How the U.S. Presidential Election Is Ratcheting Up Risk for Fashion Stocks
Evan Clark
8 min read
From the start, 2024 promised to be a tough year for fashion stocks.
Inflation has made living more expensive, interest rates are up and geopolitics seem all the more unsettled — from conflicts in Ukraine and Gaza to edge-of-your-seat elections in Europe and, now, the U.S.
The fervor for artificial intelligence and big tech helped drive the stock market higher — the S&P 500 is up 16.5 percent to 5,555.74 for the year so far, with AI specialist Nvidia up more than 150 percent — but fashion stocks have been decidedly mixed around the globe.
There were style standouts for both better and for worse.
Abercrombie Fitch & Co. shares shot up 83.1 percent to $161.53 as chief executive officer Fran Horowitz’s seven-year effort to remake the chain blossomed.
On the other side, longtime Wall Street powerhouses like Nike Inc., down 31.9 percent to $73.40, showed cracks in their armor and are now fighting their way back with consumers and investors.
Analysts and retail experts said that for the rest of the year, retail stocks’ mixed performance is likely to only get more muddled.
A Stressed Consumer
“It’s a tough space,” said Ike Boruchow, an analyst at Wells Fargo. “The consumer backdrop is not ideal.”
Shoppers are not only bearing well-known economic pressures, but they are also shifting more spending back to services from goods and generally settling into a post-pandemic normal.
It’s a normal that has not favored fashion, seemingly anywhere.
“European wholesale is going through what seems to be exactly what U.S. wholesalers started going through a couple quarters ago,” Boruchow said, referring to a tough period of sinking sales. “China, no matter how you look at it, it’s bad. It’s not nearly playing out as most of our global brands had thought. And that’s a key growth driver for these companies. Look at the last several reads we have on China, whether it was Levi’s or Nike. China is a problem.”
While there are some “idiosyncratic brands that are struggling or outperforming,” Boruchow described fashion retail as “a slow stuck-in-the-mud type of industry today that probably gets worse well before it gets better.”
The Election Equation
In the U.S., at least, the drama of the presidential election, from the attempted assassination of former president Donald Trump to the last-minute rise of his likely rival, Vice President Kamala Harris, is draining attention away from everything else.
“You’ve got an election year, which is going to be the most polarizing you’ve ever had,” Boruchow said. “We’ve done work that shows that in a typical election cycle [the softlines space] will see a 150 to 200 basis points slow down in revenue trend, second half versus first half.
“So whatever we think is going on now, the election this year means it’s going to slow by 1 or 2 points,” Boruchow said. “People are not focused on spending money. They’re on their couch. They’re, pick your poison: They’re watching MSNBC or they’re watching Fox and they’re totally engaged in the election and the news cycle, and they don’t spend money.”
In the U.S. at least, that distraction might be the uber trend that colors everything else, from the booms in denim and premium running to the weakness among department stores.
Beyond that are the other X factors — shipping in the Red Sea, the price of containers, last-mile logistics and the potential for post-election trade policy changes and more.
First Half Vs. Second Half
While Simeon Siegel, analyst at BMO, said the first half was “a story of execution and winners and losers” in the stock market, that story has now changed.
“We right now are back, at least for the present, into a macro-driven story and thinking about themes like tariff and interest rates and elections,” Siegel said.
Investors need to decide just how much risk they’re willing to take on a turnaround like Under Armour Inc. and how much they’re willing to pay for an already highly valued but stronger business like off-pricer TJX Cos. Inc., he said.
The Risk/Reward of Turnarounds
If you’re the daredevil type who likes risk, there are certainly options.
Siegel said Under Armour — which is being remade by founder Kevin Plank who is once again CEO and is looking to do more with less — has an “interesting risk-reward” and that the brand is not as “dead” as many believe.
But such bets take both a strong belief and a sturdy stomach.
“Turnarounds, when they work, can be powerful stories for the stocks,” Siegel said. “And turnarounds, until they work, are viewed as dumpster fires. The trick and the skill is looking at a business that has downside protection and has upside potential with heavy lifting that is not impossible.”
Consultant Michael Prendergast, managing director in Alvarez & Marsal’s consumer and retail group, said the companies that have turned in the best stock performances, like Abercrombie, have some commonalities.
“One is branded excellence, whether that’s preservation of their brand or progressing of their brand, or really focusing on aligning their brand with the modern demands of the customer,” Prendergast said. “And then the second thing is most of these companies are operationally excellent and have a consistent conviction and commitment to operational excellence.
“That sounds very elementary, but I do think it’s both areas, branding and operations — you have to have a long-term commitment to excellence in both of them,” he said.
A prime example is Abercrombie Fitch & Co.
“Absolutely no surprise,” Prendergast said. “They’ve been under a long-term, multiyear reinvention process, both of their brand and of their products. They’ve done a terrific job and now they’re reaping the benefits of it.
“You look at somebody like Ralph Lauren Corp., they’ve done the same thing,” he said. “They’ve been under a long-term quest to go after high margin business, less volume growth, and it’s paid off.” Lauren’s stock is up 16.8 percent to $167.01.
But that kind of focus is hard in fashion.
“It’s a market where you live and die by your last sell-through,” Prendergast said. “It’s a very conflicting situation. How do you in turn focus on long-term strategy?”
It’s a shift that Under Armour — which seems to be on everybody’s lips — is trying to make.
A look from Balenciaga x Under Armour.
“I loved Kevin Plank’s announcement when he retrenched after the last quarter, because that is a multiyear strategy,” Prendergast said. “He put all of his cards on the table, it was ugly, and clearly they got punitively damaged for it from a stock standpoint. But he basically put a long range plan on the table and said, ‘Here’s where I’m unhappy with the business. This is where I want to take it. This is where we’re going transparently, and we’re marching there.’ I have full confidence that he will do that.”
Searching for an Investment Theme
As investors bet on turnarounds, wonder over the ailing active giants, marvel at Abercrombie’s comeback, Walmart Inc.’s efforts to take on Amazon or the high-flying off-pricers, they’ll be on the lookout for the next big stock market theme.
Like fashion, the stock market has trends with stockholders chasing one type of company or investment thesis and driving up the price of those stocks before moving on, and there have been no shortage of stock market darlings in recent years.
“It felt as if the sectors were driving movement in stock,” said consultant Matthew Katz, managing partner at SSA & Co. “Everyone talked about this barbell where luxury and discount were really moving, and in the middle were lots of troubles. Then there was some conversation around the true digital darlings, and then it was going to be the large conglomerates, multibranded businesses, and then it was the combination of direct to consumer branded and store-based retailers.”
But Katz said a scan of the stock market this year showed companies with each of those attributes among both the winners and the losers.
Some of that has to do with the trends Wall Street has picked up and dropped as it looked for growth, and some of it has to do with the world today.
“There’s uncertainty about weather, there’s uncertainty about the market, there’s uncertainty about housing, there’s uncertainty about isolation versus global cooperation,” Katz said. “There’s continued conflict in the world. Supply chains are tough. Travel might be impacted.”
It’s a world where, as Katz said: “Agility is important. Having flexibility with capital and cash to do the things you want to do when you see the opportunity, that’s always been a strategy, but it doesn’t work unless you have the agility to pivot.”