The setup for apparel margins is getting less bearish. Though our outlook is still that we’ll have risk to margin expectations as demand slows, inventory continues to be worked through pressuring price in 2H23 and unit volumes fall. Diving into the April OTEXA update, YY import price up nearly 7% slowing sequentially from last month up almost 13%. CPI is up for the second month in a row, from 3.1% to 3.4% to now 3.8% in April. On the flipside, units are down 34% YY in April and down 13% from 2019 – March units were down 40% and 4% YY and vs 2019, respectively. The inventory inflow is clearly moderating. Total inventory balances are getting marginally better in 1Q but not yet fixed. The YY sales to inventory growth spread at public apparel retail companies went positive in 1Q23, though vs 2019 is still at -14%. The apparel brand spread improved, but still at -27% YY, and vs 2019 at -17%. So the channel inventory imbalance is less bad but still has to be resolved, the reduced orders (lower imports) are helping that. Price has been holding in surprising well, though partially due to elevated costs flowing through the supply chain, that’s net positive for near term margins, but bad for fed policy reads as the fed keeps an eye on categories running above normal inflation rates (apparel has been deflationary historically).
On the forward outlook, we estimate that the YY import unit volumes will remain negative until late 2023, when it will run closer to pre-covid trend. We expect YY import cost to remain positive until year end, then inflecting to negative. We expect YY change in CPI to moderate down to zero in September and then become negative for the subsequent 2 quarters. So after the industry was riding the tailwinds of ~$10bn in monthly incremental gross profit YY in 2021 to early 2022, we expect ~$10bn in gross profit headwind in the next couple quarters to be reported, which started to be seen in 1Q23. Given the high levels of annual unit consumption, apparel can reset supply/demand and return to a more normal consumption and margin cadence much faster than other categories. While there is still inventory work to be done, it looks reasonable that the inventory issues could be resolved by holiday time, at which point we’ll also be facing easier demand comparisons. This is the setup where we might look to get bullish apparel retail with a more positive growth setup for 2024.
