‘In this article, we will discuss the 10 best clothing stocks to buy according to hedge funds, and take an overview of the trends in the clothing sector.
Trends in the Clothing Sector
The internet has changed the way people shop for clothes. Social media platforms and influencers have popularized the “haul culture,” where people order a big box of low-priced clothes online and sift through them. Also colloquially known as the “Shein effect,” people are turning towards fast fashion, ordering clothing that offers an element of surprise upon receiving. Although Shein’s primary suppliers are in China, its customers are majorly US-based. Its global sales reached around $30 billion last year, almost touching the $39 billion in global sales made by Inditex, the old-school fast fashion leader and owner of Zara.
Fashion and apparel rank among some of the most significant industries in the world, creating key value for global economy. According to McKinsey, it would rank as the seventh largest economy in the world if placed alongside the GDPs of individual countries. The industry, however, faced several challenges in 2023, with the United States and Europe experiencing slow regional growth throughout the year. While China started the year with a strong performance, it gradually waned, slowing down in the second half. Even the luxury segment experienced uneven performance and slower sales. The fashion industry in 2024 can thus be described with one word: uncertainty. Weaker economic growth, dwindling consumer confidence, and rising inflation are making it hard for companies to devise suitable performance drivers. A report by Reuters showed that consumers are becoming increasingly picky about the clothes they buy, and are shopping around more. This has resulted in a “patchwork of winners and losers.”
Fashion forecasts by McKinsey show that the industry is expected to grow by 2-4% in 2024, with growth variations across countries and regions. The luxury segment is anticipated to generate the largest economic profit, but that does not mean companies in this sector won’t experience tough economic environments. Global growth forecast for the industry is lower in 2024 compared to 2023, going from 5%-7% in 2023 to 3%-5% as post-pandemic shopping sprees halt. Growth in China and Europe is expected to slow, but the US market shows a completely different outlook. North America’s growth is expected to pace in 2024 after a sluggish 2023, reflecting the region’s more optimistic outlook.
In addition, the current political unrest in Bangladesh is expected to affect the global clothing industry, disrupting the functioning of global apparel retailers ranging from H&M to Zara. With these clothing giants heading into key holiday season, the disruptions might incur heavy losses to US retailers and Bangladesh itself, which is the third largest exporter of clothing in the world as of 2023. Overall, consumer spending patterns have slowed down in the US, with people making do with what’s in their closets before the season changes. The Federal Reserve is also expected to cut interest rates in September. A report by Reuters showed that investors previously bet that the Fed would slash rates by half a percentage point, and are now estimating an approximately 75% probability of a quarter-percentage-point cut in its September meeting. This is expected to drive consumer confidence and ease spending patterns. With that, let’s look at the 10 best clothing stocks to buy.
10 Best Clothing Stocks To Buy Now
Our Methodology
For this article, we used the Finviz stock screener to identify over 20 clothing stocks then narrowed our list to 10 stocks with the most positive upside from current levels, and listed the stocks in ascending order of upside potential, as of August 19. We only chose stocks that had a market cap of over 2 billion.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Best Clothing Stocks to Buy
10. Abercrombie & Fitch Co. (NYSE:ANF)
Upside from Current Levels: 9.33%
Abercrombie & Fitch (NYSE:ANF) had a fall from grace after its 90’s heyday, with the 2022 Netflix documentary “White Hot: The Rise and Fall of Abercrombie & Fitch” showing marketing and fashion missteps by the company. But the fall was temporary, as the international near-luxury lifestyle brand has made a comeback into the lives of GenZ and Gen Alpha. This turnaround was prompted by a trend-driven collection and trendy promotional strategies, bringing out lighter and looser clothing items well suited for everything: from gym to casual hangouts.
In 2019, Abercrombie & Fitch (NYSE:ANF) reinvented its entire marketing and product design to move away from tight-fitted t-shirts and perfume-filled mall stores. It used to be a predominantly teen brand in the 90s, quite infamous for its shirtless models. But then came the shift with new management: the brand has now revamped its strategy, focusing on inclusion and offering work-appropriate wear, wedding wear, and even baggy jeans in all shapes and sizes.
With its revamped portfolio of less revealing and logo-less apparel, Abercrombie & Fitch (NYSE:ANF) holds a competitive advantage. It is now appealing to millennials and GenZ, going beyond its previously restricted target market and becoming profitable. It reported a 22% year-over-year growth in revenue, which amounted to $1 billion during the February-April quarter, a record for the company. The growth rippled across the globe, with revenue increasing by 23% in the Americas and 19% in Europe, with the highest popularity in Germany and the UK. The company’s CEO anticipated slower growth in the US after the 2023 revival, but also claimed that the company was excelling in the overall market and held a substantial opportunity for international growth, especially in countries like the UK.
Here’s what Chartwell Investment Partners, LLC said about Abercrombie & Fitch Co. (NYSE:ANF) in its third-quarter 2023 investor letter:
“Within the Carillon Chartwell Small Cap Growth Fund, information technology and industrials were the strongest-performing sectors, with strong stock selection leading to alpha generation. Abercrombie & Fitch Co. (NYSE:ANF) reported very strong earnings driven by significant margin improvement that resulted from much lower shipping and freight costs compared to last year.”
Is Abercrombie & Fitch (NYSE:ANF) cheap? The stock is currently trading at a P/E ratio of 16.37 at a 5.13% premium to its sector. So while we cannot call the company cheap, it has potential for growth. The future looks promising for the company: analysts estimate a 51% year-over-year increase in its earnings by 2025. Its median price target of $155.25 indicates an upside of 9.33% from current levels. 48 hedge funds hold Abercrombie & Fitch (NYSE:ANF) as of Q2 2024.
9. Carter’s, Inc. (NYSE:CRI)
Upside from Current Levels: 12.52%
Carter’s, Inc. (NYSE:CRI) is all about babies and young kids. It manufactures and sells apparel and related accessories for this age group under its vast portfolio of brands, including Carter’s, OshKoshB’gosh, Precious Firsts, Just One You, Child of Mine, Simple Joys, and Skip Hop. Carter’s Inc. is expanding its international footprint since Mexico and Brazil had high demand for the company’s products, offsetting slower sales in North America.
The children’s apparel market in the US stands at approximately $28 billion, with Carter’s, Inc. (NYSE:CRI) holding around 10% of the total market share over the past 12 months, giving it a competitive edge. Baby apparel remained the most popular segment in the company’s age portfolio, contributing around 60% to its total Q1 2024 apparel sales. The company operates through three segments: U.S. Retail, U.S. Wholesale, and International.
Carter’s, Inc. (NYSE:CRI) lost 23.66% of its shares’ value over a 52-week period, primarily due to weak direct-to-consumer trends and cautious consumer spending in the quarter. The combination of accumulated inflation over the past three years and the stop to pandemic stimulus payments has slashed many consumers’ budgets, with baby and young child apparel suffering from the cutbacks as well. However, the consumer demographic is improving with the recent fall in inflation, and store rationalization efforts by the brand are expected to drive a recovery in sales in the coming periods. Analysts expect the company to recover its leadership position in the domain. With rate cuts on the way and improving consumer confidence, Carter’s can experience a strong recovery in sales. Here is what Aristotle Capital Boston, LLC, had to say in its “Small Cap Equity Strategy” second quarter 2024 investor letter:
“Carter’s, Inc. (NYSE:CRI), a leading marketer of baby and young children’s apparel in North America, declined amid a cautious consumer spending environment and weak direct-to-consumer trends for the business during the quarter. We maintain our position as we believe the company has a strong brand in a stable category and that store rationalization efforts and an improving demographic backdrop can drive a sales recovery in the business in periods to come.”
The company’s EPS was $1.04 in Q1 2024, with a 9.09% 1-year increase. Its net profit margin also experienced a 10.91% 1-year increase, going to 5.65%. Carter’s, Inc. (NYSE:CRI)’s median price target of $62.81 presents an upside of 12.52% from current levels. It is currently trading at a forward P/E ratio of 10, at a 33% discount to its sector. Carter’s, Inc. (NYSE:CRI) IS held by 28 hedge funds as of Q2 2024, with Harris Associates holding the highest stake worth $81.54 million.
8. Levi Strauss & Co. (NYSE:LEVI)
Upside from Current Levels: 17.68%
Headquartered in San Francisco, Levi Strauss & Co. (NYSE:LEVI) sells apparel and accessories for men, women, and children across its portfolio of brands, including Levi’s, Dockers, Denizen, Signature by Levi Strauss & Co., and Beyond Yoga. It also sells its products through third-party retailers and directly to consumers through various channels. Levi Strauss & Co. (NYSE:LEVI) is expanding its global presence by targeting stores in Asia, opening its first store in Bangladesh, and strengthening its direct-to-consumer strategy. The brand also reopened its famous store at CentralWorld Mall in Bangkok, Thailand, expanding it to about 4,000 square feet to make it the largest Southeast Asian Levi’s store.
Despite its expanding global presence, the brand faced a fall in its stock price in June, primarily because of exceeding analyst expectations in its Q2 2024 financial results. Analysts had expected the company to earn only $0.11 per share in Q2 2024 with sales of $1.45 billion. However, the company earned around $0.16 per share, nearly 50% higher than analyst expectations, with sales reaching around $1.44 billion.
So why did Levi Strauss & Co. (NYSE:LEVI) stock plummet after exceeding analyst expectations? For starters, the company did not actually earn $0.16 per share, as it was a pro forma number. Instead, the GAAP-adjusted earnings came to $0.04.
On the bright side, the company’s earnings did improve. Sales grew by 8% year over year and gross profit margin was 60.5%. This improvement was accredited to the company’s “transformational pivot to operating as a [direct-to-consumer]-first company,” by its management. Although direct-to-consumer (DTC) sales did not exceed growth in sales as a whole, DTC sales usually do result in higher profit margins, giving Levi Strauss & Co. (NYSE:LEVI) an optimistic outlook.
Levi Strauss & Co. (NYSE:LEVI)’s strength in DTC sales and e-commerce is promising, going parallel to the increasing consumer trends of going direct to apparel companies for shopping. This broader trend may work out in favor of the company, even if its profits might take a hit in the short term. In the longer run, however, this consumer trend may support higher sales while eliminating the need to go through other retailers.
The stock is currently trading at a P/E ratio of 14.86 at a 4% discount to its sector. Overall, the stock sports a consensus Buy rating. Levi Strauss & Co. (NYSE:LEVI)’s revenue has grown with a CAGR of 6.94% in the past three years. Analysts are expecting a 14.91% year-over-year growth in its EPS by 2025. Its median price target implies an upside of 17.68% from current levels. 27 hedge funds hold stakes in Levi Strauss & Co. (NYSE:LEVI) as of Q2 2024.
