Apparel Stocks Heading Into The Holiday: BMO Sees Opportunity In Off-Price, Express, American Eagle, Abercrombie

• In a recent report, BMO Capital Markets analysts John D. Morris, Jennifer Redding and Thomas Andrews shared their outlook for the apparel industry’s holiday season.
• The experts provided some “insights into current business trends and holiday outlooks” ahead of the third quarter reporting season.

The third quarter apparel reporting season is kicking off next Monday with Urban Outfitters, Inc. URBN, which will announce its financial results after the market closes.

The analysts noted that the sell off in retail -- as fear dominates the space, seems quite overdone, in their opinion. The trend began with September’s unfavorably warm weather debilitating some retailers’ performances, and concerns continued to mount as other headwinds, like wage increases and interest rate hikes, became evident. On Wednesday, “Macy’s announced elevated inventories (~3% above plan) and 4Q liquidation plans,” the note added.

Now, contrary to sentiment, BMO analysts see an opportunity available for off-pricers as department stores continue to cancel orders. In this line, there’s a buying opportunity for Burlington Stores Inc BURL open. The experts believe TJX Companies Inc TJX “has the capability in place to capitalize on the full-price industry’s misfortune and bring cancelled goods to floors this season.”

The report continued, Ross Stores, Inc. ROST and Burlington “can pack-away deals for next year. Yet given historically conservative management teams, we do look for prudent 4Q outlooks; and, hence see greater opportunity out of 3Q prints,” the analysts explicated.

In the specialty apparel space, the firm continue to conceive 2015’s improved performance in fashion and denim as “a silver lining for select retailers.” Additionally, the anniversary of port issues and inferior back half cotton prices have created an opportunity for retailers.

Finally, the research note added, the BMO’s proprietary BBD Monitor show strength at Express, Inc. EXPR and Abercrombie & Fitch Co. ANF.

On the other hand, the analysts remain cautious on Urban Outfitters’ Anthro brand, and, interestingly, “the BBD Monitor indicates possibility for newer issues at sister brand Urban Outfitters.”

The firm believes Express and American Eagle Outfitters AEO could be the big winners at the Holiday season “as competitors find footing and see positive commentary and upside to 4Q guides from both AEO and EXPR management teams.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.