The fashion industry faces many sustainability challenges, and it has been financially sucker-punched by COVID lockdowns in China and surging inflation. So investors with environmental, social and corporate governance issues in mind face a host of hurdles when it comes to trying on fashion stocks. But we found a handful of companies that stand to outperform the industry on both financial and ESG measures.
Apparel makers have long come under fire for being environmentally unsound. A 2020 report by McKinsey & Co. and the Global Fashion Agenda, a nonprofit group dedicated to improving sustainability in the apparel industry, found that the industry was responsible for about 4% of global greenhouse gas emissions in 2018. That amount is on par with the annual emissions of France, Germany and the U.K. combined. Moreover, much of the industry hews to the “fast fashion” business model, which designs and markets styles in rapid cycles to increase consumption and demand. As a result, any improvements made in fashion sustainability may be erased quickly by growing consumption.
Some apparel companies have committed to achieving net-zero emissions by 2050 using transparent, evidence-based measures as part of a United Nations initiative to coordinate the fashion industry’s sustainability efforts. But Lindita Xhaferi-Salihu, who leads the UN project, thinks regulation is needed to bring the full industry on board.
Managing climate risk isn’t the fashion industry’s only challenge. Labor and human rights issues are also tricky. The industry has a deep and complex supply chain. Most garment companies rely heavily on supply-chain workers in Southeast Asia, where human trafficking, violence and safety lapses abound, despite some improvements after a 2013 Bangladesh factory collapse killed more than 1,100 garment workers.
Change is Coming
Regulatory change on many levels may spur the fashion industry forward on sustainability. The Securities and Exchange Commission is moving closer to requiring clothing companies to disclose greenhouse gas emissions that occur all along their supply chains. New York is working on a fashion sustainability law requiring firms with more than $100 million in operating profit and a presence in New York—where most U.S. fashion companies are based—to comply with climate change disclosures. On the employment front, earlier this year California passed the Garment Workers Protection Act, which requires that workers be paid by the hour instead of by the piece of clothing made. A similar bill has been proposed at the federal level. Many garment workers in the U.S. are paid by the piece instead of by the hour, earning well below minimum wage.
In short, the fashion industry faces myriad ESG challenges, as well as financial tests, with inflation and the possibility that a recession is on the way. These three companies are up to the task. All returns and data are through July 8.
Deckers Outdoor (DECK) produces iconic footwear, including Uggs and Teva. Like most fashion firms, Deckers uses a mountain of resources to make its shoes and clothing. But the firm is vigilant about tracking and lowering its consumption. For example, it takes 1,885 gallons of water to manufacture and package one pair of Uggs—or roughly 11% less water than it takes for the average leather shoe. And the Uggs brand is on track to cut its water use by 30% by 2030. That’s partly why Deckers has earned a “leader” rating from The Textile Exchange, a nonprofit group that rates company commitments to source sustainable and responsible raw materials.
Since 2014, Deckers has issued an annual report that examines the firm’s environmental footprint—“from farm to foot”—including inputs such as water and outputs such as emissions and waste. The firm sets a number of earth-friendly targets it wants to achieve and reports its year-by-year progress for each one. In its report for fiscal year 2021, which ended in May, Deckers said it was on track to use only repurposed wool (no virgin wool) for its footwear by 2022; last year, 98.7% of wool used in its footwear was repurposed. That level of management and disclosure is far greater than the average shoe company offers.
Meanwhile, business is humming. Deckers recently reported robust growth in sales across all of its brands over the past fiscal year. The company has a healthy balance sheet with no long-term debt, too. CFRA rates Deckers a “buy” and has a 12-month price target of $350 for the stock. A consensus of Wall Street analysts is even more bullish, with a price target of $397.
PVH Corp (PVH), which owns the Calvin Klein and Tommy Hilfiger brands, has emerged as a leader in promoting good labor practices along its supply chain. The company places third among 37 industry peers in the KnowTheChain benchmark, which rates clothing firms for labor conditions.
PVH has done a good job of addressing worker grievances and boosting supply-chain transparency. It signed the International Accord for Health and Safety in the Textile and Garment Industry, and the company has earned a near-perfect score for its Bangladesh operations; last year, it relied on 11 Bangladeshi suppliers, most with more than 1,000 workers. And ESG-rating company Refinitiv places the company fifth-best overall out of 118 apparel and textile companies, thanks to high scores on human rights, governance and sustainability.
The company spent the pandemic getting its balance sheet in order, reducing debt and building cash reserves. It reinstituted its $0.0375 quarterly dividend in late 2021 and plans to repurchase $1 billion in shares through 2026. And the stock is cheap. Shares recently traded at six times expected earnings for the year ahead, half the average price-earnings ratio of its peer group, according to Zacks Investment Research. CFRA analyst Zachary Warring rates the stock a “buy” and has a 12-month target price of $100.
Tapestry (TPR) owns the brands Coach, Kate Spade and Stuart Weitzman, which boast broad international appeal and strong sales. The firm’s overall ESG score from Refinitiv ranks a so-so 35 out of 276 specialty retail companies, largely because it lags in supply-chain labor issues. But chief executive Joanne Crevoiserat, who arrived in 2020, has reenergized the firm’s ESG strategy.
Among the new initiatives: By 2025, Tapestry will use 100% renewable energy to power its stores, offices and procurement centers. It aims to reach 500,000 factory workers with programs that address “health, financial inclusion and gender equality.” And it will link 10% of executive bonuses to performance on diversity, equity and inclusion goals.
Argus analyst Kristina Ruggeri rates the stock a “buy.” The company’s focus on data analytics and customer engagement has improved sales outside of China. Still, COVID lockdowns in China, its biggest market outside of North America, have hit Tapestry hard. As a result, Argus recently lowered its price target from $54 to $40.
