Bank Of America On Apparel, Footwear And Textiles: Challenging Outlook May Persist

As store traffic remains weak, retailers may be forced to maintain an elevated promotional environment going in to the all important winter holiday shopping season.

Robert Ohmes of Bank of America published an industry wide report on Thursday. Ohmes believes that substitute purchases to apparel and fashion accessories (such as smartphones) are gaining momentum, leaving retailers with a smaller piece of the consumer's disposable income.

Ohmes noted that consumers continue to take on financial obligations such as auto and school loans and purchasing homes, pointing to a “mid-cycle shit that historically results in slower growth of apparel and other discretionary purchases.” This would mimic a scenario similar to 1994-1996 when clothing sales growth stagnated as furniture, home furnishing sales and auto sales accelerated to double-digit rates.

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According to Ohmes, branded apparel names have historically tended to trade down relative to the S&P 500 in October by 130 basis points. Athletic stocks have also historically underperformed the index by 80 basis points. In November, both categories typically outperform the index as investor expectations improve heading into Black Friday. However, this is typically followed by a “lackluster” December.

In addition to an uncertain retail environment, a strengthening U.S. dollar could become a “significant” headwind to apparel and athletic vendors in the bottom half of 2014 and in to 2015. This would be most evident against the euro and Canadian dollar, where apparel and athletic vendors have high exposures.

Ohmes singled out Michael Kors Holdings Ltd KORS and Dicks Sporting Goods Inc DKS as two growth stocks with attractive valuations as both stocks are trading at discounts to their growth rates.

Shares of Michael Kors are trading at a two-year forward price-to-earnings ratio of 14.8x, despite the analyst's outlook for 20 percent plus revenue and earnings per share compounded annual growth rate.

Dicks Sporting Goods shares are trading at a two-year forward price-to-earnings ratio of only 13.9x, despite the analyst's prediction of an upcoming “powerful” e-commerce push and floor space reallocation away from gold and into apparel and footwear.