The recent apparel sector rally
After a rough start to 2017, sportswear stocks seem to be recovering and closing the year on a positive note. Most sportswear companies have posted a decent rally over the last month. The seven-company S&P 500 Consumer Staples Sector index has risen 9% over the previous month, outperforming the S&P 500 index (SPX), which has risen 4.3%. A generally positive sentiment toward the retail sector and better-than-expected results have recently driven the stocks of the entire retail sector higher.
How the sportswear sector is placed
Stiff competition and higher markdowns have hit the comps (comparables) and margins of sportswear companies recently. North America has particularly been a challenging market. Under Armour (UAA), for instance, reported a 12% YoY (year-over-year) decline in quarterly sales when it reported its results on October 31, 2017. Nike’s (NKE) North American sales contracted 2.6% during the last quarter, and the company expects those headwinds to continue in the near term.
However, some analysts believe that the worst might be over for sportswear players. “After a few quarters of disruption, which included customer transition from purely performance to a lifestyle-focus, we believe the athletic sector is now on more solid ground,” said Paul Trussell of Deutsche Bank in a recent client note.
Trussell added that the “pace of product innovation in apparel and footwear is accelerating” and that the companies should now benefit from a “more controlled inventory environment” in North America.
He added some words of warning: “Some caution is still warranted as markdowns are not entirely behind us, vendors face stiff competition especially in athlete/team/event sponsorship, retailers face potential online disintermediation, and there are green shoots of fashion apparel performing better across retail in recent weeks.”