With inflation easing significantly from last year’s highs, consumers’ resilient spending and soaring demand for luxury apparel and accessories are anticipated to keep the fashion industry buoyed.
Given this backdrop, quality fashion stocks American Eagle Outfitters, Inc. (AEO), Dillard's, Inc. (DDS), and Abercrombie & Fitch Co. (ANF) could be solid portfolio additions now.
Let’s familiarize ourselves with the fashion industry’s prospects before we delve into the fundamentals of these stocks.
Since reaching a peak of 9.1% in June last year, inflation has decreased significantly this year to be closer to the Federal Reserve's 2% target. U.S. retail sales in July exceeded estimates, surging by 0.7% as American consumers expanded their purchases. A 1% rise in clothing sales demonstrates strong consumer demand and indicates a sturdy economy.
The luxury apparel and accessories market is also expected to see growth driven by an increasing number of millionaires and enduring loyalty to established brands among customers. Additionally, the rising societal perception that luxury goods are synonymous with acceptance further drives product demand.
As per Statista, fashion market revenue is projected to reach $768.70 billion by 2023, with growth predicted to accelerate over the coming years and reach $1.10 trillion by 2027, reflecting a CAGR of 9.5%. The global luxury apparel market is anticipated to reach $84.04 billion by 2025, growing at a CAGR of 3.5%.
Given the industry tailwinds, it's time to examine the fundamentals of the top three stocks in the B-rated Fashion & Luxury industry, starting with the third in line.
Stock #3: American Eagle Outfitters, Inc. (AEO)
AEO operates as a specialty retailer that provides clothing, accessories, and personal care products under the American Eagle and Aerie brands in the United States and internationally. The company sells its products through retail stores; digital channels; and applications. As of July 29, 2023, the total consolidated stores stood at 1,184.
In July 2023, the company introduced its back-to-school (BTS) campaign with a focus on the brand’s iconic jeans through a 360-degree approach to product, creative and social, that authentically speaks to Gen Z.
Moreover, the brand also announces the debut of (American Eagle) AE x Maddie & Kenzie, an exclusive product collaboration designed by Maddie and Kenzie Ziegler, available online and in-store. This should bode well for the company.
On July 21, 2023, the company paid the shareholders a quarterly dividend of $0.10 per share. Its annual dividend of $0.40 per share yields 2.50% on prevailing stock prices. Its four-year average dividend yield is 2.94%.
AEO’s trailing-12-month ROCE and ROTC of 13.32% and 6.63% are 20.2% and 9.5% higher than the industry averages of 11.08% and 6.05%, respectively. Its trailing-12-month cash from operations of $506.33 million is 132.6% higher than the industry average of $217.67 million.
For the fiscal second quarter that ended July 29, 2023, AEO’s total net revenue stood at $1.20 billion, up marginally year-over-year, while its gross profit surged 22.4% from the prior year quarter to $453.12 million. Its operating income stood at $65.29 million, up 365.9% year-over-year.
Moreover, AEO’s net income and net income per share stood at $48.57 million and $0.25, compared to net loss and net loss per share of $42.47 million and $0.24, respectively. As of July 29, 2023, the company’s long-term debt stood at $3.23 million, compared to $376.52 million as of July 30, 2022.
For the fiscal year 2023, management expects revenue to be up low single digits to last year, compared to prior guidance for revenue in the range of flat to down low single digits. Operating income is expected to be between $325 and $350 million. This reflects stronger-than-anticipated business performance in the second quarter, strengthened demand, and persistent profit improvement.
For the fiscal third quarter ending October 2023, analysts expect AEO’s revenue and EPS to increase 3% and 11.9% year-over-year to $1.28 billion and $0.47, respectively. It surpassed revenue estimates in each of the trailing quarters and EPS in three of the trailing four quarters, which is impressive.
Over the past three months, the stock has gained 33.5% to close the last trading session at $15.86. Moreover, it gained 48.4% over the past year.
AEO’s POWR Ratings reflect a promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
AEO has a B grade for Growth and Sentiment. In the B-rated Fashion & Luxury industry, it is ranked #21 out of 63 stocks.
Click here for the additional POWR Ratings for Value, Momentum, Stability, and Quality for AEO.
Stock #2: Dillard's, Inc. (DDS)
DDS operates retail department stores in the southeastern, southwestern, and midwestern areas of the United States. Its stores offer merchandise, including fashion apparel for women, men, and children; and accessories, cosmetics, home furnishings, and other consumer goods.
On August 29, DDS announced the debut of Elizabeth Damrich for Antonio Melani, the company’s latest limited-edition capsule collection developed in collaboration with Mobile-based style influencer Elizabeth Damrich. The new collection would be available in 247 DDS stores nationwide and should bode well for the company.
During the fiscal quarter that ended July 29, 2023, the company purchased $103.4 million (approximately 358,000 shares) of Class A common stock at an average price of $289.32 per share.
The company has scheduled to pay the quarterly dividend of $0.25 per share to the shareholders on October 30, 2023. Its annual dividend of $1 per share yields 0.31% on prevailing stock prices. The company has paid dividends for 25 consecutive years.
Its four-year average dividend yield is 3.01%. The company’s dividend payouts have increased at a 10.1% CAGR over the past three years and 14.9% CAGR over the five years.
DDS’ trailing-12-month ROCE, ROTC, and ROTA of 51.30%, 29.11%, and 23.06% are 362.8%, 381.2%, and 492.7% higher than the industry averages of 11.08%, 6.05%, and 3.89%, respectively. Its trailing-12-month cash from operations of $1.07 billion is 390.3% higher than the industry average of $217.67 million.
For the fiscal second quarter that ended July 29, 2023, DDS’ net sales stood at $1.60 billion. Its net income and net income per share stood at $131.50 million and $7.98, respectively.
For the six months that ended July 29, 2023, DDS’ cash and cash equivalents increased 57.1% year-over-year to $774.30 million. As of July 29, 2023, the company’s total current assets stood at $2.28 billion, compared to $1.93 billion as of July 30, 2022.
For the fiscal third quarter ending October 2023, analysts expect DDS’ revenue and EPS to come at $1.51 billion and $7.30, respectively. It surpassed revenue and EPS estimates in each of the trailing quarters.
Over the past year, the stock has gained 1.5% to close the last trading session at $318.68.
DDS’ POWR Ratings reflect a robust outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Quality and a B for Value. Within the same industry, it is ranked #19.
To see DDS’ additional POWR Ratings for Growth, Momentum, Stability, and Sentiment, click here.
Stock #1: Abercrombie & Fitch Co. (ANF)
ANF operates as a specialty retailer in the United States, Europe, the Middle East, Asia, the Asia-Pacific, Canada, and internationally. The company operates through two segments: Hollister and Abercrombie.
ANF’s trailing-12-month ROCE, ROTC, and ROTA of 15.33%, 7.84%, and 3.92% are 38.3%, 29.7%, and 0.7% higher than the industry averages of 11.08%, 6.05%, and 3.89%, respectively. Its trailing-12-month cash from operations of $473.79 million is 117.6% higher than the industry average of $217.67 million.
For the fiscal second quarter that ended July 29, 2023, ANF’s net sales stood at $935.35 million, up 16.2% year-over-year, while its gross profit increased 25.4% from the year-ago quarter to $584.38 million.
Net income attributable to ANF and net income per share stood at $56.89 million and $1.10, compared to net loss and net loss per share of $16.83 million and $0.33, respectively.
The company increased full-year outlook ranges on sales and operating margin. It expects net sales growth of around 10% from $3.7 billion in 2022 and operating margin to be in the range of 8% to 9%.
For the fiscal third quarter ending October 2023, the consensus revenue estimate stood at $976.52 million, representing an 11% year-over-year increase, while its EPS is expected to increase significantly year-over-year to $1.07. It surpassed the consensus revenue estimates in each of the trailing four quarters and EPS in three of the trailing four quarters.
ANF’s shares have gained 229.6% over the past year to close its last trading session at $53.40. Over the past six months, it gained 98%.
Unsurprisingly, ANF has an overall B rating, equating to Buy in our POWR Ratings system.
ANF has an A grade for Growth and Quality. Within the same industry, it is ranked #15.
Beyond what we have stated above, one can see ANF’s additional POWR Ratings for Value, Momentum, Stability, and Sentiment here.
What To Do Next?
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DDS shares were trading at $318.34 per share on Tuesday morning, down $0.34 (-0.11%). Year-to-date, DDS has declined -1.38%, versus a 17.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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