Retail Rap: Is the Apparel Industry Dressing Down?
In a column I wrote between Black Friday and Christmas last year, I talked about how “apparel sales have been languishing”, and I mentioned that the “industry buzz is all about the struggles in apparel, where retailers just can’t seem to discount clothing enough to get things to pick up.”
With this in mind, I read an article in the March 30th issue of WWD entitled The Specialty Store Winners by Gross Margin, describing the steep declines in profit across brands coming off a markdown-heavy season. The most eye-opening information to me was the article’s analysis of the gross margin rate for 18 different apparel retailers over the last two quarters. As I’ve reiterated many times, the gross margin — the difference between revenues and costs—is a much more telling number than the sales figures that we always see released during and immediately after the holiday season.
Some of the information that jumps out at you the most includes the numbers for Aeropostale — which had a gross margin rate of 12.97 for the fourth quarter of 2014 and a 22.65 rate for the first part of 2015 — and PacSun, which went from 19.99 at the tail end of 2014 to 26.05 in 2015. While the positive trend placed both of those retailers appeared at the top of the chart that appears in the article, the remarkable thing to me isn’t the improvement, but just how staggeringly low the margin was for both brands during last year’s holiday shopping season.
A gross margin rate of 12.97 is virtually unheard of in apparel, and it is even more striking when you consider that Aeropostale reported an 11% decrease in year-over-year sales last holiday season. PacSun, on the other hand, saw same-store sales up 9% during that same period. American Eagle, which appears at the bottom of the WWD chart (with gross margins of 35.10 and 29.38 for the fourth quarter of last year and the first of this year respectively) saw revenues remain fairly steady over the holidays — if not inch up slightly.
Is Aeropostale, a category stalwart and a strong performer for many years, on the way back after some recent slippage? How worrying is it that 11 of the 18 brands profiled in the article saw their gross margin shrink in the first part of 2015? Part of it, of course, is that apparel is perhaps the most fickle of all categories: seasonal product can be in or out and brands can see their performance ebb and flow fairly dramatically in what can seem like capricious ups and downs. I’ve often joked in the past that the two things I’m most scared of in life are drowning and being the CEO of a teen apparel retailer. It is just so tough to predict trends from year to year (or even season to season).
It’s also important to point out here that we can’t just lump apparel into one category — there are important differences between category segments. Women’s fashion, for example, typically has a higher gross margin than teen apparel (with rare exceptions), making women’s fashion brands better equipped to absorb a drop in gross margin.
As for what’s happening today, I know that more than a few retailers have a tendency to blame margin drops on increased freight charges. I tend to be skeptical that that’s the root of the problem, but the current West Coast shipping strike is a valid concern, and if it persists for too long we could see some damage.
I also see some structural concerns going forward for these retailers. Apart from the always questionable loyalty of teen customers, there is significant (and growing) desire to lower prices and provide big deals, which inevitably puts pressures on margins. I can’t help but wonder if consumers are “getting used” to spending less on apparel, and if the continued climate of big deals and deep discounts isn’t creating a climate of low price expectations that will be damaging for the apparel sector going forward. Deep discounts and low margins are bad news for any retailer.
As always, I’d love to hear your thoughts and observations. Is there a way out of the cycle of deep discounts? Are other industry segments falling into the same trap? Don’t hesitate to reach out with your questions and comments on this page, or by emailing [email protected].