Why Europe's fast-fashion retail stocks are still feeling the heat online

Europe’s fast-fashion retail stocks are back in the spotlight. After a disastrous 2018, hurt by the summer heatwave and increased discounting, the shares are beating the benchmark Stoxx 600 Index this year.

Yet, not all are doing well in equal measure. Inditex, owner of the Zara chain, has fallen out of favor with investors, according to Citigroup analyst Adam Cochrane, and Wednesday’s quarterly results will be a chance for the Spanish retailer to show whether its sales target for the year is on track. Swedish fashion giant H&M reports revenue next week and the strength of its recovery will be key. Shares for both companies, which have an extensive high-street presence, lag behind the performance of their online-only peers. Zalando shares, for instance, are up 61% this year, making them the third-best performer in the Stoxx 600.

Investors have been attracted to the growth profiles of online retailers as people increasingly shop via smartphones and tablets. In the U.S., online fashion retailer Revolve Group has been making a splash with investors after pricing shares in its initial public offering at the top end of a marketed range last week. The stock has nearly doubled since it began trading on Friday.

“Online retail is still relatively underpenetrated,” says Gavin Launder, a fund manager at Legal & General Investment Management. “Barriers to entry are pretty low -- it’s a bit of tech spending, really, and given the size of the market, there isn’t really any barrier to growing either.”

When investors support companies such as Asos, Boohoo or Zalando, they’re backing the management team’s ability to carry the right product, Launder says. The valuation ratios of the three are well above those of Inditex and H&M.

So just what would it take for the gap to narrow? Inditex needs to give more information about its online business, in terms of scale and profitability, according to Launder. Otherwise, there needs to be either a high-street recovery or doubts about growth for the online retailers.

But the one to watch is Amazon, according to Launder, which is already disrupting other sectors such as grocery and online food delivery. Amazon does sell apparel, but it’s typically a more standard assortment of products such as jeans, t-shirts and sneakers. “That’s not to say they couldn’t do it,” he says. “My suspicion is that if they did want to, they’d end up buying something. That’s a quick way to do it.”

In the meantime, Euro Stoxx 50 futures are trading up 0.2% ahead of the open.