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Finding a clothing retail stock with strong long-term growth is difficult. The fluctuation in stock value stems from fast changes in fashion trends and the volatility from season to season. Investors should be cautions in the industry, and it will take some time and research to find a firm that best matches your own expertise and investing habits.

As with any other investment, financials and earning reports should be analyzed along with basic SWOT analysis (Strengths, Weaknesses, Opportunities, Threats). While a firm may be performing well on paper and promising through your secondary research, experiencing the stores firsthand will provide the best indication of the firm’s growth potential. After all, retail success depends on sales to consumers like yourself.

Brand Loyalty

In the fashion and apparel industry, it is difficult for companies to develop a strong competitive advantage. Their goods are usually easily substitutable, and thus consumers have low brand loyalty. Shopping malls draw high volumes of traffic largely because of the amount of selection, and shoppers will sift through numerous stores until they find exactly what they are searching for.

Despite the fickleness of fashion, some brands do manage to maintain customer loyalty, and ultimately stand out. Here’s what to look for when shopping for your little black dress.

little-black-dress

Luxury Brands

High-end luxury brands are able to secure a strong loyal consumer base once exclusivity is established as part of the brand. As consumers continually strive for status symbols, price is not a barrier to them, and in fact discount pricing and lowered price points actually will erode the elite status associated with these brands, and reduce its value. A few publicly traded companies to watch include Coach (COH), Michael Kors (KORS), and Tiffany & Co. (TIF).

As Chinese tourism in the United States grows, look for even further growth in luxury brands. Now that travel restrictions between China and the U.S. have been lifted, Chinese tourists are splurging on luxury brands to buy gifts that impress their friends and families back home, spending about $6,000 per trip. These western brands are heavily taxed in China, and hence are cheaper when purchased at outlet stores in the U.S.

Chinese visitors

Loyalty Programs

Brand loyalty can also be developed through loyalty and reward programs. American Eagle Outfitters (AEO) and their AEREWARD$ loyalty program is a successful example.

AEO logo

In October 2005 when the program was launched, their stock price rose from $15 to $34 in 2008 before the recession. It worked – I was one of these loyal fashion victims at the time, collecting points and continually buying excessive amounts of clothing every quarter to maintain the 40% discount. From fiscal year 2005 to 2006, net sales increased 20%, with 12% growth in same-store sales. Gross profit margin also increased slightly to 48%, and improvement to the merchandise markdown rate primarily due to lower markdowns.

However, slowing of the general economy and reduced stored traffic caused net sales to suffer in 2008. Increased merchandise markdown was caused from increased promotional activity in a heavily discounted industry. With the exception of Abercrombie and Fitch (ANF), American Eagle fared well and showed considerable growth during this period, in comparison with other competitors such as Aeropostale (ARO), Gap Inc. (GPS), Urban Outfitters (URBN), Pacific Sunwear (PSUN), and indices (Dow, S&P, Nasdaq).

AEO comparison chart

Market Positioning

Another way that certain firms retain brand loyalty is through cleverly positioning their brands across multiple market segments that not only cover different segments of consumers, but also the different life stages of consumers.

gapinc logo

Take Gap Inc. (GPS) as an example. With their three main lines – Old Navy, Gap, and Banana Republic – they cover various styles, price points, and also market demographics. As I shifted life stages, I also upgraded my wardrobe from Old Navy to Gap to Banana Republic over the course of 15 years. Through their diverse market positioning, Gap Inc. has managed to retain business with consumers such as myself throughout the majority of my life, and will probably continue to do so in the long-term.

Despite slumps of poorly trending fashion, the reason I stuck around was because I trusted the quality of their clothing. Even when Gap lost its market identity, the core values and qualities of the entire group as a whole was enough to keep me from migrating away during fashion up-shifts. What about Gap’s growth? – See below.

Gap Chart

Shopping Apparel Stocks

With fashion trends changing overnight, it’s important to assess a companies’ ability to not only grow its consumer base, but also to retain existing customers. A firm’s ability to maintain a loyal consumer base is an indicator of growth potential for same-store sales. While there is a slew of other business operations and financial ratios to consider when shopping for clothing retail stocks, brand loyalty is just another indicator.

If there’s a brand you love, there’s a reason why you’re hooked. To boost your stock analysis and find that little black dress, look for ways that companies maintain that loyalty – whether it be through status, loyalty programs, or as a trustworthy brand positioned well within market segments.

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One thought on “Finding Your Little Black Dress of Apparel Stocks

  1. Very good article!
    I agree with most of your analysis. In addition to luxury brands and loyalty program, I would also want to look at if the producer is making a high-value or a low value product. (forgot the term we learned in class). For example, lululemon sells differentiates products at a premium price, whil gap is selling similar items at a much lower rate, but targeted audience is mucj broader. It is usually the premium brands that are more recession proof.

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