Retail Stocks Add Holiday Cheer

Investors toasted a strong performance in footwear and apparel stocks in December, with the S&P 500 closing the year up nearly 30 percent, at 1,848.4 — a record high.

Market watchers are predicting Wall Street will post additional gains through the first quarter of 2014, amid increasing signs of an improvement in the U.S. economy and the gradual recovery in consumer confidence.

Paul Swinand, an analyst at Morningstar, said apparel, accessories and footwear earnings before interest, tax, depreciation and amortization valuation levels are tracking close to historical highs.

In turn, he said, these lofty share price valuations could propel companies to invest in 2014. “Strong valuations do help people push forward, whether it’s by taking risks to make an investment, open stores or hire more people. When valuations are solid and sales are solid, companies are encouraged to act,” he explained.

Since the third quarter of 2009, EBITDA valuation levels for apparel, accessories and footwear companies have largely traded at a premium to those of the S&P 500. The S&P Retail Index jumped 44 percent in 2013, beating the broader S&P 500 Index, which rose 30 percent.
Swinand cited Nike Inc. and Adidas Inc. as strong performers in the athletic space for the year, despite a share price lull in December following the announcement of weaker-than-expected earnings.

John Zolidis, an analyst at The Buckingham Research Group, said he favors companies pegged to the robust cold-weather categories and to athletic apparel overall, citing The Finish Line Inc. and Dick’s Sporting Goods Inc. as particularly strong players. Zolidis also lauded Foot Locker Inc. and Nike, but labeled both Under Armour and Lululemon Athletica Inc. as underperformers. Another standout for the year was Fifth & Pacific Companies Inc., which rose 157.8 percent in 2013.

“If we exclude the week impacted by the calendar, [with the later Thanksgiving and shorter holiday selling season], the data continues to suggest that athletic footwear demand remains strong,” Zolidas said, speaking to the sector’s broader performance.

Other firms fared well also. On Dec. 30, shares of Crocs Inc. saw a more than 20 percent boost after the struggling company announced a trifecta of news about its turnaround plans. In addition to the retirement of CEO John McCarvel, the company said it had netted a $200 million injection from private equity firm Blackstone Capital Partners and has plans to launch a $350 million stock repurchase program. Despite the bump, the company’s shares closed the year just 10.6 percent higher.

Coach Inc. performed strongly through the holidays, given its relative strength across the accessories and handbag business, Swinand said. Deckers Outdoor Corp. also scored during the season, in part because its casual comfort-wear makes it less exposed to the winter seasonality. “There are still risk factors weighing over the stock as [Coach] increases its presence in footwear and accessories, which requires a lot of work and tinkering. There is also the issue that their handbag business is seen as being a bit long in the tooth,” he said.

Shares of Coach were 1.1 percent higher for the year, while shares of Deckers finished the year up 109.7 percent.

Swinand noted that retail stock prices avoided a hit during the holidays, thanks to many firms’ decisions to employ deep discounting in an attempt to excite customers.

“The heavy promotional environment doesn’t seem to have hurt share prices, as more of the big footwear guys are wed to broader economic issues and many also carry private labels, which acts as a buffer,” he said. 

Some of the key risks to stock performance in the coming year include share price volatility caused by retailers that report monthly same-store sales numbers, and any dip in the overall economy, which could result in consumers putting the brakes on discretionary purchases, market watchers said.

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