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Shopping Surge Should Bolster Apparel Sector

The fourth quarter and holiday season is “make it or break it” time for consumer discretionary stocks. Apparel, including clothings is no exception. The sector is highly sensitive to consumer sentiment, shopping trends, and the overall economy. Consumer trends and fashions change year-to-year, and young companies like Lululemon and Canada Goose blanket the sector. While these two companies are thriving now, they could be off the stage by 2020.

Luckily, retailers and apparel stocks should come out on top following this year’s holiday shopping window. According to the National Retail Federation, consumer spending is expected to rise between 4.3 and 4.8 percent.

“Our forecast reflects the overall strength of the industry,” said NRF President and CEO Matthew Shay. “Thanks to a healthy economy and strong consumer confidence, we believe that this holiday season will continue to reflect the growth we’ve seen over the past year. While there is concern about the impacts of an escalating trade war, we are optimistic that the pace of economic activity will continue to increase through the end of the year.”

Black Friday and Thanksgiving weekend saw more of the same as far as consumers shifting towards online shopping.

According to Cowen & Co. analyst John Kernan, foot traffic to brick and mortar retailers was down 1 percent, which, while better than last year’s slump of 1.6 percent, still shows a decrease in mall traffic. In spite of this statistic, it’s undeniable that 2018 Holiday Shopping is off to a solid start. According to Adobe analytics, consumers spent 34 percent more on online shopping over thanksgiving weekend alone.

While consumer spending as a whole is up, and the holidays are expected to be great for retail, as always, there will still be winners and losers in the highly competitive apparel sector.

“If there was one takeaway from area mall visits, Lululemon athletica was the foot traffic champion by an enormous margin, impressive given the brand was not promotional,” said Kernan in a note. The key question for investors is whether Lululemon’s holiday popularity is already priced into the stock. While it’s trading up over 80 percent for the year, it has a consensus price target of $163, representing a 22 percent increase from current trading levels. It’s men’s line has been doing surprisingly well against the competition.

Other apparel stocks should do well this holiday season also, specifically Nike, which has pushed a direct-to-consumer model this past year.

Any apparel stock with exposure to Foot Locker should be on investor’s radar, as the company is thriving in the ecommerce and overseas arenas, rising 15.3 percent in November.

Even with a chart-breaking holiday shopping window likely in store, investors should still be cautious of apparel stocks. Their exposure to China provides a window of uncertainty for 2019 amid an ongoing trade war. Even if these companies post stellar fourth quarter results, if their guidance shows a hint of uncertainty, there will be negative price action to follow.

“Tariff and supply chain issues could create uncertainty over initial guidance for 2019 across the entire sector, which is likely to limit near-term valuation multiple expansion and create volatility,” wrote Cowen’s John Kernan.