Apparel unit profit economics just flipped negative (see last chart below). December CPI was reported last week and it showed another deceleration in apparel pricing to 3.1%. November apparel import trends indicate the setup remains bearish for margins in apparel retail. Apparel unit imports were down 20% in November. That’s “good” given we have an inventory problem, but the November level was just barely below 2019. Import unit costs remain sky high, at +23%, while CPI in Nov was up just 3.3%. Inventory data points from retail continue to show inventory growth far exceeding sales growth, so the excess inventory problem is far from fixed. We need to see more promotions to clear product, while import prices are up materially. In our analysis the estimated unit margin has inflected to negative as of November (assuming 3 month lag from import to sale) and is likely to get much worse in the coming months. Expect further margin compression in apparel retail. We’re short many name in apparel... top short ideas in the category include GOOS, RVLV, JWN, OXM, RL, DDS, TGT, M, H&M, Fast Retailing, GPS, and URBN.
