Don We Now Our Gay Apparel Stocks

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There's an upbeat outlook for holiday shopping -- and for many of the stocks that should benefit, says Standard & Poor's analyst Marie Driscoll. S&P looks for about a 3% gain in holiday retail sales this year, she reports, with two more shopping days before Christmas as well as an early Hanukkah.
The sectors most likely to benefit are luxury goods, teen apparel, and consumer electronics, Driscoll adds. In the category of luxury goods she cites the stocks of Neiman MarcusNMG.A, Coach (COH), Federated Department Stores (FD), Target (TGT), and Williams-Sonoma (WSM). Driscoll's highest ranking, a strong buy, goes to Pacific Sunwear (PSUN), which markets a variety of apparel brands to teenagers. And she has a buy on Abercrombie & Fitch (ANF).
Driscoll sees a strong fashion trend in play now, and that leads her to a buy rating on two apparel manufacturers, Liz Claiborne (LIZ) and Jones New York (JNY), plus a hold on Polo Ralph Lauren (RL). As for consumer electronics, her favorites there are Best Buy (BBY), a strong buy, and Circuit City (CC), a buy.
These were some of the points Driscoll made in an investing chat in the course of replying to questions from the audience and from Jack Dierdorff of BW Online. Edited excerpts from the chat, presented Oct. 12 by BusinessWeek Online and Standard & Poor's on America Online, follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
(Marie Driscoll is a Standard & Poor's Equity Research Services analyst. She has no ownership interest in or affiliation with any of the companies under discussion in this chat. All of the views expressed in this chat accurately reflect the analysts' personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this chat. For required disclosure information and price charts for all S&P STARS-ranked companies, go to spsecurities.com and click on "Investment Research" and then on "Required Disclosures & Standard & Poor's STARS vs. Closing Prices Charts.")
Q: What retailers are you expecting to have a big holiday shopping season -- and why? I understand you've done a report for S&P on holiday sales.
A: S&P is looking for about a 3% gain in holiday retail sales this year. That's down modestly from last year, but ahead of the 2.6% compounded average annual growth rate of the 2000-03 period. No. 1, you have 29 shopping days between Thanksgiving and Christmas, which is two more than last year and the most since 2001. You have an early Hanukkah beginning Dec. 7 -- that compares with Dec. 19 last year. So that will have shoppers in the store earlier, in earnest.
You had resilient back-to-school sales for the late August and September period. So, despite four hurricanes, oil prices topping $50 a barrel, declining consumer confidence, an interest-rate hike, and a job picture that's basically benign, back-to-school sales grew modestly, according to the National Retail Federation. Those are some promising things. We are upbeat for the holidays.
Q: What's your opinion on Wal-Mart (WMT)?
A: I don't cover WMT. However, my colleague Joe Agnese does [and he and S&P] have an optimistic outlook for this holiday season. They believe some new merchandise put in the stores is selling well. They believe there's improvement in the economy, basically. The industry in general has low inventory levels, which should result in rational pricing. They have an easy comparison in apparel. Last year they didn't do that well. Our target price is $62, and it's rated 4-STAR (buy).
Q: What retailers are doing best these days, and is this a pattern you expect to continue during the holidays?
A: The retailers that are doing the best are positioned to serve the luxury shopper. So, Neiman Marcus , Coach, some of the Federated Department Stores , Target (with its position for a higher demographic than Wal-Mart), and Williams-Sonoma. We also see the teen-apparel retailers and consumer-electronics retailers positioned to do well this holiday.
Q: Who are the leaders in teen apparel, and are their stocks worth a look?
A: Abercrombie & Fitch is a leader (a buy), and Pacific Sunwear (PSUN) a strong buy. We also have Aeropostale (ARO) rated as a buy. Another leader is American Eagle (AEOF), which we have rated hold. Another interesting company that spans the college-to-young-adult demographic is Urban Outfitters (URBN).
Q: What about the apparel industry generally? How has it been doing?
A: As Wal-Mart (WMT) commented, inventories are lean across apparel. This makes a much more rational marketplace for industry participants. At the same time, we're in a strong fashion cycle, which is creating demand for new color, new trends, and matching accessories to go with your new color. Both men's and women's fashions are in a positive fashion trend. So people are out shopping and replacing old clothing, casual clothing.
Also, numerous larger companies have reinstated dress codes, forcing individuals to go out and spend...So the better department stores are enjoying -- after 10 years of losing market share -- increased traffic. Selective specialty apparel retailers are benefiting as well. Some apparel manufacturers that are benefiting are Liz Claiborne (LIZ) and Jones New York (JNY) -- both buy-rated, as well as hold-rated Polo Ralph Lauren (RL).

Q: What is especially attractive about some of the stocks you rate as buys?
A: In the case of my 5-STAR (strong buy) Pacific Sunwear, there is a $29 12-month target price. This is a company that sells multiple national brands in its stores, as well as private label. So, despite the popularity of any particular brand, PSUN can get in that inventory and meet customers' need. This lessens the fashion and inventory risk, vs. most teen-apparel retailers, which are vertical retailers selling one brand only and exposed to the whims of their teen audience, which could turn away from one brand of choice to another brand...
What I like about Abercrombie & Fitch is the seasoned management team that excels at creating and maintaining strong brand equity in its retail brands. The company has among the highest metrics in retail in terms of operating margins, growth margins, and profitability. Its Hollister division recently passed 200 stores in number and is starting to more meaningfully affect sales, same-store sales comparisons, and profits. Recently, the company launched a fourth concept, Ruehl -- positioned at the twentysomething college grad. It's very casual denim and leather. We think it has a lot of promise. We're enthused by the opportunity, and here, too, the stock trades at a discount to the market and peers.
Q: How about chains like The Gap (GPS)?
A: We like The Gap and rate it 4-STAR buy. Right now, we see fine-tuning of the merchandise offerings at all three of its brands, using a market segmentation approach. They have divided the shopper into different groups...and by drilling down, they're trying to market to these individuals appropriately. By investing in information technology, they have improved inventory turn, better merchandise allocation. We think that the Gap brand is mature...we think there's still opportunity in Old Navy and Banana Republic. We expect the company to develop a new brand, positioned to the 35-year-old woman.... Longer-term, this could provide growth opportunities and help further rationalize Gap brands' store locations.
Q: How big a factor is online shopping in the apparel trade? Who's doing best at it? Pacific Sunwear.
A: I think it accounts for about 5% of apparel sales. And most of the big players are doing online transactions. Gap is one of the best, but Pacific Sunwear sends out e-mails their customers. TJX Companies (TJX) recently launched an off-price e-commerce site. Coach does an excellent job. We see that it has become virtually essential to have an online site to better connect with your customer, because most of the competition does. So the best retailers offers 24/7 access, and online is very profitable.
Q: How about Chico's (FAS) and Coach?
A: Chico's is well-known for their Passport Club. Chico's provides the best, as far as we're concerned, customer relationship management in retail. Their online site is great. What I find wonderful as both an analyst and a consumer is the way many retailers reach out to you -- by notifying you of new merchandise, new fashion trends, sales, e-mailed coupons. This is across the board -- the best are doing this, and Coach is among this group.
Q: You mentioned companies reinstating dress codes -- does that mean a revival in suits and ties for men? What are the trends in men's apparel?
A: At some firms down in [New York's] Financial District, yes, it has meant that. At other firms, it's just sprucing up "casual" to make it "business casual" -- and it can mean a sport jacket with or without a tie. Woven shirts with color are a strong fashion trend, and men's dress pants are moving as well. Jackets are also growing in popularity. So men's fashion has heated up after years of nothing.
Q: Is there any apparel manufacturing left in the U.S., or is it all outsourcing now?
A: A small amount is done domestically, but not by the big firms. Apparel is a very fragmented business, so there are always a few people locally who start a fashion line. If you have more expensive, very fashionable merchandise, it is best to be sourced close to the consumer so that the retailer can quickly capture the fashion trend before it's replaced by another fashion trend. One company that sources close is Bebe's (BEBE), which is hold-rated.
Q: Is Toys 'R' Us (TOY) going out of business?
A: We have a hold on it, with an $18 target price. The company continues to be under pressure from mass-market giants such as Wal-Mart and Target. We view it positively that they're closing and/or selling 146 Kids 'R' Us stores and are increasing their focus on Babies 'R' Us. But Wal-Mart has hurt them. They're considering a spin-off of Babies 'R' Us.
Q: If consumer electronics is selling well, are there retailers whose stock looks good?A: We rate Best Buy (BBY) a 5-STAR (strong buy) and Circuit City (CC) a 4-STAR (buy). There is strong demand for digitized products, plasma-screen TVs, digital cameras, and despite double-digit price deflation as some of these newer technologies come down to the mass market.... We like BBY better because it's the better executor.