Softline spending should show modest improvement during the second half of 2024 as back-to-school shopping and improved consumer sentiment provide a tailwind to the industry’s growth rate for the rest of the season. With softline stocks trading at a 24% P/E discount to the S&P 500 compared to its normal 13% discount, the sector is ripe for bargain-hunting, especially now that Federal Reserve Chairman Jerome Powell has raised the odds for a September rate cut which will jump-start consumer confidence and alleviate capital constraints on individuals and businesses.
Softlines, also known as soft goods, are those made from fabrics, textiles, or flexible materials. They include clothing, bedding, linens, costume jewelry, luggage, and handbags. Spending trends impact each differently with some bolstered by back-to-school shopping, others getting a more immediate boost from holiday spending.
Data compiled by UBS shows inflation remains a major issue for U.S. consumers and a higher percentage of shoppers are looking for value more often. At the same time, the data looks “less bad” in August, month-over-month. The UBS “Happiness Index” shows U.S. consumers’ mood improved in August, and this is true for all income demographic groups. Consumers are also more financially secure with UBS data showing 35.3% feeling financially secure in August, up 50 basis points from July.
For Back-to-School, UBS endorses American Eagle Outfitters (AEO) with a strong combination of solid fundamental strategy, favorable quant factors, high and strong leverage in the current denim fashion trend.
Another contributing factor to outperformance among softlines is the “Go it Alone” strategy. As consumer shopping moves more towards online, companies that can “Go it Alone” through online sales don’t need malls or other third parties to drive consumer engagement and sales growth.
“These companies are likely to take market share and become the industry winners,” UBS says.
And companies with “premium positions” in the marketplace have the best opportunity to “Go it Alone” and grow, specifically those that operate a profitable direct-to-consumer business while also funding investments in product innovation and brand relevance. Companies with a “Go it Alone” growth potential also exhibit consistent inventory control and full-price selling, a disciplined brand management strategy, and are properly segmented within healthy channels.
Those with the best chances to succeed on a “Go it Alone” paradigm include On Holdings (NYSE:ONON), Skechers (SKX), and Deckers Outdoor (DECK).
Seeking Alpha has written extensively on the strength of On Holdings (ONON) and Deckers (DECK) as disruptors to the multi-billion-dollar footwear category. On and HOKA continue to steal market share in an intensely competitive category with new product launches, like On’s Cloudsurfer and Cloudboom Strike Lightspray and HOKA’s Skyward X, expected to fuel growth through 2025.
“Despite the tough macro environment and fierce competition, people are buying On shoes at a record pace – a testament to its strong brand, innovative technology, and sleek design,” SA investor Riyado Sofian writes.
And SA’s Ken Taylor concurs adding that if On Holdings (ONON) is able to successfully scale its footwear business, expand its apparel offerings and sales, and continue to expand operating and free cash flow margins, “it should scale into a much larger company and turn out to be an incredible investment.”
For UBS, the softline stocks best positioned to outperform are those with strong growth outlooks not fully priced in, including Levi Strauss (LEVI), Ralph Lauren (RL), Amer Sports (AS), Birkenstock (BIRK), TJX (TJX), Boot Barn (BOOT), and Signet (SIG), as well as Deckers (DECK), On (ONON), and Skechers (SKX).
On the other end of the spectrum, UBS considers Nordstrom (JWN), Macy’s (M), Dillard’s (DDS), Kohl’s (KSS), and Buckle (BKE) as those with well below average growth where the downside isn’t fully priced in.
