What to Watch: Fashion Stocks Soar, but Will They Stay Aloft?

Fashion might be its own hardest act to follow.

The industry largely powered through the COVID-19 uncertainty and an epic global supply chain backup last year to post big gains on Wall Street as firms retooled for the pandemic and beyond.

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But while investors can be quick to put companies up on a pedestal and keep plowing more money into a hot market, they can also turn on a dime. And as the market settles into 2022, the comparisons with last year’s bull rush are only going to get harder — and come just as the government stimulus that helped support the economy fades.

For now, the rush is still on — and it’s not just the buzzy new IPOs that are getting some extra attention.

After rising 18.7 percent last year, the Dow Jones Industrial Average set a new all-time high on Tuesday — again — briefly trading at 36,734.84 before closing up 0.6 percent, or 214.59 points, to 36,799.65.

It’s been the luxury crowd leading the fashion market higher, including Hermès International, up 74.6 percent in 2021; Brunello Cucinelli, 69.4 percent; Versace parent Capri Holdings Ltd., 54.6 percent; LVMH Mo?t Hennessy Louis Vuitton, 42.3 percent; Estée Lauder Cos. Inc., 39.1 percent, and Moncler, 28 percent.

There were also winners further down the price scale, including Abercrombie & Fitch Co., up 71.1 percent; Ulta Beauty Inc., 43.6 percent; Target Corp., 31.1 percent; American Eagle Outfitters Inc., 26.2 percent, and Levi Strauss & Co., 24.7 percent. (Last year’s leader was Macy’s Inc. with a 123.7 percent run that was fueled by an activist investor push to separate the retailer’s e-commerce and brick-and-mortar operations).

Investors will have a chance to read the tea leaves as companies release their holiday results and tiptoe toward 2022 projections — some updates are expected next week in conjunction with the annual ICR conference.

Jay Sole, a stock analyst at UBS, said companies will be going back over holiday sales when investors are keen to talk 2022.

“Our view is companies will give fourth-quarter sales and EPS updates that are generally better than the market is expecting,” Sole said in a research note. “However, we doubt this good news boosts sentiment much. The reason is we don’t foresee companies giving first-quarter or fiscal-year 2022 outlooks, which assuage market fears around tough [comparisons].

“We don’t expect companies to give much forward-looking commentary around sales or costs and whatever guidance is offered is likely conservative due to uncertainty related to COVID-19,” Sole said.

Projecting what will happen through a quarter is hard enough, let alone a year. And all bets seem to be off with the Omicron surge straining essential services and forcing consumers to hunker down.

But consultant Hemant Kalbag, managing director in Alvarez & Marsal’s consumer retail group, said the stage is set for the retail resurgence to continue with shoppers looking to buy into new fashions as Omicron wanes (fingers crossed).

“There will be a pent-up demand for people wanting to refresh their wardrobes,” Kalbag said. “That will be good for the fashion industry. People are looking to go out and dress up.”

And the COVID-19 driven supply chain back ups of 2021 are expected to ease as the year progresses.

One key issue to be navigated will be prices across the economy.

“There is real inflation,” Kalbag said. “Inflation in labor costs, inflation in raw materials.”

Retailers and brands can try to hold the line on prices for consumers, accept lower margins and risk irking investors, or pass along prices to shoppers and risk alienating them.

“Rather than price increases, I suspect most retailers and brands will pull back on [price] promotions,” he said.

But if performance lags, there are clearly investors ready to pounce. Already, Macy’s and Kohl’s Corp. are facing activist pressures.

“There is going to continue to be pressure on the space in the coming year,” Kalbag said.

As if fashion needed more pressure.

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