3 Apparel Stocks You Must Own in 2013
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After a mixed global scenario in 2012 in the apparel industry, I feel 2013 will be more stabilized looking at the optimism in the overall business environment. The various opportunities in this sector include strategic partnerships to support supply chains, design and innovation, better use of technology, and better margins. Almost all major apparel companies are focusing on such strategies to satisfy their investors with improved returns in 2013. However, certain headwinds are also expected in the form of uncertainty and rising production costs. I have screened three apparel stocks for investors to look-out for in 2013. I feel these companies will be able to surpass the headwinds in the industry with their much focused growth strategy. Let's analyze these stocks in detail.
Ralph Lauren Corporation (NYSE: RL)
Recently, the company reported its 3Q13 results with its total revenue up by ~2% to $1.8 billion. This was mainly fueled by its growth in the retail segment which offset the decrease in its wholesale shipments. Its retail sales increased by ~6% to ~$1.1 billion whereas the wholesale segment saw a decline of ~2% Y/Y. Overall, the company was able to post good numbers with its operating income up by ~13% y/y to ~$304 million. This shows the company's strong hold on its profit margin.
Much brighter road ahead
Ralph Lauren is already done with phase one of its SAP roll out. The next phase will start in FY2014 and will include initiatives about its global distribution activities. The SAP implementation will focus on processes such as order-to-cash and the global supply chain. This investment will start paying off in FY15 with an opportunity of around a 25% reduction in the SKU (stock keeping unit). Also, the benefits like procurement savings removing manual data transfer will follow. This will further provide the company with great support in its margin improvement initiatives. Phase three of this process will start in FY15/FY16 focusing more on its Europe and Asia operations.
Another factor that I like about Ralph Lauren is their capital allocation strategy, which focuses on new stores, dividends and buybacks in the future. The new store strategy will include expansion in China, which started in 2012 with a target of 60 new stores in the next three years. The business in China has the potential to contribute around one-third to the global sales as compared to only ~1%-2% currently. This growth via expansion would support the company's top-line revenue in the next couple of years. This growth will be passed on to its shareholders as their return under its capital allocation strategy.
Under Armour (NYSE: UA)
Under Armour’s stock is on a down slide since the last six months with a movement of ~ -12%. The company was mainly challenged due to unfavorable weather conditions and its chronic supply issues. In spite of these factors, Under Armour posted solid 4Q12 results with its profits up by ~54% fueled by its sales growth in all major segments. Its footwear segment was very strong with its net revenue up by around 43% to ~$45 million.
Moving on to 2013, innovation will continue to drive its footwear as well as apparel stocks. The company will remain focused on product innovation, diversification and enhancing the overall appearance of its retail outlets. Recently, Under Armour launched a new fitness monitoring device Armour39 targeting the determined athletes. With this launch, the company marks its entry into the flourishing fitness technology market giving a tough fight to established players such as Nike. I feel Armour39 is better placed as it measures heartbeat rate, calories burned and calculates a WILL power number which shows the efficiency of the workout. It combines all the data in an easier way and presents a benchmark of individual workouts. The system currently works with iOS but will soon be launched on Android also. The growing attraction towards the work-outs technology will provide a great opportunity to the company to mark its presence in this segment.
The recent downfall of the stock presents a good investing opportunity to the investors. It will be a good entry point for future gains, considering the growth drivers of the company.
PVH Corp. (NYSE: PVH)
The stock of PVH Corp reached its new heights (~$121) in January 2013, beating the earlier record of its 52-week high of ~$119.62. The stock has given an impressive return of around 38% in the last six months. The company's overall positive outlook of FY2012 and its business expansion strategy via acquisitions were the main drivers for the upside movement in the stock.
PVH recently completed its acquisition of The Warnaco Group which will strengthen its portfolio pushing it to be among the leaders of the branded apparel companies. Via this acquisition, the company will be able to capitalize on Warnaco's already deep rooted presence in Asia and Latin America. This will also support PVH's already existing operations in North America, Europe and will expedite the company's operations in all the major consumer markets, providing it with a global presence.
Following this acquisition, the company has immediate opportunities for its flagship brands, Calvin Klein (CK) and Tommy Hilfiger. PVH is aiming at again establishing its leading position under CK Jeans in North America and Europe. While on the other hand, the company is targeting expanding the Tommy Hilfiger brand in Asia and Latin America via Warnaco.
I expect the top-line synergy from this acquisition will start flowing in 2014. However, in 2013 PVH will witness more of the initial cost synergies of around $100 million, leading to an accretion of around $0.35 per share in 2013's EPS.
The investor’s takeaway
Overall, I believe Ralp Lauren is an attractive stock which will be beneficial for both income as well as growth investors. The company remains focused on returning good value to its shareholders via dividend and share repurchases. It has around ~$627 million cash available at the end of 3Q13. Similarly, Under Armour is also well-placed in the industry and its portfolio expansion plans will further boost up its market share benefiting the investors. On the other hand, PVH already has some of the big brand names under its portfolio. The company's Warnaco acquisition will provide it the much needed support to enhance its brand image globally.
I recommend a buy for all the three stocks.
madhudube has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing. 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!