Three Apparel and Footwear Ideas for Investors

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The US economy seems to be back on track. Jobs are being created faster than a year ago and GDP growth, according to IMF estimates, is expected to be as high as 3% in 2014. All this data made me take a look at some cyclical industries. In one of them, the apparel and footwear sector, I could find some companies that are going through interesting times, growing their revenues while increasing margins. Here I will analyze the best three US stocks I could find in this highly cyclical space.  

Complete operational outperformance

Phillips-Van Heusen (NYSE: PVH) markets and distributes classic US brands such as Calvin Klein and Tommy Hilfiger. The company is having a great operational moment because of a combination of (A) sustained growth in the US and (B) international expansion.

The company is growing its top line in an efficient way. While Tommy Hilfiger revenue increased 9% year over year (yoy) and Calvin Klein's revenues increased 14%, operating margins were up 2.9% to 11.5%. The ameliorated operating margins were driven by increases in gross margins thanks to lower product costs.

The company's stock has largely outperformed the market and now looks cheap relatively to its peer group. Trading at 2013 14x P/E, Phillips-Van Heusen looks like a good choice within the apparel space

A bet on continued growth

Under Armour (NYSE: UA), the designer and marketer of high-performance athletic apparel is focused on growth in the US. The company's channel expansion initiatives are encouraging, and the market doesn't seem to be valuing the existing opportunities on footwear and international businesses. 

Under Armour, through wider and better distribution, seems to have the ability to sustain a +20% top-line growth via its core apparel business. Besides, the company has further room for operating margin expansion given by improved supply chain operations (gross margins kept on improving reaching almost 46%). Hence, it would be reasonable to expect +20% annual EBITDA growth.

Even if the market does not seem to be valuing them fully, footwear (up 26.9% year over year in the first quarter), women’s (estimated to be up 25%), and international (up 40.6%) might be keys for long-term growth.

As we all might imagine, growth comes at a price. Under Armour trades at 39 times 2013 earnings. Even if the company looks overly-expensive, I find it a great candidate for anyone's watch list.

Opportunities for adjustments are there to be taken

Urban Outfitters (NASDAQ: URBN) has a good business story. The company has opportunities on every front: (A) improved merchandising; (B) better pricing; (C) e-commerce growth; (D) ameliorated inventory management; and (E) better sourcing. 

Despite all the fronts the company should – and actually is – addressing, Urban Outfitters reported solid first-quarter results, with segments growing in a healthy way (supported by surging e-commerce business) and gross margins recovering up to 36.9%.

Urban is adequately addressing execution and competitive challenges and sustaining high single-digit square-footage growth, so EPS growth should continue going forward at rates that should be around 10% year over year.

Trading at 25.5 times 2013 earnings, I think Urban is a company to keep on the watch list. Room for improvement is there and management seems to be addressing it.

Bottom line

The three companies named above look extremely compelling for any watch list. While Phillips-Van Heusen looks reasonably valued, I would wait  to buy Under Armour. On the other hand, Urban Outfitters is almost a turnaround case since successful operating adjustments could boost value relatively easy.  

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Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Under Armour. The Motley Fool owns shares of Under Armour. 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!

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