3 fashion retail stocks to invest in 2020

3 fashion retail stocks to invest in 2020
Written by:
Michael Harris
20th September, 15:48
Updated: 24th September, 00:52
  • Latest figures from the U.S. show that online shopping rose 31.8% in the last quarter
  • Inditex, H&M reported a profit after recording heavy losses during the pandemic
  • Shares of Nike, Adidas, and Next could surge on rising online sales

Fashion retail is on the rise again, judging by the financial results of major players in this sector. Earlier this year, the pandemic created havoc in this industry as lockdown measures forced stores to close. However, the fact that people couldn’t shop in stores actually accelerated the shift towards e-commerce and online shopping. 

According to the U.S. Census Bureau of the Department of Commerce, the country’s retail sales grew by nearly a third in the second quarter. The rise came as a result of a surge in online shopping, which rose 31.8% from the last quarter, or 44.5% on a year-to-year basis. 

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“As more states start to lift coronavirus restrictions, consumers are likely to return to shopping at physical stores but a significant portion of online shopping may be here to stay. Ecommerce sales are expected to surpass $1 trillion and represent 18.1% of total retail sales in the United States by 2024,” Zacks’ Ritujay Ghosh wrote. 

Fashion rental sees a quick recovery

Just a few months ago, the major fashion retailers were reporting record losses as stores were forced to close. For instance, Inditex (BMV: ITXN), the owner of Zara and Bershka brands, reported a loss of €409 million (£358 million) between for three months ending April 30. 

At that time, the Spain-based fashion retailer said that 88% of its physical stores are closed. The group reported that it lost around €2.6 billion in sales for the reported period, compared to a year ago.

Arguably the best example of how quick the fashion retail industry did recover is Next (LON: NXT). The British retail firm said in April that it expects a loss of £150 million, just a few months before it raised its outlook for a second time this year on the back of the quicker-than-expected recovery. 

“The prospects for the next six months remain as uncertain as the outlook for the virus itself; never has our guidance been more tentative or as broad in its possible outcomes”, the retailer said.

“But in all our guidance scenarios the Group generates a profit, generates cash and reduces its debts.”

In a similar fashion, both Inditex and H&M (ETR: HMSB) returned to profit in the last quarter. The latter reported a preliminary profit before tax of $229 million, for the three months to August 30. For instance, analysts expected a $21.8 million profit, as they downplayed the strength of a rebound. 

“Third-quarter profit is indicated much better than expected,” Societe Generale analyst Anne Critchlow commented on H&M quarterly figures.

Inditex posted a net profit of $253 million in the second quarter, after a net loss of $465 million for three months ending April. The company saw its online sales soar 74% in the first half of the year.

All in all, the recovery in this sector has been impressive.

Here we outline 3 fashion retail stocks that are likely to outperform the rest of the market in the short-term

Nike 

Morgan Stanley’s analyst hiked the price target for Nike (NYSE: NKE) stock to $142 per share recently on positive EPS revisions. Nike has witnessed an uptick in demand in China, one of its key markets. 

“Valuation nears historical highs, but out-year revenue forecasts may be $1-4B too low, implying underestimated earnings power. Positive EPS revisions could drive the stock higher,” Morgan Stanley’ analyst Kimberly Greenberger noted in a note. 

Greenberger has an “Overweight” (equal to “Buy”) rating on NKE, which trades at $114.66.

Next

As noted earlier, Next raised its forward-looking guidance for the second time this year. In layman terms, the retailer expects to perform better than previously anticipated. Next said that its online sales have continued to rise, jumping 21% from the end of May. 

“Next is well positioned following years of investment in their digital proposition while many others remain in survival mode,” Richard Lim, chief executive of Retail Economics, said.

“Their e-com platform, slick distribution centres and strategic partnerships have differentiated them from their competitors and they are well-positioned to capitalise on the new wave of online shoppers emerging due to the pandemic.”

Next stock closed the week at 6254p. 

Adidas

Adidas (ETR: ADS), the German sportswear retailer, has a bright future ahead after making claims that it will make between €600 million to €700 million in operating profit in the third quarter alone. 

Last month, Adidas posted a net loss of €306 million or $362 million. However, the company has been boosted by its online sales, which rose 93% in a quarter ending June 30. 

”We addressed the challenges and went after opportunities, as reflected in our e-com business nearly doubling in Q2. We are now seeing the light at the end of the tunnel as the normalization in the physical business continues, with the vast majority of our stores being operational again,” CEO Kasper Rorsted said

Adidas stock closed the week at €279.60.

Summary

It is clear that e-commerce is driving retail sales in the past two quarters. This trend may be here to stay despite the lifting of coronavirus restrictions as consumers head towards a return to shopping at physical stores. Adidas, Nike and Next have all reported a surge in demand for their products as fashion retail sector seeks to return to pre-COVID19 sales. 

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