We recently published a list of The 10 best clothing stocks to buy now. In this article, we take a look at how Carter’s, Inc. (NYSE:CRI) compares to other apparel stocks.

Trends in the clothing industry

The internet has changed the way people buy clothes. Social media platforms and influencers have popularized “haul culture,” where people order large boxes of inexpensive clothing online and then browse through them. Also known colloquially as the “Shein effect,” people are turning to fast fashion and ordering clothes that offer an element of surprise upon receipt. Although Shein’s main suppliers are based in China, its customers are primarily based in the United States. The company’s global sales reached around $30 billion last year, nearly matching the $39 billion global sales of Inditex, the old-school fast-fashion leader and owner of Zara.

Fashion and apparel are among the world’s most significant industries and create important value for the global economy. According to McKinsey, this would make it the world’s seventh-largest economy when compared to individual country GDPs. However, the industry faced several challenges in 2023, with the United States and Europe experiencing slow regional growth throughout the year. While China began the year with a strong performance, it gradually tapered off and slowed down in the second half. Even the luxury segment saw uneven performance and lower sales. The fashion industry in 2024 can therefore be described in one word: uncertainty. Weaker economic growth, dwindling consumer confidence and rising inflation are making it difficult for companies to develop suitable performance drivers. A Reuters report showed that consumers are becoming more selective in their clothing choices and are shopping more. This has led to a “patchwork of winners and losers.”

Fashion forecasts by McKinsey show that the industry is expected to grow by 2-4% in 2024, with growth varying by country and region. The luxury segment is expected to make the biggest economic gain, but that does not mean that companies in this sector will not experience difficult economic conditions. The global growth forecast for the industry is lower in 2024 compared to 2023, falling to 3-5% from 5-7% in 2023 as shopping sprees come to a halt after the pandemic. Growth in China and Europe is expected to slow, but the US market shows a completely different forecast. Growth in North America is expected to pick up in 2024 after a sluggish 2023, reflecting the region’s more optimistic forecast.

The story continues

In addition, the current political unrest in Bangladesh is expected to affect the global apparel industry, disrupting the work of global clothing retailers from H&M to Zara. As these apparel giants head into the crucial holiday season, the disruptions could cause heavy losses for U.S. retailers and Bangladesh itself, which is the world’s third-largest apparel exporter as of 2023. Overall, consumer behavior in the U.S. has slowed, with people making do with what they have in their closets before the season changes. The Federal Reserve is also expected to cut interest rates in September. A report from Reuters showed that investors had previously bet that the Fed would cut rates by half a percentage point and now estimate a probability of about 75% for a quarter-percentage point cut at its September meeting. This should boost consumer confidence and ease spending behavior. With that in mind, let’s look at the 10 best apparel stocks to buy.

Our methodology

For this article, we used Finviz’s stock screener to identify over 20 apparel stocks. We then narrowed our list down to the 10 stocks with the most upside potential from current levels and listed the stocks in ascending order of their upside potential (as of August 19). We only selected stocks with a market cap of over $2 billion.

At Insider Monkey, we’re obsessed with the stocks hedge funds invest in. The reason is simple: Our research shows we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (Further details can be found here).

A colorful range of children’s clothing with different themes that captures the dynamism of the company.

Carter’s, Inc. (NYSE:CRI)

Upside potential from current level: 12.52%

Carter’s, Inc. (NYSE:CRI) is all about babies and toddlers. The company manufactures and sells clothing and accessories for this age group under its extensive portfolio of brands, including Carter’s, OshKoshB’gosh, Precious Firsts, Just One You, Child of Mine, Simple Joys and Skip Hop. Carter’s Inc. is expanding its international presence as there has been high demand for the company’s products in Mexico and Brazil, offsetting declining sales in North America.

The children’s apparel market in the United States is approximately $28 billion, with Carter’s, Inc. (NYSE:CRI) holding approximately 10% of the total market share over the past 12 months, giving the company a competitive advantage. Baby apparel remained the most popular segment in the company’s age portfolio, contributing approximately 60% of total apparel sales in the first quarter of 2024. The company operates in three segments: U.S. Retail, U.S. Wholesale, and International.

Carter’s, Inc. (NYSE:CRI) lost 23.66% of its stock value over a 52-week period, primarily due to weak direct-to-consumer trends and cautious consumer spending in the quarter. The combination of inflation accumulated over the past three years and the halt in pandemic-related stimulus payments has severely slashed many consumers’ budgets, with baby and toddler apparel also suffering from the cuts. However, consumer demographics are improving with the recent drop in inflation, and the brand’s in-store streamlining efforts should lead to a rebound in sales in the coming periods. Analysts expect the company to regain its leadership position in the space. With the upcoming rate cuts and rising consumer confidence, Carter’s may see a strong rebound in sales. Here’s what Aristotle Capital Boston, LLC had to say in its Small Cap Equity Strategy for the second quarter of 2024 investor letter:

The company’s earnings per share was $1.04 in Q1 2024, up 9.09% year over year. Net profit margin also increased by 10.91% to 5.65% within a year. Carter’s, Inc. (NYSE:CRI) median price target of $62.81 represents an upside of 12.52% from current levels. The company is currently trading at a P/E ratio of 10, a 33% discount to its sector. Carter’s, Inc. (NYSE:CRI) is held by 28 hedge funds as of Q2 2024, with Harris Associates holding the largest stake at $81.54 million.

Total CRI 9th place on our list of the best clothing stocks to buy. While we recognize CRI’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than CRI but trades at less than 5x earnings, read our report on the cheapest AI stock.

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Disclosure: None. This article was originally published on Insider Monkey.