In initiating coverage on the Apparel & Accessories sector, Goldman Sachs said many companies in the space are expected to benefit from ongoing lifestyle shifts towards active and casualwear, faster fashion cycles and digital’s ability to drive direct communications with consumers. Among active lifestyle stocks, VF was initiated at a “Buy” while “Neutral” ratings were given to Nike, Under Armour, Lululemon and Canada Goose.

“Apparel & Accessories brands are attractive assets characterized by high growth, strong margins and healthy returns. Several brands in our coverage group are showing improving fundamentals driven by better momentum and better control, and we initiate with an Attractive coverage view,” wrote Alexandra Walvis, the lead analyst in the space at Goldman Sachs.

Among the positives, Goldman wrote lifestyle shifts and product cycles stand out as key drivers of demand. The report states, “Exogenous lifestyle shifts towards active and casualwear, and endogenous innovator-led fashion cycles (particularly in jewelry and handbags), are driving fresh consumer demand for apparel and accessories.”

Fashion cycles are also getting faster, with the consumer demanding new product more often and social media “exacerbating the frenzy.” Fashion innovators and those “fast enough to respond” stand to benefit.

For vendors, digital is enabling them to communicate more directly with consumers and better understand consumer preferences, “in turn leaving them better placed to create relevant product.” Digital is also enabling vendors to more easily sell directly to consumers “in a capital-light manner.”

Finally, the domestic high-income consumer and the tourist consumer are spending, the retail environment is improving, M&A activity involving brands in the space is accelerating and “the sector performs well in periods of rising interest rates and inflation,” wrote Goldman.

Goldman said in evaluating stocks, the firm looks “for companies with momentum, strong category exposure, control and acquisition optionality.”

Among the stocks in the active lifestyle space:

  • VF Corp was initiated with a “Buy” rating at a 12-month price target of $96. Goldman called VF an “under-appreciated platform model with expertise in operating active and lifestyle brands.” Strong momentum is being seen by Vans; The North Face and Wrangler have “credible turnaround potential” and most of VF’s brands have “material opportunities for channel shift enabled by digital.” Doubling the company’s workwear exposure with the acquisition of Williamson-Dickie also provides new growth and margin expansion opportunities. Goldman wrote, “Finally, a strong balance sheet and proven expertise in integrating acquisitions leave us enthusiastic about opportunities to deploy cash.”
  • Nike was initiated with a “Neutral” rating and a 12-month price target of $78. On the plus side, Nike is expected to benefit from the global shift towards active lifestyles persists, arriving innovation that’s expected to reinvigorate growth in North America and a reduction in “competitive headwinds.” Challenges include slowing momentum for the Jordan Brand, a multi-year decline in marketing investments and continued evidence of markdown activity at the brand. The brand may also face possible near-term disruption from Nike Brand’s push to sell largely to “differentiated retail” spaces. Goldman added, “Further, FX is returning to a headwind, and with relative valuation above historical ranges, we believe recent momentum in the stock is largely embedded in Street estimates and see the long-term value of the brand as well-appreciated by investors.”
  • Lululemon was initiated with a “Neutral” rating and a 12-month price target of $133. The yoga-themed retailer’s growth is accelerating as the company benefits from continued secular growth in athletic apparel, and as the company cycles operational challenges. Strong control of distribution, inventories and a “zealous protection of full-price values” should continue to build that momentum. Multiple expansion opportunities remain, particularly international. At this point, however, Goldman wrote that Lululemon’s “valuation and our assessment of sentiment suggests this is well understood by the market.”
  • Under Armour was initiated with a “Neutral” rating and a 12-month price target of $22. While Goldman is “cautious on the company’s core brand momentum in the medium term and believes there is some risk to brand health and gross margins from inventory clearance, we believe these risks are well understood by the Street and see potential execution upside as management becomes increasingly focused on tighter control of inventories and costs.” The brand is still expected to continue to benefit from lifestyle shift tailwinds and a strong U.S. and international consumer, and Goldman believes “the cycle of EPS misses and negative guides (a persistent issue in 2017) is largely in the rearview mirror.”
  • Canada Goose was initiated with a “Neutral” and 12-month price target of C$92 (U.S.$69). Canada Goose represents the “fastest growth profile” among the stocks Goldman picked up in the space, with “considerable pent-up demand” in existing distribution channels and new opportunities across product (lighter-weight styles) and geographies (China). The company also has the “most margin upside” in Goldman’s new coverage, driven by the shift to direct-to-consumer. But Goldman expects gains to moderate somewhat in the years ahead and indicated the stock’s gain of 100 percent year-to-date already reflects Canada Goose’s recent outsized performance.

On Monday, VF closed at $81.21, easing 37 cents; Nike ended at $72.35, down $1.08; Under Armour closed at $20.76, off 3 cents; Lululemon, $124.86, up 68 cents and Canada Goose, $58.84, gaining $1.23,

Other stocks Goldman Sachs initiated coverage on included Tapestry (“Buy”), Tiffany (“Buy”), PVH (“Sell”), Ralph Lauren (“Neutral”) and Michael Kors (“Neutral”).

Photo courtesy Vans