Tommy is back, and Ralph still looks good.
Clothes makers are attracting interest from analysts and investors who hope low interest rates will goose prices, even as Wall Street worries about recession.
While companies like
are back on Wall Street's radar screen because their threads are once again popular among fashionistas, and others such as
have done well for months, much of the sector is showing life again because of the
Federal Reserve's two ambitious rate cuts in January, which together sliced a full percentage point from the key
federal funds rate.
So-called fashion vendor stocks -- the companies that stock department stores and bargain chains such as
-- are among the top 10 performing sectors in the months after the Fed cuts rates, and most analysts expect them to outperform in the next year.
Consider this: Sam Stovall, chief investment strategist at
Standard & Poor's
, researched all Fed rate cuts since 1971 and found that stocks in apparel manufacturers have risen an average of 14.7% in the six months after a cut, or more than the 12.3% average gain of the
S&P 500. This compares with a 10.4% rise for department store stocks and a 9.3% jump for general merchandisers.
"Because there was so much focus on retailers the last few years, manufacturers didn't do so well," says Himali Kothari, retail analyst at the
John Hancock Small Cap Growth
fund. While retail stocks did well amid the economic boom of the mid- to late-1990s, vendor stocks failed to keep up, Kothari says. But when retail sales started to tank in the second half of last year, vendors became more disciplined than retailers in keeping their costs down, she says. The result: As earnings started to trickle in last week for some of the larger vendor companies, the figures were generally strong.
"They came in line with Q4 estimates, and inventories looked good," she says.
Kothari's two favorite vendor stocks are
and Tommy Hilfiger, both of which her fund owns. Columbia, which makes outdoor clothing, topped Wall Street estimates when it released earnings Feb. 2. But more importantly, the company said its orders for spring merchandise are up 20% from a year ago, a strong figure, she says, especially at a time of a consumer spending slowdown. Shares recently traded at $58.38, close to their 52-week high of $61.94.
Tommy Hilfiger is a favorite right now among just about everyone who follows the fashion industry. The company, feted by
magazine in a recent article that featured Hilfiger's first interview in more than two years, has ditched its hip-hop image in favor of a more classic, preppy look. The company recently reported lower sales and profits than a year ago but beat Wall Street estimates. More importantly, the company has succeeded in convincing analysts that it has regained its fashion sense. A flurry of Tommy upgrades have come from investment banks in recent weeks, and shares are near their 52-week high, recently trading at $15.80.
"The recent revival of the classic Tommy Hilfiger sportswear business has demonstrated to us that this brand truly does have staying power and growth potential," wrote retail analyst Stacy Pak of
in a recent report upgrading the stock to strong buy. (Her firm does not have an underwriting relationship with Tommy.)
In contrast to Tommy, another prominent fashion house, Polo Ralph Lauren, had a strong run in 2000 and remains a popular stock. Its shares rose nearly 30% last year, and the company has given no signs of letting up. On Feb. 8, Polo announced earnings that topped Wall Street expectations by 2 cents a share, and said its earnings for the next fiscal quarter could also top current consensus estimates by 2 cents. At the same time, the company said it would emphasize its status as a luxury brand by focusing attention on its full-priced stores and European businesses and cutting the amount of products it sells in cut-rate discount stores such as
"I think it's a good time to buy, but investors need to remain selective," says John Rouleau, an analyst at
. "The weak companies are going away."
Consolidation has marked the retail industry of late: European luxury goods maker
LVMH Moet Hennessy
, to name one notable example. And, although the deal never got done, Tommy Hilfiger flirted with buying
. This same trend is accelerating on the vendor side, says Rouleau.
Women's apparel maker
, for example, has made several acquisitions in the past few years, most recently buying a small women's accessories company last July. And several private vendor companies have filed for bankruptcy, according to Rouleau.
In addition, some large department stores have said they will trim the number of vendors they do business with. For example, in a recent interview,
Women's Wear Daily
the company intends to reduce vendors by about a third within the next few years.
Rouleau's favorite vendor stocks are
, which specializes in moderately priced clothing. (Rouleau's firm has no underwriting relationship with these companies.)
Much of the optimism for vendor stocks -- and retailers, for that matter -- stems from hope that the second half of 2001 will look much better than the first. "We expect fashion purchases in the coming half year to not exactly be extravagant," says Kurt Barnard, publisher of
Barnard's Retail Marketing Report
. "We do not see people buying on impulse or whim."
While certainly it will take time for lower interest rates to wend their way through the economy and boost consumer spending, retailers will also face tough comparisons when they report sales figures in the coming months. And the retail industry, more so than others, uses year-on-year comparisons as its benchmark for success.
"Basically, most have conceded that the first half of this year is not going to be very good," says Rouleau, the analyst at Gruntal.
In the second half, analysts expect a one-two punch for both retailers and apparel companies: rising consumer spending and easier year-on-year comparisons.
And if you think that scenario is plausible, now may be the time to buy the stocks.