Sales Hanging By A Thread?

• Marilyn Much
• On 5:55 pm EDT, Friday October 2, 2009

Apparel makers have faced strong head winds over the past year as recession-hit consumers scrimped on clothes and other discretionary purchases.

Hit with sagging sales and profits, retailers have aggressively cut inventory levels in the past few quarters to avoid bulging shelves and heavy markdowns.

Now, experts say the tide may be turning for the top publicly traded apparel suppliers.

In August, sales at stores open at least a year fell 2.3% vs. August 2008, said Ken Perkins, president of Retail Metrics. That might not seem like cause to break out the champagne, but it was the strongest showing since last September, on the precipice of last fall's plunge.

Perkins says same-store sales bottomed in July, while retail profits bottomed in the fourth quarter of 2008, thanks largely to cost cuts.

"The current environment is the beginning of a transition from de-stocking to re-stocking at retail," said Piper Jaffray analyst Jeffrey Klinefelter.

"In light of recent positive changes in top-line trends at retail, the re-stocking process has improved, and we believe most apparel vendors are seeing a slight uptick in their re-orders and their future bookings rates," he said.

Robert Shearer, CFO of VF Corp. (NYSE:VFC - News), says the environment for apparel and most retailers VF sells to is more stable than it's been the past year.

"The overall spending isn't increasing, it's stabilizing," he said. "That's a better position to be in rather than not knowing the bottom."

Jones Apparel (NYSE:JNY - News) CEO Wesley Card says the business climate has improved.

"Conditions feel better and more stable," he said. "As we ended the summer and finished back to school, business stabilized. We're starting to feel the beginning of a recovery."

Sales and profits have slid for many apparel firms over the past year or so. But the top publicly traded ones have navigated well through the storm, analysts say.

"The general reaction has been to reduce their own commitments to manufacturing capacity and raw materials so their inventory levels could become more aligned with the lower future bookings," Klinefelter said.

They've also reduced expenses and have tightened up infrastructure. Such moves have made apparel companies more efficient and profitable, he adds

As of Friday, clothing manufacturers ranked No. 23 out of IBD's 197 industry groups, up from No. 92 six months ago.

Apparel company stocks are performing well now because in the depths of the recession, they had been priced as if they were going out of business, says Standard & Poor's analyst Marie Driscoll.

"When they didn't, generally they rebounded more than the market on a percentage basis," she said.

1. Business

Apparel companies have morphed from manufacturing firms to brand managers, designers and marketers. These days, they usually outsource manufacturing to third parties in Asia and other areas.

The big players sell their products via retailers across a number channels -- from department store chains to discounters. They also boast a broad portfolio of brands.

Take Jones Apparel, a designer, marketer and wholesaler of clothing, shoes, jeans and accessories.

At the end of last year, it ran 373 specialty retail stores and 644 outlet stores.

Its best-known brands include Jones New York, Nine West, Anne Klein and Gloria Vanderbilt -- each of them differing by style, price strategy, distribution channel and target consumer.

CEO Card says Jones' brands are priced in the "sweet spot" of today's economy. And in a tough economy, consumers stick to brands they trust and value, such as Jones' labels.

"The diversification across various distribution channels and brands is critical in this environment, because it gives you balance and penetration in various parts of the market," he said.

VF is the world's No. 1 apparel maker, with more than 30 brands and over $7 billion in annual sales.

It owns a broad portfolio of brands in categories including jeans, outerwear, packs and sportswear. The North Face, Wrangler, Vans and Lee are among its best-known brands.

At the end of the second quarter, it had about 700 of its own stores. Shearer says a key element of VF's business model is diversification.

"We have performed pretty well over this period because we're not reliant on one brand or one channel," Shearer said. "Consumers have changed. If they shopped in one channel and moved to another, we have a brand (for) most levels of consumers."

VF benefits from geographic diversity, too. It's growing faster overseas than domestically, Shearer says. He figures international sales will account for 30% of overall revenue in 2009 vs. 19% in '04.

Maidenform (NYSE:MFB - News) designs and markets a range of intimate apparel products, including bras, panties and shapewear.

CEO Maurice Reznik says the category has performed better than apparel overall. The reason: Underwear is a necessity, not a luxury.

Maidenform's sales have grown in three of the past four quarters, and the firm expects a full-year increase in the high-single-digit to low-double-digit percentage range vs. 2008.

Name Of The Game: Apparel outfits must stay relevant and come up with a steady stream of fashions that sell well at retail. Managing and investing in brands are also key, as is innovating in terms of both fashion and utility.

2. Market

The apparel market is fragmented, with national brands sold by about 20 companies accounting for roughly 30% of apparel sales, and the remaining 70% made up of smaller and private-label store brands, says S&P's Driscoll.

Still, Klinefelter says the market consolidated as a few large portfolio companies such as VF, Phillips-Van Heusen (NYSE:PVH - News)and Warnaco (NYSE:WRC - News) account for a growing share of sales.

With competition from large chains and less credit available, operating in today's environment is tough for small vendors, Klinefelter adds.

As department stores consolidate, they're pruning suppliers. Those that remain are getting stronger, adds analyst Eric Beder of Brean Murray, Carret & Co.

3. Climate

Apparel dollar sales at retail fell 3.6% last year vs. 2007, and 7% in the first half of the year vs. the year-ago period, says market research firm NPD Group.

Apparel firms are enduring some of the most difficult times they've ever faced, says Madison Riley, a retail strategist at consulting firm Kurt Salmon Associates.

Consumers have permanently changed the way they shop, he says.

S&P's Driscoll says today's consumers won't buy what they already own, so apparel firms have to create something new.

"That's what makes fashion fun and people open their purse strings," she said.

Last year, retailers had the worst holiday season in decades. At the same time, a number of retail stores went bankrupt, which further swelled inventories

Beder expects to see a a better fourth quarter this year. With retail inventory levels down, clothes makers will face less pressure to discount, he says. And fewer markdowns at retail mean better margins for wholesalers and retailers.

4. Technology

Maidenform is focusing on innovation and differentiation, not price, says CEO Reznik.

That strategy came into play when the firm launched a new type of shapewear in April called Fat Free Dressing. The T-shirt uses a hidden microfiber liner to slim, shape and smooth the body.

Reznik says the product is drawing a lot of first-time users to the shapewear category.

Other apparel makers are using technology to improve operations.

VF does a lot of business on a flow replenishment basis. When a product is checked through the cash register of a large retail customer, VF knows it. It gets feedback through the register that lets it know what product, style and size was sold -- and that it needs to get that product back on shelves.

Instead of being out of stock at retail with the most popular styles and sizes, it allows VF to send just the right stock to the retailer.

5. Outlook

Short-term prospects for apparel makers are a mixed bag.

NPD's chief industry analyst Marshal Cohen expects full-year retail apparel sales to drop 4% to 5%, and he sees a sluggish fourth quarter.

In the past, apparel was always the No. 1 gift item across all age groups during the holidays, Cohen says.

This year, he doesn't see that happening in the younger age group, a trend that will hurt sales in the crucial fourth quarter.

Klinefelter is more optimistic: "We expect the holiday period to be far more profitable than last year," with sales rising as consumers begin replenishing their wardrobes and buying gifts for others.

This year's second half and 2010 should bring expanding profit margins and at least moderately improving top-line growth .

Upside: The cloud over retail is lifting. The worst is likely over for same-store-sales declines, and retail profits likely bottomed in last year's fourth quarter.

As consumers grow less cautious, they'll be more willing to buy discretionary goods such as clothes.

The bigger brands with diversified portfolios have an advantage because that's where the consumer tends to rebound, Cohen says.

Risks: The retail climate can worsen and send apparel firms' customers into a tailspin. A double-dip recession would quickly reverse recent gains in consumer sentiment , Driscoll says.

Buzz up!