Are These Clothiers 'The Emperor's New Clothes?'
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Emperor's New Clothes is a nearly two century old fairy tale by Hans Christian Anderson about an emperor who pays good money for new "magic" clothes, clothes that can supposedly only be seen by wise people. Everyone pretends to see the clothes, as to not seem stupid, with the moral of the story being that sometimes many people are too afraid to criticize something because everyone else thinks it's good.
With that said, is it time to criticize the clothing industry? The major clothing stocks include Ralph Lauren (NYSE: RL), VF (NYSE: VFC) and PVH (NYSE: PVH), and all these stocks have grossly outperformed the market over the past five years.
Analysts have also gotten on the clothier rebound. Each stock has at least 15 analysts following it; Ralph Lauren has 7 "strong buy" ratings and 7 "buy" ratings; PVH has 5 strong buys and 9 buys; VF has 7 strong buys and 7 buys -- and none of the companies have a rating less than "hold".
However, even with the strong performance and hype, I think it's too early to say these clothing stocks have no clothes on. The beauty about clothing stocks is that have showed a resiliency to perform nicely in up and down economies. Even during the latest recession people didn't stop buying clothes, and revenue remained elevated.
Now the only questions is which is the best clothing stock to invest in going forward?
Ralph Lauren remains one of the leading specialty retailers, offering premium lifestyle merchandise. Ralph Lauren has a leading market share in department stores, with three key department stores accounting for about 45% of its wholesale revenues, while Macy's is its largest customer -- accounting for 27% of wholesale revenue. Ralph Lauren also sells directly to consumers via various specially retail locations and shop-within-shop locations.
With the U.S. market becoming saturated, Ralph Lauren and many of the clothing companies are seeking new growth opportunities overseas. Ralph Lauren plans on growing earnings via penetration of the European and Asian markets, hopping to up its total business from the areas to 33% each. Other initiatives for the stock includes a growing wholesale distribution of accessories and the Denim & Supply Ralph Lauren brand.
Ralph Lauren also has a strong balance sheet, one that's both debt-free and boasting cash of $1.4 billion at the end of fiscal 2013.
NorthFace, Timberland, etc.
Unlike some of the other apparel companies that don't own or operate any production facilities, VF manufactures a small percentage of its footwear and a significant percentage of its denim bottoms and occupational apparel. In 2012, the company manufactured 28% of its merchandise in units.
The company gets over 60% of its revenues from the U.S., and as a result, VF is branching out overseas, namely in Asia Pacific, with plans to increase its store count to over 6,000 over a period of five years from 2,300 currently.
The usually warm winter in the U.S. strained the company's key winter brands, The North Face and Timberland. Even still, the company has managed to beat EPS estimates in each of the last four quarters. Analysts also expect the company to grow EPS by 5% year over year for the current quarter (ended June).
Calvin Klein, Van Heusen, etc.
PVH provides its products to the top department stores, including J.C. Penney, Kohl's, Dillard's and Macy's. PVH also has some 700 outlet stores under the brand names Van Heusen, IZOD, Bass, and Calvin Klein.
Of course, the big news for PVH of late has been the acquisition of The Warnaco Group, which previously licensed the Calvin Klein jeans wear and underwear businesses. The acquisition brings the Calvin Klein brand under one roof.
Analysts expect revenue to grow to over $8 billion in fiscal 2014, thanks to an over $2 billion addition from the Warnaco businesses. PVH has managed to beat EPS estimates in each of the last four quarters, including its 40% beat last quarter. Analysts expect EPS to grow 10% year over year next quarter.
What's a fool to do?
As the market rebounds, there's no better way to play the increase in consumer spending than on clothes. PVH is trading below the other major clothiers on a price to sales basis.
But PVH has one of the most levered balance sheets, with the highest debt-to-equity ratio.
But this was in part due to the company's acquisition of The Warnaco Group earlier this year. PVH is now expected to grow EPS at an annualized 12.1% over the next five years, better than either Ralph Lauren or VF, which are expected to grow EPS at 11% and 10.8%, respectively. You couple PVH's top growth rate and cheap valuation, and it appears to be the best bet in the industry with a PEG ratio of 1.5, compared to Ralph Lauren's 1.98 and VF's 1.7.
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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!