Basic Togs Overtaking High Fashion

It's back to basics for apparel makers as high fashion takes a back seat to underwear, socks, leggings and fitness clothing. The shift in consumer buying trends — toward basics and athletic-inspired casual wear — has put a spotlight on everyday innerwear and activewear-focused companies such as Hanesbrands (HBI), G-III Apparel (GIII), Cherokee (CHKE) and Columbia Sportswear (COLM), not to mention that increasingly popular kid-on-the-block, the tech-inspired performance brand Under Armour (UA).

They are among the best performing stocks in apparel manufacturing. Another member, Carter's (CRI), has struck it rich with basics in baby wear, such as T-shirts, onesies, socks and blankets.

Upscale fashion brands Ralph Lauren (RL), Michael Kors (KORS) and Coach (COH), meanwhile, have fallen off the runway, struggling to keep sales and profits growing at the same lofty rates they once enjoyed.

"Underwear and socks are leading the charge," said Marshal Cohen, chief industry analyst with the NPD Group.

Part of it is cyclical, he says. Consumers tend to "binge" on underwear when fashion styles change, such as the move away from skinny jeans to leggings and workout pants.

"As bottom styles change, the underwear business picks up," he said.

Dressing In Layers

Hanesbrands, one beneficiary of that trend, sells underwear and activewear under its namesake brand as well as Champion, Playtex, Bali and Maidenform, among others.

The company is a "cash machine," said analyst Steven Marotta of C.L. King & Associates.

He says most of its merchandise, which is sold wholesale to department stores and mass-merchants, is usually fully priced.

Hanesbrands has used its plentiful supply of cash to help make three notable acquisitions in recent years, Marotta says. They include Maidenform in 2013, the French innerwear maker DBApparel and, most recently, Knight Apparel, which sells collegiate logo apparel to mass retailers.

"When they layer on those acquisitions to their own manufacturing platform, it's highly profitable," Marotta said.

Columbia Sportswear has made strides in footwear and outdoor apparel, sold at sporting goods stores such as Dick's Sporting Goods (DKS) and some department stores, says Camilo Lyon, analyst with Canaccord Genuity.

Its outdoor products "are on trend right now," he said, adding that its Sorel-branded footwear business has been doing well.

"When a company like Dick's Sporting Goods is one of the fastest growing retailers, you know something's up," Cohen said.

Sporting brands are gaining all the momentum, he says. And he added, "All the sportswear companies are trying to create an 'athleisure'-inspired style.

Technical innovations are driving a lot of consumer interest in Under Armour. "The products look awesome," said Paul Swinand, an analyst with Morningstar, who added that the stores have been very busy.

Swinand is apparently a personal fan. "Friends, family and investors say to me, 'How many tight shirts do you need?' I say, 'You can still buy more. They still make them better.'

Other apparel makers are following Under Armour's lead in fabric innovation. G-III, as one example, said it was adding "technical fabrics" to its men's business in order to boost its "appeal," CEO Morris Goldfarb told analysts in a conference call.

Acquisitions are also moving the needle for activewear brands. G-III acquired footwear brand G.H. Bass in late 2013 and recently announced it would step up Bass' expansion in the U.S. and Canada through a wholesale licensing and design agreement with Genesco.

Goldfarb thinks G.H. Bass can become a $1 billion brand.

Cherokee, which focuses on tees, hoodies and hats, recently said it would acquire surfing brand Everyday California and use it as a licensing vehicle. Cherokee's "deal appetite remains high," noted Eric Beder, an analyst at Wunderlich Securities.

Are Consumers Simply Bored?

For all its flexing muscle, the back-to-basics trend may have a darker side.

"There's something wrong when the most basic categories are the ones exciting the industry," Cohen said. He noted that 57% of consumers surveyed by NPD viewed fashion assortments over the holiday season as boring.

"If it's boring, that doesn't strike the impulse purchase," he said, adding that impulse-buying accounts for nearly 40% of fashion purchases. And basics are not impulse buys.

If consumers are bored, Target's short-lived Lilly Pulitzer promotion this spring provided a breath of fresh air. Lilly's breezy, brightly colored prints and accessories sold out within minutes as customers sought to land low-price versions of the high-end line.

Target's promotion helped increase awareness for the brand's owner, Oxford Industries (OXM), which plans to step up Lilly store openings in the U.S.

Many apparel wholesalers, among them Carter's, Under Armour and G-III, are increasing their direct-to-consumer efforts, opening more stores and sharpening their e-commerce sites.

G-III's Goldfarb told analysts that the firm could potentially double the size of its retail footprint over time, from 155 stores now.

E-commerce is especially helpful to reeling in millennial buyers. "They love to shop on digital channels (especially mobile) and are growing to be the dominant spend across all retail," said Al Sambar, managing partner at Kurt Salmon.

An Abundantly Limitless Market

Carter's plans to launch its namesake brand on China's largest e-commerce website, Alibaba (BABA), in the second half of the year. It's also exploring other ways to build its presence in China.

Under Armour also wants to play deeper on the China field. Of the 100 stores it currently plans to open outside North America, the majority are eyed for China.

China "seems like an abundantly limitless place," said CEO Kevin Plank in a conference call.

Global apparel brands "can do very well" in markets with rising middle classes, such as China, says Sambar.

In that regard, some of the fashion brands that have stumbled still might have opportunities to grow in international markets.

Ralph Lauren has seen a slowdown in the U.S., but it "hasn't taken off in emerging markets yet," said Swinand.

Ralph Lauren recently merged its luxury lines into single labels for women and men, Ralph Lauren Collection and Ralph Lauren Purple Label, respectively. Company president Jackwyn Nemerov told analysts in a conference call that the change will "clarify our luxury message.

Nemerov sounded more excited about the upcoming global launch of Polo Sport as a way to leverage the Polo brand's "athletic spirit and sensibility.

Polo Sport will start off with men's and boys' lines. Preorders for the August launch begin in June.

"As you know, the active segment of the apparel market is growing at a rapid rate and both we and our wholesale partners believe this is a significant long-term market share opportunity," Nemerov said.

Michael Kors tries to strike a fashion pose in what it calls the "luxury-lifestyle" market.

It's had a long run of stunning top and bottom-line growth as it expanded the brand into various channels in the U.S., Europe and Japan. But growth has slowed. And retail partners have marked down product to clear out inventory.

"Kors is suffering from overdistribution," Lyon said. He said the brand is "everywhere," from discount apparel chains T.J. Maxx (part of TJX Cos. (TJX) and Ross Stores (ROST) to department stores such as Macy's (NYSE:M)and the company's own retail stores and website.

"I don't think they've done much to maintain the brand's exclusivity," he said. "That's not to their advantage in the long term. Other brands are out there competing for space.

Profit and revenue growth remain healthy but have slowed from prior highs. With 114 more stores open than a year earlier, Kors' fourth-quarter revenue grew nearly 30% to $1.3 billion. Same-store sales were up 8.6%, but that was lower than the 15.4% a year earlier.

Part of Kors' slowdown has to do with its "meteoric rise," says Cohen, who doesn't think the brand has lost its luster. That may be so, but the stock is down 38% from its high in February of 2014.

"When you're king of the hill, you always have people nipping at your heels," Cohen said.