The makers, designers and retailers of apparel have provided
one of the brighter patches in a gradually mending U.S.
Consumers flocked to uber-trendy clothing such as brightly
colored skinny jeans and printed tops over the spring and summer,
according to Retail Metrics, an industry analyst.
The group reported overall apparel same-store sales in August
grew 7.8% vs. 2011, beating estimates for 5.3% growth.
IBD 50 stockMichael Kors ' (
) earnings smashed analyst views when it reported Q4 earnings in
August.TJX Cos. (
), also on the IBD 50 list, topped EPS expectations when it
announced earnings last month.
IBD tracks apparel markets in two separate industry groups.
The Retail-Apparel/Shoes/Accessories group ranked No. 8 Friday
among IBD's 197 industry groups. Apparel manufacturers ranked No.
40. Manufacturers tend to be designer brands tightly tied to
their own manufacturing, and which have a large portion of their
business in wholesale channels such as department stores. Some
retailers also manage their own manufacturing, but focus on their
store chains rather than on wholesale sales.
As the economy has gradually recovered off its recession lows,
data from both groups have formed a barbell pattern as high-end
luxury brands such as Kors and discounters such asRoss Stores (
) have outperformed mid-range apparel players such asAmerican
) andPacific Sunwear (
The entire apparel sector can be brutally competitive.
Companies need clearly differentiated brands and product lines in
order to draw shoppers to stores and websites, according to Ken
Perkins, a research analyst at Retail Metrics.
Luxury brands like Kors,Ralph Lauren (RL) andCoach (COH)
distinguish themselves via high-quality products and services for
their customers. Coach leather handbags retail for nearly $400
each. Sales rose a steady 15% over the past two years as
customers paid up for the signature "C" prestige. Analysts expect
a slowdown to 12% sales growth this year.
Discount apparel retailers like Ross and T.J. Maxx map out the
low end of the fashion market by acquiring brand-name fashions
from department stores and other larger retailers who overbought
inventory. Customers scour their racks to find cheap deals.
The middle ground is more rocky.
"The midtier has been in a tough spot as it's a highly
competitive space," Perkins said. "They can't provide the
services of luxury brands and have difficulty competing with
discounters without ruining margins."
Apparel retailer Pacific Sunwear, for example, reported an
eight-cent loss per share for Q2.Express (EXPR) reported
second-quarter earnings above views; it gave cautious guidance
for the rest of the year.
Not all mid-range retailers are doing poorly.Limited Brands
(LTD) reported a 4.7% jump in August same store sales, or sales
in stores open at least one year according to Retail
Metrics.Francesca's (FRAN) reported strong Q2 earnings and raised
guidance earlier this month. Shares suffered a sharp sell-off the
week of Sept. 7 on news that co-founder and Chief Executive John
De Meritt was retiring. The unexpected news followed the firing
of the company's chief financial officer in May.
One key to Limited's and Francesca's fundamental success is a
mastery of niche markets.
"Limited Brands owns the undergarment space with Victoria's
Secret," said Jamie Katz, an equity analyst for Morningstar.
"There is no one that specializes in it the way they do. American
Eagle has its Aerie segment, but Limited has the ability to drill
down into core items."
Francesca's strategy includes limiting inventory at its small
boutique-style stores. Smaller supplies encourage customers to
buy that dress or top now, or miss out on it later. The company
orders merchandise for delivery no more than 90 days in advance
to ensure the styles are en vogue.
The recent economic slowdown largely skipped over the core
luxury customer. High-end retailers rebounded quickly after the
recession because their core long-term customers were the last to
retreat into a "spending cocoon," and the first to emerge,
according to Marshal Cohen, chief retail analyst at the NPD
Now luxury brands are trying to reach beyond those core
customers in order to drive additional growth.
To jump-start auto sales after the recession, some upscale
carmakers likeVolkswagen (VLKAY) made cheaper models of their
popular cars to attract customers in a wider range of income
levels to the brand. Cohen explains that luxury apparel retailers
are following a similar tack by blurring the lines between their
Neiman Marcus is teaming up with big-box discounterTarget
(TGT) to offer a limited holiday collection. Jimmy Choo is
selling a line of shoes through bargain fashion chain
"While this might lower the brand a bit, it is a way to get
aspiring customers back that used to shop at the luxury shops
before the recession," Cohen said.
While the upper class emerged from the recession largely
intact, the middle class remains in duck-and-cover mode. Many
were forced to change spending habits and turn from mid-range
stores to discounters. Those changes proved to be stubborn.
"Even with some stability in domestic economic environment,
there has been more of a permanent shift," said Katz. "People
don't feel like we are out of the woods yet."
As a result, off-price retailers saw a 6% gain from August
2011 to July 2012 vs. the previous year, according to NPD. And
consumers continue to see the economy as a pressing concern.
"The consumer still has the price value equation at the top of
their mind," Cohen said.
On the upside, cotton prices have declined and should help
margins this fall and winter, according to Perkins.
E-commerce sales topped $200 billion last year as consumers
become more comfortable shopping online. Online sales are seen
growing from 7% of total retail sales last year to nearly 9% by
2016 according to Forrester, a global research firm.
"E-commerce reaches a whole new audience where there is no
brick and mortar store," said Katz. "Retailers get clear data on
what people are interested in and what people are clicking on
which can be an extremely helpful marketing tool."
Getting a grasp on what consumers are interested in can help
retailers manage inventory better and reduce the need for sales
and clearances to offload unwanted merchandise.
Analysts are generally positive that apparel groups will see
continued strength as they move into this year's holiday season.
Cohen expects women's wear to gain momentum in the next six
months and the men's market to remain strong.
Katz sees apparel retailers managing inventory better and
remains confident in the domestic part of the businesses.
Citigroup analyst Oliver Chen launched coverage on a dozen
luxury and specialty retail stocks Thursday. Accessories have the
advantage, Chen wrote, with consumers craving "multiple watches,
layers of jewelry and handbags for different occasions."
Michael Kors, Limited Brands, Ross Stores and TJX were among
those that received buy ratings.Abercrombie & Fitch (ANF)
earned a sell rating, with a neutral outlook going toUrban
Outfitters (URBN) and Coach.
Apparel makers who offer unique products, discounted but trendy
clothing or high-quality goods with excellent customer service
will keep customers flocking to their stores.
Consumer spending could drop if unemployment rises. Mid-market
apparel chains could disappear if they aren't unique enough to
entice customers. A new iPhone or other gadget could shift
spending back to electronics from apparel.