With a 15 per cent upside potential, the apparel sector is trading at acceptable prices. The sector upside is entirely due to Inditex and M&S. In a €120 billion market cap sector made up of six stocks including Inditex worth €70bn, the post lockdown action was limited to Zalando, a €14billion ecommerce brand. Investors have remained on the side-lines since early June when consumers were effectively free to return to stores.
The crux of that misfiring is due to Inditex, as it is five times bigger than Zalando. Following its Q1 earnings, its target price was raised by about 10 per cent. The retailer booked a 95 per cent increase in online sales when 90 per cent of its stores were closed. The lack of performance of the sector at large may well indicate that investors are less concerned by the percentage of revenues derived from online, than by whether consumption will hit another COVID wall when stay-at-home policies combine with unemployment to bring down discretionary spending.
Before COVID-19, the sector had the profile of a rising annuity largely determined by Inditex. Only Zalando and Asos still have to become dividend payers and offset the shortcomings of M&S.
