Dressed for Success?

The apparel industry is the latest addition to S&P's top performers' list. But investors need to shop carefully

By Sam Stovall

The list of industries with top Standard & Poor's has sported a new look in recent weeks with the addition of Apparel, Accessories, & Luxury Goods. The group has enjoyed some sharp gains in the midst of a sloppy stock market. During 2001, the industry subindex climbed 12.2%, vs. an 11.8% decline for the S&P 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes). And year-to-date through Aug. 30, the group continued to significantly outperform the market, rising 10.3%, compared to a 19.5% loss for the S&P 1500.

Can this group remain in fashion with investors? S&P analyst Tuna Amobi has his doubts and maintains a neutral outlook for it. In spite of increasingly favorable inventory-to-sales ratios, as companies better align their supplies with consumer demand, Amobi projects very modest sales growth in 2002 in the absence of major near-term fashion trends or products. He believes casual lifestyle-oriented products will continue see the best growth.

While the women's and junior categories should continue to grow modestly, Amobi expects a gradual -- but slow -- second-half turnaround in the men's apparel as well. With inventories trimmed from recent industrywide promotional selling, Amobi says the near-term demand-supply imbalance should continue to ease. But he still sees a moderate level of markdown activity in the second half of 2002, with a gradual improvement as retailers are able to realize better prices on merchandise.


  Since the apparel business is mature, Amobi continues to expect extremely competitive conditions, with key players vying aggressively for market share. Demand should remain strong for brand-name apparel with high visibility. Companies with well-known labels will likely attempt to improve sourcing and efficiencies, broaden product offerings, and target unfilled niches through strategic acquisitions.

Amobi also expects some manufacturers to increasingly use alternative distribution channels -- such as their own retail stores, specialty shops, mass merchandisers, and the Internet -- as they face stagnant growth in available selling space at old-line department stores.

Current industry trends have handed consumers significant influence in the market, notes Amobi. As shoppers focus on value, apparel companies have responded by moving certain product lines to lower price points and creating entirely new midprice lines -- some specifically designed for discount chains and mass merchandisers.


  Also, as consumers buy closer to season (especially true of this year's back-to-school period) and request fresh products, companies have reacted by producing and shipping later, and reducing the amount of time it takes to bring new offerings to market. For the longer term, Amobi believes efficient companies that are best in tune with consumers' needs will outperform the rest.

Amobi's top pick in the industry is Quiksilver (ZQK ), which he ranks 5 STARS (buy). He thinks this provider of youth-oriented casual apparel and accessories should continue to gain ground thanks to modest but steady U.S. growth and continuing momentum in Europe, aided by recent weakness in the U.S. dollar vs. the euro. Amobi expects a relatively strong reception for Quiksilver's fall offerings.

S&P Relative Strength Rankings

These industries carry 12-month relative strength rankings of "5" as of Sept. 6, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.

Industry/Sector Largest Company (Market Cap.) S&P STARS* Rank
Apparel, Accessories & Luxury Goods/Consumer Discretionary Quiksilver (ZQK) 5 STARS
Brewers/Consumer Staples Anheuser-Busch (BUD) 4 STARS
Casinos & Gaming/Consumer Discretionary Harrah's Entertainment (HET) 4 STARS
Commodity Chemicals/Materials Lyondell (LYO) 3 STARS
Consumer Electronics/Consumer Discretionary Harman International (HAR) Not Ranked
Fertilizers & Agricultural Chemical/Materials IMC Global (IGL) 5 STARS
Gold/Materials Newmont Mining (NEM) 4 STARS
Homebuilding/Consumer Discretionary KB Home (KBH) 5 STARS
Housewares & Specialties/Consumer Discretionary Fortune Brands (FO) 5 STARS
Managed Health Care/Health Care UnitedHealth (UNH) 5 STARS
Metal & Glass Containers/Materials Pactiv (PTV) 5 STARS

*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).

Stovall is chief sector strategist for Standard & Poor's

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