News

Aug 07, 2023

Positive Q1 for apparel retailers in the US, with the trend seeming to continue

Inflationary surges impacting discretionary spending of customers is what has been associated with US economics of late, with poor GDP growth leading to unemployment leaving numerous firms facing

Inflationary surges impacting discretionary spending of customers is what has been associated with US economics of late, with poor GDP growth leading to unemployment leaving numerous firms facing diminishing revenues and lowered sales expectations. However, select US apparel retailers have defied these prevailing conditions, achieving better-than-anticipated results in Q1 of FY 2023 (ending 29th April). Analysis of these apparel retailers’ recent earnings reveals that the most successful ones present a compelling value proposition. Their success stems from a blend of strong direct-to-consumer segments, appealing inherent value and customer attraction for physical stores. Notably, these exceptional outliers effectively communicate the value of their products, resulting in increased customer traffic, improved brand awareness and enhanced merchandise availability. Among various product categories, womenswear has emerged as a dominant product category.

Thriving retailers encompass a diverse range of companies, including Abercrombie & Fitch Co. (providing casual luxury), PVH Corp. (purveyor of premium fashion), TJX Companies (a fast fashion giant), Lululemon (an activewear brand) and many more. Overall, the observed trend suggests the beginning of growth, indicated by single-digit percentage increase in net sales and revenue. The sentiments expressed by these companies also hint at continued growth in the forthcoming quarters, with similar single-digit percentage increments.

Increased customer traffic was among the reasons US-based apparel retailers saw revenue and sales growth. Urban Outfitters, the retailer of women’s and men’s fashion apparel saw its Q1 retail net sales rise 12 per cent, and, as a result of increased customer traffic, comps rose 11 per cent.

Abercrombie & Fitch Co., retailer of apparel and accessories for men, women and kids, posted net sales of US $ 836 million, up by 4 per cent on a constant currency basis – which refers to a fixed exchange rate that eliminates fluctuations when calculating financial performance figures. Abercrombie & Fitch Co., attributed the increase in sales to an increase in returning customers and an increase in office-going customers.

Lululemon, with 426 stores in the US providing yoga and exercise apparel, beat the top and bottom line in its fiscal first quarter and posted a net revenue of US $ 2 billion which is an increase of 24 per cent compared to the same period of last year. Lululemon saw growth primarily because customers responded well to the company’s product offerings and markets saw increased footfall.

Columbia Sportswear Company, another leading US-based organisation that deals in outdoor and active lifestyle apparel, increased its net sales by 8 per cent over the previous year’s same quarter to US $ 820.6 million. Columbia’s growth was, in part, due to increased consumer traffic to outlet stores, with customers seeking promotions and overall value in the marketplace.

Chico’s FAS, the US-based women’s apparel retailer, has reported a Q1 net income of US $ 39.9 million which is an increase of 14 per cent from the previous year’s quarter. Chico’s saw this increase because existing reactivated and new customers were up over the prior year with existing and new customers experiencing growth in the mid-teens. Total customer count increased nearly 15 per cent over last year’s first quarter.

Market leader Walmart Inc., achieved strong revenue and operating income growth of 7.6 per cent and 17.3 percent respectively. Walmart’s revenue growth was achieved, in part, due to the focus of the company on an upgraded presentation and experience in remodeled stores.

Retail giant PVH Corp., the owner of Tommy Hilfiger, Calvin Klein, Warner’s, Olga and True & Co., also posted a good quarter for sales. For the quarter, the net sales of the company stood at US $ 2.051 billion, an increase of 2 per cent (increased 5 per cent on a constant currency basis) compared to the same quarter of the previous year. PVH Corp saw sales growth because one of the key components of its PVH+ Plan for growth was improved customer engagement in new and engaging ways.

As mentioned above, womenswear emerged this quarter as a popular product category. Urban Outfitters saw its sales rise along with record first-quarter revenues due to its womenswear doing particularly well with sales rising in double digits on its womenswear brands.

Abercrombie & Fitch Co., posted higher net sales due to an expansion in product category – especially womenswear – with dresses selling especially well in the quarter.

For Lululemon, sales of womenswear were up by 22 per cent, leading to an overall increase in net revenue for the company.

For retail giant Gap Inc., gross profit for the quarter was US $ 1.214 billion compared to gross profit of US $ 1.096 billion for the same quarter of the previous year, an increase of 9.71 per cent. One of the main drivers of Gap Inc.’s profit was the growth in the womenswear segment which also drove net sales in line with expectations.

For Urban Outfitters, revenue growth was also due to growth in its brands as net sales rose 18 per cent at Anthropologie, 15 per cent at Free People and 1 per cent at Urban Outfitters.

Abercrombie & Fitch Co., saw decade-high first quarter net sales led by 14 per cent growth from the Abercrombie & Fitch brand which is a provider of men’s and women’s apparel and outerwear.

PVH Corp., leveraged the Calvin Klein and Tommy Hilfiger brands in its PVH+ Plan to drive growth. Tommy Hilfiger revenue increased 5 per cent compared to the prior year period and Calvin Klein revenue increased 3 per cent on a constant currency basis.

Inventory also played a role in improving the growth in revenue and sales for these companies. With better inventory management and better margins, growth for these apparel retail companies was bolstered. Walmart’s inventories decreased by 9 per cent below the previous year’s inventory due to improving inventory efficiency and merchandise flow and store in-stock levels resulting in greater operating income.

Total inventory for Urban Outfitters decreased by US $ 39.6 million, or 6.3 per cent, compared to total inventory as of the previous year. Total retail segment inventory of Urban Outfitters decreased by 5 per cent primarily due to better inventory control supported by a more reliable supply chain. Improvement in supply chains and falling freight costs have contributed to margin expansion for Urban Outfitters, which is expected to improve by around 3 per cent in Q2 of 2023.

For TJX Companies, total inventories was US $ 6.4 billion, compared to US $ 7 billion at the end of the first quarter of the previous fiscal. The inventory for TJX Companies reduced due to an improvement in supply chains and reduction in delays.

Inventory of Abercrombie & Fitch Co., stood at US $ 448 million, a decrease of 20 per cent compared to the previous year’s quarter. This decrease in inventory resulted in improved margins, due to the recovery in Abercrombie & Fitch Co.’s supply chain driven by a decrease in freight costs and shipment delays and return of chase capability – which is a company’s ability to adjust production to market demand.

Chico’s FAS also reported a decrease in inventory, totalling US $ 293.8 million at the end of the first quarter, compared to US $ 325.6 million in the same period of the previous year. Chico’s FAS’s inventory decrease has led to an improvement in gross margin, primarily due to normalised supply chain conditions – decrease in freight costs, improvement in raw material demand, rising purchases that resulted in significantly lower in-transit inventories — products that have been shipped by the seller but are yet to reach the customer owing to strong demand by customers.

Gap Inc.’s ending inventory of US $ 2.3 billion was down 27 per cent compared to last year. Gap Inc.’s reduced inventory provided a basis for improved gross margin performance. Its reduced inventory was driven by better in-transit inventory, a decrease in pack and hold inventory (inventory which is packed away till the actual shipping date) which resulted in fewer purchasing receipts and more working capital and a decrease in fashion and seasonal basic inventory.

Apart from these reasons, there were some other reasons that benefited the revenue growth of these companies. For Walmart Inc., the revenue growth was also driven by improving product mix, increasing sales penetration in higher-margin categories like apparel and home.

TJX Companies leveraged its growth around increased store counts with stores in the US increasing to 3,524 compared to 3,500 stores during the previous year’s quarter. Long term, it sees the potential to open more than 1,400 additional stores across current geographies. TJX Companies also leveraged the availability of merchandise via a team of more than 1,200 buyers who source from a universe of approximately 21,000 vendors.

Columbia Sportswear Company also saw an increased sales trend because of better availability of Spring ’23 products.

Chico’s FAS saw sales growth boosted by key enhancements in product and marketing that drove full-price selling and higher average unit retails.

US Commerce Department data shows that e-commerce is on track for another trillion-dollar year as overall e-commerce sales increased 7.8 per cent from the first quarter of 2022. And various retailers’ DTC models also performed well in the first quarter. DTC segments of the above mentioned apparel retail companies also performed well and contributed to their overall increase in revenue growth. Along with these companies, DTC segment saw good results for some other apparel retail companies as well.

PVH Corp’s DTC revenue increased by 8 per cent compared to the prior year period (increasing 12 per cent on a constant currency basis). PVH Corp saw strong growth in both the company’s owned and operated stores and owned and operated digital commerce business.

Columbia’s net sales for the US stood at US $ 517 million, up by 3 per cent from the previous year’s quarter. Columbia’s net sales were also led by DTC bricks-and-mortar and wholesale segments, with 156 stores in the US.

Indochino, the DTC apparel brand, announced that Q1 of 2023 marked the largest quarterly revenue in the brand’s history. Building upon the business’s success in 2022, profitability and operational efficiency for Indochino remained key priorities, resulting in a 35 per cent increase in EBITDA year- over-year in Q1 2023. Indochino also completed its full omnichannel launch of women’s made-to-measure in late March, debuting the product online as well as bringing it to all owned showrooms.

Sales of women’s suit separates in the first quarter for Indochino were up 27 per cent year-over-year to US $ 266.3 million, while women’s jackets and blazers were up 17 per cent to reach US $ 503 million, according to the Circana/Consumer Tracking Service. Men’s suit sales during the period were up by 31 per cent to US $ 647 million, while men’s suit separates increased 6 per cent to US $ 339.5 million.

Full-price DTC sales for Oxford Industries Inc., the parent company of leading lifestyle brands like Tommy Bahama and Lilly Pulitzer grew 27 per cent Y-o-Y to US $ 266 million, including US $ 36 million of DTC sales from Johnny Was and a 10 per cent aggregate increase from Tommy Bahama, Lilly Pulitzer, and emerging brands. Oxford Industries Inc., reported an impressive 41 per cent Y-o-Y growth in full-price e-commerce sales, which stood at US $ 126 million.

US revenue for Kontoor Brands, the parent company for Lee and Wrangler, was US $ 518 million, increasing 2 per cent over the same period in the prior year. Kontoor Brands’ gains were augmented by continued strength in DTC, with US own.com revenue increasing 15 per cent compared to the same period last year.

In the US, Wrangler DTC increased 16 per cent compared to the same period last year while for Lee, DTC increased 8 per cent in the similar period.

Companies seeing improvement in the first quarter are now upbeat about the second quarter and even for the full year too. The apparel retail companies discussed above are upbeat about the summer season and continue to improve the assortment for the season. They are cautiously optimistic about consumer demand. Overall things also seem to be improving as in mid-June, the Federal Reserve decided to leave interest rates unchanged. Secondly, US employment increased more than expected in May as employers added 339,000 workers in May and manufacturing activity also showed signs of resilience.

For fiscal 2023, Abercrombie & Fitch Co., now expects net sales growth in the range of 2 to 4 per cent from US $ 3.7 billion in 2022. While Urban Outfitters currently sees no signs of change in customer behaviour, no indication that customers are shopping less frequently, buying fewer items, or trading down.

Looking ahead though, PVH Corp., expects second-quarter revenue to increase by low single-digits but for the full-year, revenue is anticipated to increase by 3 per cent to 4 per cent.

For the second quarter of 2023, Lululemon expects net revenue to be in the range of US $ 2.140 billion to US $ 2.170 billion, representing growth of approximately 15 per cent, while for 2023, it expects net revenue to be in the range of US $ 9.440 billion to US $ 9.510 billion, representing growth of approximately 17 per cent. The company expects to open around 50 new company-operated stores in the fiscal year.