2 Popular Apparel Stocks for Your Portfolio
Jaiyant is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apparel companies that are popular across communities and cultures will tend to be more long-lasting and enduring. Any company that has mass appeal and works towards reaching out to customers will also project a positive image in the long run.
In this article, I will discuss two apparel companies that are popular across communities and why investing in either of these companies can be a great idea. Nike (NYSE: NKE) and Gap (NYSE: GPS) are probably two of the most recognizable apparel companies that are not luxury brands. They manufacture clothes that almost all of us can afford without worrying about burning a hole in our pockets. Let us take a look at why investing in these two companies can be a good long-term option.
Nike understands the power of equal rights
Nike is a sports apparel legend that is recognized world over, almost like Coca-Cola, and is popular across cultures and countries. Part of its appeal depends on the company's tactful brand building and the ability to reach out to communities that have often felt ignored. An example that I would like to describe is Nike's support for gay rights. Nike recently made its support clear when it praised the Supreme Court's decision to strike off the Defense of Marriage Act (DOMA) wholeheartedly.
Moreover, I would like to point out that Wells Fargo currently rates Nike at Outperform. Analyst Evren Kopelman observed that amelioration of conditions in China and improvement in Nike's gross margin will sustain Nike's EPS growth for several years. Nike has looked at the mid-teens market as a long-term target which analysts at Wells Fargo believe is sustainable for Nike. They also note that double-digit growth in running and basketball gear will help Nike increase its overall profitability.
With a PEG ratio of 1.91, Nike may seem overvalued, However, I believe this just shows that there is a lot more opportunity in this stock and the high PEG ratio is a reflection of Nike's promising prospects. With a market cap of $59 billion and an enterprise value of $54 billion, Nike is one of the most important apparel and sports goods companies in the world. The company's profit margin is almost 10% where as its operating margin is 13%. With a total cash of $6 billion, Nike is one of the more stable apparel companies to invest in.
Gap reports favorable second-quarter results
Though Gap's results may not have impressed a lot of people, it still reported an increase of 8% in sales, when compared with last year's second quarter. CEO of Gap, Glenn Murphy, revealed that the company is focused on continuing its momentum. Moreover, on Gap, Topeka Capital maintains its Buy rating with a price target of $53, up from $50, Topeka sure thinks positively about this stock. Analyst Dorothy Lakner said that the company's focus on online sales, newer concepts, and international selling will help Gap recapture lost market share.
Like I mentioned earlier in the article, Gap is another company that is easily recognized just like Nike, all over the world. Its international presence and ubiquity help the company reach out to different communities and remain popular. Gap has followed Nike's pattern in appealing to minorities and diverse groups. To draw a parallel with the previous example that I stated, Gap launched its 'Be One' ad campaign last year that featured a gay couple hugging within a single t-shirt, which created a bit of a controversy. However, that only went on to prove that the company supports equal rights.
With a market cap and an enterprise value of $21 billion each, Gap is a formidable company to invest in. The company has a profit margin of almost 8% and an operating margin of 13%. Even with that, a revenue of $16 billion is mighty impressive. With a return on assets of 17.36%, management clearly knows where to put the money. Gap's return on equity is almost 40%, which suggests that a lot of investment is being converted into assets and that Gap is a high growth company.
Equal rights does not mean equality
Abercrombie & Fitch (NYSE: ANF), which is known for its gay-friendly ad campaigns, is not really known for its inclusiveness. CEO Mike Jeffries has often stated that A&F manufactures clothes only for the 'cool and good looking kids' and has refused to make clothes in XXL sizes, an obvious snub for plus sized people. A company that claims to cater to its own version of what is 'cool' and good looking does not appeal to a lot of people and therefore, will never have the positive connotation that Nike and Gap have. A&F plans to close more than 180 stores by 2015 and its sales fell 17% in the first quarter of 2013.
Foolish bottom line
As we can see, equal rights across the world are beginning to get attention and those companies that are seen as inclusive and friendly towards diversity will be more popular. Nike and Gap have the right mix of being diverse and business-smart, which should sustain the companies for a long time to come. Moreover, these high-growth companies will see opportunities rise in emerging markets such as India, Thailand, and China. Investing in these two apparel stocks is a smart move.
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Jaiyant Cavale has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!