After a mixed global scenario in 2012 in the apparel industry, I feel 2013 will be more stabilized looking at the optimism in the overall business environment. The various opportunities in this sector include strategic partnerships to support supply chains, design and innovation, better use of technology, and better margins. Almost all major apparel companies are focusing on such strategies to satisfy their investors with improved returns in 2013. However, certain headwinds are also expected in the form of uncertainty and rising production costs. I have screened three apparel stocks for investors to look-out for in 2013. I feel these companies will be able to surpass the headwinds in the industry with their much focused growth strategy. Let’s analyze these stocks in detail.
Ralph Lauren Corp (NYSE:RL)
Recently, the company reported its 3Q13 results with its total revenue up by ~2% to $1.8 billion. This was mainly fueled by its growth in the retail segment which offset the decrease in its wholesale shipments. Its retail sales increased by ~6% to ~$1.1 billion whereas the wholesale segment saw a decline of ~2% Y/Y. Overall, the company was able to post good numbers with its operating income up by ~13% y/y to ~$304 million. This shows the company’s strong hold on its profit margin.
Much brighter road ahead
Ralph Lauren is already done with phase one of its SAP roll out. The next phase will start in FY2014 and will include initiatives about its global distribution activities. The SAP implementation will focus on processes such as order-to-cash and the global supply chain. This investment will start paying off in FY15 with an opportunity of around a 25% reduction in the SKU (stock keeping unit). Also, the benefits like procurement savings removing manual data transfer will follow. This will further provide the company with great support in its margin improvement initiatives. Phase three of this process will start in FY15/FY16 focusing more on its Europe and Asia operations.
Another factor that I like about Ralph Lauren is their capital allocation strategy, which focuses on new stores, dividends and buybacks in the future. The new store strategy will include expansion in China, which started in 2012 with a target of 60 new stores in the next three years. The business in China has the potential to contribute around one-third to the global sales as compared to only ~1%-2% currently. This growth via expansion would support the company’s top-line revenue in the next couple of years. This growth will be passed on to its shareholders as their return under its capital allocation strategy.
Under Armour Inc (NYSE:UA)
Under Armour’s stock is on a down slide since the last six months with a movement of ~ -12%. The company was mainly challenged due to unfavorable weather conditions and its chronic supply issues. In spite of these factors, Under Armour posted solid 4Q12 results with its profits up by ~54% fueled by its sales growth in all major segments. Its footwear segment was very strong with its net revenue up by around 43% to ~$45 million.
Moving on to 2013, innovation will continue to drive its footwear as well as apparel stocks. The company will remain focused on product innovation, diversification and enhancing the overall appearance of its retail outlets. Recently, Under Armour launched a new fitness monitoring device Armour39 targeting the determined athletes. With this launch, the company marks its entry into the flourishing fitness technology market giving a tough fight to established players such as Nike. I feel Armour39 is better placed as it measures heartbeat rate, calories burned and calculates a WILL power number which shows the efficiency of the workout. It combines all the data in an easier way and presents a benchmark of individual workouts. The system currently works with iOS but will soon be launched on Android also. The growing attraction towards the work-outs technology will provide a great opportunity to the company to mark its presence in this segment.