Clothing retailers far from dead

‘Speed brands’ a response to online rivals

Specialty apparel and department store stocks have been battered in recent years as a steady stream of store closings and unenticing merchandise put their future in doubt.

But the apparel and accessories business is suddenly looking more fashionable.

Last week, Goldman Sachs analyst Alexandra Walvis initiated coverage of Tapestry Inc., Tiffany & Co. and VF Corp. with a buy rating. Several days before that, UBS initiated coverage on a basket of nearly two dozen apparel and accessories stocks, including buy ratings on the likes of Nordstrom Inc. and American Eagle Outfitters Inc. The accompanying research note said “the market has exaggerated the ‘stores are dead’ idea.”

And earlier in June, Omar Saad of Evercore ISI went so far as to write that “the retail-pocalypse is over” as he closed short positions in Kohl’s Corp. and Dick’s Sporting Goods Inc. and offered a rosy view on the prospects of Macy’s Inc.

The retail apocalypse is hardly behind us. More carnage can be expected at the mall as retailers struggle with hefty debt loads and changing consumer habits. But many big names in the clothing business have better days ahead because they’ve made some underappreciated progress in solving some important problems.

The biggest challenge for apparel retailers in recent years hasn’t been a failure to adapt to Amazon.com Inc. but rather a different kind of online challenge. Social media and live-streamed runway shows have meant that shoppers see new styles faster than ever before — and that trends tend to burn very hot for short periods.

Hennes & Mauritz AB and Inditex SA’s Zara were trailblazers in nimbly responding to those dynamics. But the other guys are starting to get the hang of it.

At Urban Outfitters, more than half of the women’s apparel it buys is on a “chase” model, meaning the retailer makes decisions about what to buy closer to when those garments appear on store shelves. Kohl’s says its “speed brands” — the ones on which it has drastically shortened the production cycle — were 40 per cent of its private-label assortment last year. It expects that will rise to 50 per cent by year end. These production revamps go hand-in-hand with changes to inventory management — a key to retail profitability. And apparel sellers appear to be doing better at this, too. Saad notes that some are finding efficiency by shifting to a centralized view of inventory rather than one that is compartmentalized for online and for stores. Jay Sole, a UBS analyst, points out that technology solutions such as RFID tagging allow apparel chains to keep better track of their inventory.

Plus, as Poonam Goyal, an analyst with Bloomberg Intelligence, notes, retailers have made these improvements against a backdrop of strong consumer sentiment and a shift in fashion silhouettes — factors that present significant opportunity to stoke sales growth.

It also seems the fresh optimism about the apparel business is an acknowledgment of a dynamic I’ve called out before: Amazon, at least so far, is not that great at selling fashion. Plenty of shoppers use Amazon for replenishment-type purchases such as socks or underwear, but fewer are going there for more considered purchases.