DEMAND-RESISTANT PRICE RISE MAY HELP APPAREL BRANDS SUSTAIN GROWTH IN THE US
Despite factory shutdowns in Vietnam and supply chain issues, apparel companies in the US have managed to emerge successfully from the pandemic. As per a Live Mint report, most companies posted healthier than expected revenue and profit growth during the latest quarter of this fiscal. Ralph Lauren’s sales grew over 25 percent compared to a year earlier in the three months ended December 25. Its operating margin grew to its highest levels since 2013 to 15.9 percent. Revenues of Capri Holdings, owner of Michael Kors, Versace, and Jimmy Choo, grew 24 percent compared to a year earlier while its operating margins surged 6 percentage points. Profit margins of Levi’s and PVH Corp also increased in their latest quarter compared to both 2020 and 2019.
Prices on recovery mode
At the start of 2022, an equal-weighted basket of these apparel companies had declined 15 percent. However, they recovered just before their earnings were rolled out. Most apparel companies were also able to pass along the higher supply chain and freight costs to consumers. Michael Kors’ brand increased the average unit retail price of its shirt and bag in double digits during the quarter ended December compared to a year ago. The average unit retail price of Levi’s also increased 7 percent for the full fiscal while Ralph Lauren’s prices increased 18 percent during the last quarter of the fiscal year.
Ralph Lauren has raised its revenue and operating margins outlook for the current fiscal year ending March. Both companies expect their revenues to grow by about 10 percent in their respective fiscal years. Levi’s revenues are expected to double its five-year average growth pace before the pandemic.
Supply chain and inventory issues dent growth
To achieve revenue targets, apparel companies need to continue increasing prices without impacting demand. They also need to fuel new demand. As per a Credit Suisse report, apparel was earlier considered a ‘deflationary’ category. Government stimulus announced last year along with pent-up demand and a collective lack of inventory, helped companies raise their status amongst consumers last year. However, easing supply chain issues and ready availability of inventory may test their credibility this year. Simeon Siegel, Analyst, BMO Capital Markets believes, the industry may find it difficult to maintain inventory levels this year as most consumers have adopted the casual style of dressing and are unlikely to refresh their wardrobes soon.
Cost inflation is likely to rise in mid-to high-single-digital percentage, says Ralph Lauren. Already, cotton prices have achieved their highest growth levels of 12 percent this year. This is impacting the profit margins of many apparel brands, reveals October 2021 data from the US Bureau of Economic Analysis. Defying trends, expenditure of Americans on clothing and footwear reached its highest levels since 2015 to 3 percent of their total expenditure, signaling good times ahead for the industry.
