The holiday shopping season has arrived, and consumers are hitting the hip and trendy clothing shops to buy goodies. But whether it’s wise to purchase stock in U.S. apparel companies is another matter — especially when it comes to two marketplace competitors, Gap (ticker: GPS) and Abercrombie & Fitch Co. (ANF).
Even though Santa hasn’t had a chance to fill his sleigh with pullovers and jeans, there are some indications that the fortunes of both companies are headed in opposite directions. Based on Abercrombie’s strong third quarter, Chicago-based Zacks Investment Research has now moved ANF into its “strong buy” category, giving it “A” grades for growth, value and momentum. Ho, ho, ho!
Meanwhile, Gap’s results for the third quarter amount to a proverbial lump of coal. Net sales fell 3 percent to $3.86 billion, compared with $3.97 billion in the same quarter last year. Lagging behind was its Banana Republic Global brand, which reported a 12 percent drop compared to flat sales last year.
Still, both outlets are thus far fighting a dismal holiday shopping season for apparel. And even if December provides a strong sales bounce for both companies — which mix brick-and-mortar stores with online sales — they’ve so far plodded through 2015, while Amazon.com (AMZN), an exclusively online retailer, has boasted an amazing year. AMZN stock has doubled in the last 12 months, and its holdings include Zappos, the shoe and clothing website that turned into a consumer darling over the last decade.
“Abercrombie & Fitch and Gap have both struggled mightily this year, with many forecasting more pain ahead for the mall-based clothing retail chains,” says Jesse Cohen, senior editor at Investing.com, a global financial portal. “And I see more pain ahead for Gap as three of its branded stores — Gap, Banana Republic and Old Navy — showed sales deceleration in the third quarter.”
The question is, does ANF stock share that pain? While the apparel industry remains in a slump, there are strong indications that Abercrombie & Fitch could pull off a switch. True, ANF reported that its sales fell for the 11th consecutive quarter, but it also excited investors by beating Wall Street expectations on revenue, recording $878 million for the quarter while analysts had expected $862 million. That sent shares up by more than 34 percent.
It’s all about appearances. Marketing and image proves irrelevant in some sectors ( aerospace parts, for example) but in casual clothing, it means everything. Can a chain revive a moribund clothing line? What’s the perception among style-conscious consumers? And has the sales strategy hit home?
Gap and Abercrombie operate at vastly different scales. Gap is dramatically larger, with a market capitalization of $11.2 billion compared to ANF’s $1.8 billion. “The scale difference is best illustrated by the fact that Gap employs 141,000 people and Abercrombie employs 8,000,” says Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania.
Yet investment bulls have cheered on Abercrombie & Fitch for its resolute focus on revamping its image and the strong performance of its Hollister line, which has gained favor among younger clientele. “A&F caters largely to teens and college students,” Johnson says. “The loyalty of this demographic is strong but fickle. In other words, when the market turns against you, it can turn quickly and dramatically.”
That’s in large part due to a trend so aptly named for our lightning-fast digital age: fast fashion. Overseas chains storming America’s shores, such Sweden’s H&M, Japan’s Uniqlo and Spain’s Zara, excel at fast fashion, where cheap clothes are cribbed from catwalk designs and shoveled into stores on the fly.
Want proof of fast fashion’s success? At the recent opening of Uniqlo’s Chicago store, lines extended more than two blocks, and there wasn’t even a new iPhone model in sight. When was the last time you saw a queue like that at the Gap?
“With fast fashion, large name-brand stores cannot react to in time,” says Tanner Gunderson, lead analyst with the Roland George Investments Program at Stetson University in DeLand, Florida. “As a result, A&F’s revenue has dropped 17 percent since 2013, and Gap’s has dropped 2 percent so far in 2015, largely protected by Old Navy’s strong growth.”
Yet where Old Navy keeps Gap afloat, Banana Republic clearly drags it down. Gap also plans to shutter a quarter of its retail stores, and in the meantime has five brands to look after, including Intermix and Athleta. Getting even some of them to hit home with the buying public represents an uphill battle at best.
And with fast fashion, even powerful suppliers have been slow in catching up. For example, the Chinese retailing monolith Alibaba Group Holding (BABA) clearly hasn’t caught on with its apparel offerings — and it hasn’t had so rosy a year, either. Its stock has slumped 23 percent in 2015.
So who wins the war of the clothes? Some believe Abercrombie sits in a much stronger position headed into 2016. Its comparable sales jumped in the second quarter, and analysts and investors alike are bullish after it beat Wall Street in the most recent quarter. It’s on an upward swing while other clothing retailers continue to tread water.
Yet a few not-so-bad quarters do not a comeback make. ANF stock is still down 12 percent for the year, and it was off 34 percent prior to its boost from the third-quarter report. Meanwhile, some experts maintain that the optimism doesn’t hold water if you look to the long term.
For both ANF and GPS, “The future doesn’t look bright,” Johnson says. He bases this view on research he conducted for Invest With the Fed, a book he co-authored. “Apparel is one of the poorest performers in a rising interest rate environment. And with most economists predicting higher future rates, don’t expect A&F and Gap to outperform.”
If there’s an edge between the competitors, give it to Abercrombie & Fitch, although it’s far from a consensus. ANF stock seems to have found a groove, however tentative, in restoring consumer appeal and keeping up with two brands as opposed to Gap’s diffuse stable. “Abercrombie seems like a safer bet in the short term,” Cohen says.
Still, some are betting on Gap. “They were able to use their lower-price Old Navy stores as the foot solider to combat fast fashion effectively,” Gunderson says. “A&F, on the other hand, cannot use Hollister, another high-priced, ‘cooler of the cool’ surfer-dudes brand, to test everyday new ideas for average people.”
And in the end, you could turn your back on it all with a “bah, humbug.”
“I don’t want to sound like Scrooge,” Johnson says, “but the bottom line is that while you may want to shop for presents at Gap or Abercrombie & Fitch, putting some shares of stock under the tree doesn’t appear wise.”
More from U.S. News
12 Terms Every Investor Needs to Know
10 Ways to Invest in Driverless Cars
8 Smart Ways to Invest in Metal Stocks
Stock Market Showdown: Abercrombie & Fitch vs. Gap originally appeared on usnews.com
