Bridget Weishaar: The apparel sector has been a little bit weak heading into the holiday season, and we think that there are two trends that are really going to characterize performance in the fourth quarter.
First of all, the consumer seems very focused on value right now--even more so than in the past year. The performers that have done very well have been companies like TJX Companies (TJX) and Wal-Mart (WMT), which offer that value proposition that customers have wanted. We've also seen way too much inventory in the pipeline in the apparel sector in general, and that typically means that there's going to be high levels of discounting going into the holidays.
The second trend that we've noticed is a shift in category spending. Consumers have shifted away from buying apparel and into other categories. We think there are a couple of factors that have driven this. First of all, there hasn't been much in the way of new fashion trends in apparel, so I just don't think there's that much exciting merchandise out there.
Second, interest rates have been very low, and we think consumers are taking advantage of that and buying big-ticket items like homes, autos, and certain categories of consumer electronics. We also think that consumer spend, in general, has been pressured as rents have gone up and medical expenses have also gone up. So, we're seeing a little bit of weakness in the consumer, especially in the apparel sector.
That being said, we think that both of these trends lead to an interesting entry point for some high-quality stocks. The two apparel stocks that I would highlight as my top picks right now are TJX and VF Corp (VFC). TJX is very interestingly positioned in the off-price channel, taking advantage of that value proposition, while VF Corp is a best-in-class retailer with a brand portfolio of more than 30 brands and an exposure to many international markets.