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By Bridget Weishaar | 03-25-2015 12:00 AM

4 Trends in Apparel Retail

Morningstar retail analyst Bridget Weishaar discusses the main drivers of performance in the sector and shares several picks.

Bridget Weishaar: As the fourth-quarter earnings wind down, we look into 2015 and see four key drivers for performance. In the apparel retail sector, our top picks continue to be Gap (GPS), PVH (PVH), and VF Corp (VFC).

So, the four things that we are looking for in 2015 include an easing in the spend of the lower-income consumer. The wallet has been very tight in this demographic, and we are finally seeing signs of her starting to spend some of the excess money that she is getting from lower gas prices, better employment rates, and slight wage increases.

Secondly, we think international exposure is going to be a big headwind for many retailers. It's going to impact both the top line and the margins as the top line gets converted back into U.S. dollars and, on the margin line, most of the cost of goods sold is denominated in U.S. dollars.

Third, we see labor costs and IT spend starting to tick up, and we think that this will also have a negative impact on profitability.

Finally, the West Coast port strike has had a big impact on inventory levels going into the first half of 2015, with the first quarter likely to be underinventoried and then the second quarter likely to be highly promotional as they clear through all of the excess inventory.

So, many of these drivers, we note, are short term in nature--those being the [foreign exchange] impact and the West Coast port strike--and could [make for] an interesting entry point for many of our stocks.

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