Clothing brands face the daunting task of surpassing last year’s strong sales and margins, which were driven by unusual circumstances.
By guest author Jinjoo Lee from the Wall Street Journal.
Vietnam factory shutdowns and supply chain snags notwithstanding, apparel companies emerged from the pandemic looking sharp. How long can they keep it up?
Their m
omentum seems intact following reports of healthier-than-expected revenue and profits. Ralph Lauren saw its sales grow by more than a quarter compared with a year earlier in the three months ended Dec. 25. Its operating margin, at 15.9 %, was the highest seen in a comparable quarter since 2013. Capri Holdings, CPRI 5.38% which owns Michael Kors, Versace and Jimmy Choo, saw revenue up 24% compared with a year earlier in its last quarter and saw operating margins expand by 6 percentage points. Levi’s and PVH, owner of Calvin Klein and Tommy Hilfiger, likewise saw healthy margin expansions in their latest quarters compared with both 2020 and 2019.
An equal-weighted basket of those four companies had been off by 15 % since the start of 2022 until just before those earnings began to roll out but have recovered. They are now down by just 5%. While a strong holiday season was largely expected, the bigger surprise was that apparel companies were able to pass along higher supply chain and freight costs to consumers, who have not only been willing to pay full prices, but to tolerate hefty price increases. The average price of a shirt or bag sold—known as average unit retail, or AUR—at Capri’s Michael Kors brand increased by a “high teens” percentage in the quarter ended Dec. 25 compared with a year earlier. For its full fiscal year, AUR at Levi’s increased 7% compared with pre-pandemic levels. At Ralph Lauren, prices increased 18 % last quarter; that was after a 19 % rise a year earlier.
Companies say the good times can continue. Ralph Lauren raised its guidance—both revenue and operating margins—for its current fiscal year, which will end in March. Both Levi’s and Capri are expecting revenue to grow about 10 % in their respective fiscal years that correspond with 2022. For Levi’s, that would be at least double its five-year average growth pace before the pandemic.
But two conditions are necessary for apparel companies to meet those ambitious goals: First, they would have to be able to keep increasing prices without killing demand. Two, consumers will have to continue wanting to refresh their wardrobes. Both could turn out to be shaky assumptions. Before the recent increase in pricing, apparel had generally been a “deflationary category” according to a recent report from Credit Suisse. Plus, the stuff that helped lift all boats in the past year—government stimulus, pent-up demand and a collective lack of inventory—makes it hard to figure out which brands actually fared well because they gained more cachet among customers. The differentiation won’t be obvious until later, when supply chain issues ease and more inventory floods the market.
Simeon Siegel, analyst at BMO Capital Markets, says that it will be tough for the industry to keep inventory discipline going. Meanwhile, consumers broadly pivoted to casual clothes last year and a “return-to-normal” closet refresh seems less likely as most have adopted hybrid work-from-home arrangements.
Cost pressures are mounting too. Ralph Lauren said it expects cost inflation in the “mid- to high-single-digit percentage” range. Cotton prices are up another 12 % year to date, and are at the highest levels since the cotton price surge of 2011 that left many apparel brands’ margins worse off. Meanwhile, Americans, as of October, were spending almost 3 % of their total expenditure on clothing and footwear—the highest share seen since 2015, according to data from the U.S. Bureau of Economic Analysis.
A wrong read of the fashion trend or the price tag could just end up unravelling some companies this year.