere in the range of $3 and $5 per share.
Some good news: Ruhnn is expecting to generate revenue in the range of 1,320 million yuan and 1,500 million yuan, representing a year-over-year rise of between 2 and 16% for the full fiscal year 2021. As of March, the company had restricted cash and short-term investments of $113.1 million.
(Yahoo Finance!: RUHN)
As for Ever-Glory, it was also an abysmal quarter ending March, which reported its sales were $58.36 million, down 34% year-over-year. In addition, it posted ever-widening losses of $2.7 million versus $455,000 in the same period in the preceding year.
While the Nanjing-headquartered firm has not issued guidance, the stock has been gaining some ground in the past month but still trades barely over $1 per share. In fact, Ever-Glory went nearly two months without closing above $1 per share before doing so on June 9.
As to whether you should buy shares in these two firms, I am reluctant in doing so until Sino-U.S. trade tensions cool down. The biggest issue is whether or not a bill passed by the U.S. Senate, which could delist Chinese firms from trading on American bourses reaches Donald Trump’s desk. While Ruhnn could be an intriguing buy, I would wait to see if the bill does indeed become law.
Road to Retail Recovery
No doubt, apparel retailers have been hit hard by closures with Covid-19. Some were forced to file for bankruptcy protection, and others still might—especially if another shutdown occurs amid the rise in cases throughout many states, some of which have been forced to roll back reopenings.
Tom McGee, the CEO of International Council of Shopping Centers told Zack Guzman of Yahoo! Finance earlier this month that the government needs to provide more Covid-19 relief funding.
“I think the retail environment is very uncertain right now,” he said.
McGee added, “I mean, obviously, the last two retail reports showed a resilience in the marketplace. But as you see spikes reemerge around the country, particularly in the south and in California and other parts of the west coast, I think there is a great deal of concern.”
The next two upcoming job and retail sales reports for July and August will be critical. While I am recommending a buy on TJX, that could change if it is ordered to close its doors again.
As for the long term, I am more bullish on the industry. In 2019, the U.S. apparel market was valued at an estimated $368 billion, according to the online research firm, Statista.
E-commerce helped bring in more than $100 million, while store retailing was valued at over $268 billion. The research also noted that the online retail market for retail products is anticipated to “grow steadily.”
Online Dressing Rooms Via Zoom?
The pandemic has accelerated growing trends in consumer behavior, trends that will continue long after a vaccine is hopefully delivered. E-commerce will only grow in popularity even after the “old” normal is restored. A world in which robot retail workers candidly tell customers via if they do indeed look fat in those computer-generated pants might be inevitable.
But, no matter how people shop for new clothes, new clothes will never go out of style (even if the new clothes are made to look old).
It is for that reason that long term, I am sanguine on the industry. But, like many other sectors right now, the short-term outlook for apparel retailers looks grim.
That reminds me, I have laundry to do. On second thought, I’ll just wait until we enter the next phase of reopening.