In this article, we discuss the 10 best clothing stocks to buy now. If you want to skip our discussion on the apparel sector, go directly to 5 Best Clothing Stocks To Buy Now.
The apparel sector was among the numerous sectors adversely impacted by the COVID-19 pandemic. According to the data compiled by the US Census Bureau, the apparel sector saw its sales decline by 26% YoY during 2020. However, consumer confidence started to bounce back in 2021 following the government stimulus and economic recovery as COVID-19-related lockdowns and restrictions started to ease. During the last quarter of 2021, consumer spending on apparel jumped by 60% YoY as consumers started to embrace the trend of e-commerce and leisurewear.
Luxury apparel brands also showed great strength during the pandemic by reporting healthy profits, maintaining pricing power, and improving their liquidity on the balance sheet. According to the World Inequality Report issued in 2021, 0.01% of the richest people in the world saw their wealth grow by 11% in 2021. This means that the demand for luxury goods is unlikely to see any signs of a slowdown soon. According to estimates, Americans have over $2.7 trillion in excess savings due to the pandemic as movement and discretionary spending was restricted. Meanwhile, the change in lifestyle and widespread adoption of work-from-home will result in a further saving of $360 billion by the end of this year. This means that the customer would have the financial means to spend more on basic and luxury clothing.
The Path to Environmental Sustainability
The apparel industry has come under criticism due to its impact on the environment. According to a report issued by the non-profit group Global Fashion and management consulting firm McKinsey & Co., the apparel sector was responsible for generating 4% of the greenhouse gas emissions globally in 2018. To put this number into perspective, this was equivalent to the greenhouse gas emissions generated by France, Germany, and the UK combined. Furthermore, the rise of fast fashion is resulting in higher demand and production, rapid turnover of inventory, and more production cycles. Some clothing companies have announced that they intend to achieve net-zero emissions by 2050, but experts believe that legislation and regulations are required to get the buy-in of the whole industry.
Environmental sustainability is not the only concern for clothing stocks such as NIKE, Inc. (NYSE:NKE), Lululemon Athletica Inc. (NASDAQ:LULU), and Target Corporation (NYSE:TGT). They are also engulfed by issues related to labor and human rights. The clothing industry has a complex and deep supply chain that is spread all over the globe. This means that these companies have to deal with some developing countries where labor laws are not very strict. Meanwhile, in the US, regulations are already in place to favor labor in the clothing industry. For instance, the state of California passed the Garment Workers Protection Act that has made it mandatory to pay the workers by the hour instead of giving them a per piece rate of remuneration. Similar legislation is under the process of approval from the Federal government. The per piece rate compensated to labor is usually lower than the minimum per hour wage rate approved by the states and the Federal government.
Photo by John Cameron on Unsplash
Our Methodology
We have shortlisted the 10 best clothing stocks to buy now, keeping in mind all the prevalent themes and market trends. The best clothing stocks are not just great clothing manufacturers, but most of them also have a strong retail and e-commerce presence, aiding them in gaining market share. These companies are looking to capitalize on the emerging trends following the COVID-19 pandemic and working on being environmentally sustainable. We have ranked these stocks in terms of hedge fund ownership as of Q2 2022.
10 Best Clothing Stocks To Buy Now
10. Ralph Lauren Corporation (NYSE:RL)
Number of Hedge Fund Holders: 24
Ralph Lauren Corporation (NYSE:RL) is a New York-based fashion company that caters to the mid-range and luxury segment.
On September 16, Matthew Boss at JPMorgan assigned Ralph Lauren Corporation (NYSE:RL) stock a target price of $130 for December 2023 along with an Overweight rating. The target price reflects a potential upside of over 47% from the closing price as of September 23. On September 19, Ralph Lauren Corporation (NYSE:RL) disclosed its long-term targets. The company anticipates revenue to grow by mid to high single digits till 2025.
Ralph Lauren Corporation (NYSE:RL) intends to increase its operating margin to at least 15% through expansion in gross margin and by controlling operating expenses. Moreover, Ralph Lauren Corporation (NYSE:RL) aims to maintain capital expenditure of around 4% to 5% of total annual sales. The company plans to give back to investors nearly $2 billion through dividends and share repurchases by 2025.
9. PVH Corp. (NYSE:PVH)
Number of Hedge Fund Holders: 33
PVH Corp. (NYSE:PVH) is a New York-based clothing brand that has notable brands like Calvin Klein, Olga, Tommy Hilfiger, True & Co., and Warner’s in its portfolio, along with a presence in over 40 countries. The company is at the ninth position on our list of the 10 best clothing stocks to buy now.
PVH Corp. (NYSE:PVH), founded in 1881, outsources apparel production to around 1,100 different manufacturers. Calvin Klein and Tommy Hilfiger contribute around 90% to the company’s top line and EBIT. PVH Corp. (NYSE:PVH) intends to achieve an annual topline of $12.5 billion, an operating margin of 15% by 2025, and a free cash flow of over $1 billion.
In the trailing 12 months, PVH Corp.’s (NYSE:PVH) top line and operating margin stood at $9.01 billion and 9.5%, respectively. The company is struggling on the international front as it observed a YoY sales dip of 2% and 9%, respectively, for Calvin Klein and Tommy Hilfiger. However, to overcome this weakness and execute a new growth strategy, PVH Corp. (NYSE:PVH) has announced that Sara Bland will take over as the new COO from October 31. She has a strong background in global strategy and operational excellence. Under the new leadership, PVH Corp. (NYSE:PVH) is expected to achieve greater operational efficiency.
First Pacific Advisors discussed its stance on PVH Corp. (NYSE:PVH) in its Q2 2022 investor letter. Here’s what the firm said:
“PVH Corp. (NYSE:PVH) owns the Tommy Hilfiger and Calvin Klein brands globally. Approximately two-thirds of profits comes from its International segment, where Tommy in particular has a premium positioning, strong same store sales growth and demonstrated pricing power. Shares are down with other fashion and apparel names as investors worry about inventory levels and economic headwinds for consumer spending.”
8. Tapestry, Inc. (NYSE:TPR)
Number of Hedge Fund Holders: 36
Tapestry, Inc. (NYSE:TPR) is a Manhattan-based holding company for modern luxury lifestyle clothing brands like Coach, Kate Spade New York, and Stuart Weitzman.
Tapestry, Inc. (NYSE:TPR) revealed its 2025 financial goals on September 9. The company shared that it intends to achieve a top line of $8 billion by 2025. This would mean that Tapestry, Inc. (NYSE:TPR) anticipates its top line to compound at an average rate of 6% to 7% in the next three years. The company also aims to give back $3 billion to shareholders by 2025 by generating healthy free cash flows.
Adrienne Yih at Barclays has given Tapestry, Inc. (NYSE:TPR) stock a target price of $43 along with an Overweight rating in a research note issued on August 22. The analyst believes that the company’s strong domestic presence helps it combat the headwinds from the Chinese market. Tapestry, Inc.’s (NYSE:TPR) positioning in the apparel sector makes it one of the best clothing stocks to buy now.
Ariel Investments shared its stance on Tapestry, Inc. (NYSE:TPR) in its Q3 2021 investor letter. Here’s what the investment management firm said:
“Luxury accessory and lifestyle brand, Tapestry, Inc. was the top contributor to performance over the trailing one-year period. Revenue improvement across all three brands with a notable increase in consumer demand, particularly for the Coach business, triple-digit growth in e-commerce, and better than expected pricing, drove margins higher. Looking ahead, we expect Tapestry’s supply chain and SKU rationalization initiatives to continue to deliver margin expansion. Together, with early signs of improved receptivity for the Kate Spade brand, we believe a significant value creation opportunity lies ahead.”
7. Under Armour, Inc. (NYSE:UA)
Number of Hedge Fund Holders: 38
Under Armour, Inc. (NYSE:UA) is a Baltimore, Maryland-based manufacturer and seller of sports apparel, athletic shirts, and other products.
The company has some of the most well-known celebrities as endorsers. For instance, NBA superstar Steph Curry joined Under Armour, Inc. (NYSE:UA) in 2013 and is close to signing a lifetime extension deal of around $1 billion with the entity.
Like other clothing brands, Under Armour, Inc. (NYSE:UA) is facing tough economic circumstances due to higher freight costs and a deeper promotional environment prevalent due to inflation hovering around a multi-decade high. However, despite these challenges, Under Armour, Inc. (NYSE:UA) anticipates its annual topline growth to be around 6% during FY23. The company has undergone restructuring to improve its sales and gross profit margins.
Renaissance Technologies increased its investment in Under Armour, Inc. (NYSE:UA) by 96% during Q2 2022.
6. Farfetch Limited (NYSE:FTCH)
Number of Hedge Fund Holders: 39
Farfetch Limited (NYSE:FTCH) is a London, UK-based e-commerce platform for luxury fashion with a presence of over 700 brands globally.
The company is considered a market leader in luxury e-commerce, with Amazon Luxury as a close competitor. Farfetch Limited (NYSE:FTCH) does not keep an inventory of any of the brands in its warehouse and operates as a marketplace only. The size of the luxury fashion industry stands at around $110 billion, with little e-commerce penetration due to high consumer involvement in the buying decision process. Farfetch Limited (NYSE:FTCH) has been able to gain credibility in the minds of high-value customers and only needs to work on its technology capabilities to grow further. Furthermore, the partnership with YNAP should aid Farfetch Limited (NYSE:FTCH) in scaling its operations and getting new customers.
In its Q1 2022 investor letter, Miller Value Partners mentioned Farfetch Limited (NYSE:FTCH). Here’s what the firm said about the company:
“Farfetch (NYSE:FTCH), which we’ve added to, exemplifies the opportunity. We see strong competitive advantages, significant growth prospects, attractive business models and no additional capital needs. Importantly, we can make very compelling valuation cases on these companies (and ALL our companies!).
We strongly believe these companies will be worth much more five years from now. Farfetch is a great example. We initially purchased it in late-2019 after the stock had fallen from $30 to $8-10 on concerns about heighted promotional activity and an acquisition (New Guards Group) the market didn’t like (but turned out well!).
Farfetch operates a global luxury marketplace, but we are most excited about the prospects for Farfetch Platform Services (FPS). FPS aims to be the digital technology backbone of the global luxury industry (think a verticalized Amazon Web Services (AWS) for luxury).
Since our initial purchase, Farfetch has made substantial progress. Harrods was the first sizeable company to officially launch on FPS in 2020. That same year, Farfetch announced a strategic deal for their China business with Alibaba and Richemont whereby those companies invested in Farfetch. Just this month, Farfetch announced a deal with Neiman Marcus Group for FPS. An FPS deal with Richemont, which the company has been negotiating for months, could come as soon as May…” (Click here to see the full text)
As of Q2 2022, 39 funds held a stake in Farfetch Limited (NYSE:FTCH).
Besides Farfetch Limited (NYSE:FTCH), clothing stocks such as NIKE, Inc. (NYSE:NKE), Lululemon Athletica Inc. (NASDAQ:LULU), and Target Corporation (NYSE:TGT) are among the 10 best clothing stocks to buy now.
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Disclose. None. 10 Best Clothing Stocks To Buy Now is originally published on Insider Monkey
