Millennials are among the market's fastest-growing consumers of luxury fashion goods. These tech-savvy generations, who grew up in the era of mobile technologies, are highly exposed to the omnichannel experience.
Against this backdrop, investors could consider buying fundamentally sound apparel stocks, American Eagle Outfitters, Inc. (AEO), Kontoor Brands, Inc. (KTB), and Caleres, Inc. (CAL), which might trend higher this year.
Millennials are among the market's fastest-growing consumers of luxury fashion goods. These generations are highly aware of the various luxury fashion brands available and look for luxury goods as part of the experience. These generations also offer long-term potential for luxury brands to expand their revenue. Therefore, the global luxury fashion market is expected to have a CAGR of 5.5% by 2031.
Moreover, this demographic shift is fueling a surge in demand for clothing and accessories as consumers seek to upgrade their wardrobes, follow fashion trends, and improve their lifestyles. The global apparel market is projected to grow at a CAGR of 4.1% from 2024 to 2030.
Considering these encouraging trends, let’s take a look at the fundamentals of the three best Fashion & Luxury industry stocks, beginning with the third choice.
Stock #3: American Eagle Outfitters, Inc. (AEO)
AEO operates as an international multi-brand specialty retailer. The company offers jeans, apparel and accessories, and personal care products for women and men under the American Eagle brand and intimates, apparel, activewear, and swim collections under the Aerie and OFFLINE by Aerie brands.
AEO’s trailing-12-month gross profit margin and EBITDA margin of 39.19% and 12.05% are 6.3% and 6% higher than the industry averages of 36.86% and 11.37%, respectively. Similarly, the stock’s trailing-12-month levered FCF margin of 8.53% is considerably higher than the industry average of 5.45%.
For the first quarter that ended May 4, 2024, AEO’s total net revenue increased 5.8% year-over-year to $1.14 billion. Its gross profit grew 12.4% from the year-ago value to $464.24 million. The company’s operating income of $77.84 million indicates growth of 240.9% from the prior year’s quarter.
In addition, the company’s net income came in at $67.75 million and $0.34 per share, up 267.2% and 277.8% from the prior year’s quarter, respectively.
Street expects AEO’s revenue and EPS for the second quarter (ending July 2024) to increase 8.4% and 48.9% year-over-year to $1.30 billion and $0.37, respectively. Furthermore, the company surpassed the consensus EPS estimates in all of the trailing four quarters.
AEO’s stock has soared 24.2% over the past nine months to close the last trading session at $21.17.
AEO’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Quality and Growth. It is ranked #14 in the 59-stock A-rated Fashion & Luxury industry.
Beyond what is stated above, we’ve also rated AEO for Value, Momentum, Stability, and Sentiment. Get all AEO ratings here.
Stock #2: Kontoor Brands, Inc. (KTB)
KTB is a lifestyle apparel company that designs, produces, procures, markets, distributes, and licenses denim, apparel, footwear, and accessories, primarily under the Wrangler and Lee brands. The company operates through two segments: Wrangler and Lee.
KTB’s trailing-12-month asset turnover ratio of 1.56x is 56.7% higher than the industry average of 0.99x. Likewise, its trailing-12-month Return on Common Equity and Return on Total Capital of 65.32% and 16.74% are 167.2% and 31% higher than the industry averages of 11.82% and 6.26%, respectively.
KTB’s net revenues for the fiscal first quarter that ended March 31, 2024, stood at $631.20 million. Its operating income came in at $84.43 million and adjusted EBITDA at $99.45 million. Its adjusted EPS remained flat at $1.16.
Analysts expect KTB’s revenue for the third quarter ending September 2024, to increase 3.4% year-over-year to $676.52 million. Its EPS is expected to grow 15.7% year-over-year to $1.41 for the same quarter. Moreover, the company surpassed the consensus EPS and revenue estimates in three of the trailing four quarters.
Over the past three months, the stock has gained 21%, closing the last trading session at $65.29.
KTB’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
KTB has a B grade for Quality. The stock is ranked #10 in the same industry.
Click here to access the additional KTB ratings (Growth, Value, Momentum, Stability, and Sentiment).
Stock #1: Caleres, Inc. (CAL)
CAL engages in the retail and wholesale of footwear business in the United States, Canada, East Asia, and internationally. It operates through Famous Footwear and Brand Portfolio segments.
On May 23, 2024, CAL declared a regular quarterly cash dividend of $0.07 per share, payable on June 20, 2024. The company pays $0.28 annually, which translates to a yield of 0.79% on the prevailing price level. Its four-year average dividend yield is 1.43%.
On April 2, CAL’s portfolio brand, the American heritage fashion footwear brand Dr. Scholl’s Shoes, launched a special collaboration with Free People as part of its 100th anniversary celebrations. To honor this milestone, Dr. Scholl’s Shoes partnered with a series of iconic brands throughout the year, starting with Free People during festival season.
CAL’s trailing-12-month gross profit margin of 45.11% is 22.4% higher than the industry average of 38.86%. Its trailing-12-month ROCE of 31.55% is 166.8% higher than the 6.26% industry average. Also, the stock’s trailing-12-month net income margin of 5.96% is 22.4% higher than the 4.87% industry average.
CAL’s net sales from famous footwear amounted to $349.55 million, indicating a marginal year-over-year increase in the first quarter that ended May 4, 2023. For the same quarter, the company’s gross profit increased 2.1% year-over-year to $309.10. As of May 4, 2024, the company’s total assets stood at $1.86 billion, compared to $1.81 billion as of April 29, 2023.
Analysts expect CAL’s revenue for the second quarter (ending July 2024) to increase 4.2% year-over-year to $724.88 million. For the same quarter, the company’s EPS is expected to increase by 24.5% year-over-year to $1.22. Moreover, the company surpassed the consensus EPS estimates in each of the trailing four quarters.
Shares of CAL have gained 28.2% over the past year to close the last trading session at $33.02.
CAL’s POWR Ratings reflect bright prospects. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
CAL has a B grade for Value and Quality. It is ranked #6 in the same industry.
In addition to the POWR Ratings highlighted above, one can access CAL’s ratings for Growth, Momentum, Stability, and Sentiment here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
AEO shares were trading at $20.45 per share on Monday afternoon, down $0.72 (-3.40%). Year-to-date, AEO has declined -1.65%, versus a 19.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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