We’re at the tail end of 2Q22 Retail earnings season. Incremental data points from public companies as well as the OTEXA July data update last week are supportive of our bearish view on apparel now in the back half of 2022. July imports have slowed vs June but are still up 17% YY and +4% vs 2019. Inventories at retail are building with public apparel retailers seeing a sales/inventory spread of -36% vs -25% last Q. Brands are seeing more inventory as well with their spread worsening to -43% from -7% last Q. The inventory is building while at the same time consumer discretionary income is compressing. That means promotions are ramping, we saw it start in some 2Q numbers, but think it gets worse in 2H. Finally, cost inflation pressure in the supply chain remains, high materials and input costs are still flowing through the chain and into retail P&Ls. In July, the average import cost was up 13.8% YY.
Punchline is we remain bearish on apparel in aggregate as we think EPS estimates and multiples do not fully reflect the demand and margin downside risk through 1Q23 (only 3Q has been fully addressed in guidance), which could be high and rapid.
