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Perfect Storm for Apparel Retailers

With gloomy consumer sentiment surveys reflecting dysfunction in both Wall Street and Washington, stagnant GDP growth, stubborn 9% unemployment and the ongoing housing slump, most experts are calling for a conservative holiday season.

But the American shopper? She begs to differ, at least when it comes to apparel, for herself and her family. Certainly, clothing was run through the wringer in the recession, as demand plunged 8% from its peak annual levels of 2007, bottoming in 2009. This year, apparel is suffering the further indignity of seeing the first cost inflation in decades, as cotton prices peaked at record levels in March.

Although apparel bounced off the bottom in 2010 with a 4% year-over-year rebound, sales still lagged pre-recession levels. But for the first nine months of 2011, apparel sales were up almost 6% over 2010, with little if any let-up during back-to-school. Although historically back-to-school is an imperfect predictor of holiday sales, full-year apparel sales in 2011 will, at the current pace, finally breach the sales levels achieved four years ago.

So despite the dour consensus outlook, apparel is on track for its best Christmas since 2006, if not ever. Five factors are driving apparel’s comeback:

• Pent-up demand

After four years of outfitting her kids but scrimping on herself, women are finally freshening their wardrobes — since you can accessorize that schmatta just so many times. 
Men, notorious for making that suit or sport coat last one more year, are returning to the haberdashery, with men’s clothing sales up about 9% year-over-year.

• Muted price elasticity

Although many retailers are now passing through most — but not all — of the cost increases, evidence to date shows little demand destruction. By Customer Growth Partners’ estimates, apparel price elasticity ranges from 0.6 to 0.8, indicating that average price increases of 10% will reduce demand by only 7%, netting a 3% revenue boost.

• Discretionary spending rotation

Through 2007, the twin drivers of discretionary retail spending were home improvement projects and consumer electronics. Both sectors remain about 11% below their 2006 to 2007 peaks, freeing up almost $50 billion in annualized demand that is being redeployed, largely at fashion or outlet malls instead of The Home Depot or Best Buy.

• New technology

Although not always visible on runways, apparel technologies have made great strides in recent years, from Lululemon’s nylon and no-sew seaming innovations to “heat-tech” styles from FAST’s Uniqlo. The advances have enabled higher price points and margins, and consumers have not objected — since the merchandise is a “materially” better value.

• Fashion excitement

Last but not least, fashion is, after all, a fashion business, and apparel has finally doffed recession-era boring basics to enter a new creative cycle. Consumers are seeing innovation in everything from beauty and fragrance to designer excitement at post-recession, savvy-shopper prices, in retail formats from fast fashion to once-dowdy department stores. Doubters need only witness Macy’s Lagerfeld collection full-price sell-through, Target’s website-crashing Missoni blow-out, or Kohl’s high-profile J.Lo and Marc Anthony launches, to understand that newness is back big time.

In short, well-managed apparel merchants will enjoy a positive perfect storm this holiday season. Continued pent-up demand, recession-originated cost controls, fashion innovation and moderate cost inflation — combined with modest price elasticity — augur for strong earnings leverage in the holiday quarter.

Craig R. Johnson is president of Customer Growth Partners (customergrowthpartners.com), a consulting and research firm serving the retail and consumer industries. Founded in 2001, CGP also conducts both proprietary and public forecasts of holiday, back-to-school and full-year retail sales.

© 2014