• Investing Insights & Exclusive Offers → Get Our FREE “Market Brief”
    Sign-up for our free weekly newsletter. Get unparalleled investing insights and exclusive Summer Sale discounts on Hedgeye research.

    Disclaimer: By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails. Use of Hedgeye and any other products available through hedgeye.com are subject to our Terms Of Service and Privacy Policy

9 out of 10 CEOs can’t tell me within a 20% band how many units of apparel are consumed in the US. That’s why I think monitoring the relationship between unit cost and sales matters so much.

Now that so many are realizing the importance of factoring in a macro view with the (always important) company fundamentals, I am getting more questions about changes in the import price environment.

A common mistake out there is that many people look at the percent change in apparel/footwear CPI vs. the percent change in the import cost. If import costs are off by 1%, but consumer prices are off by 2%, then that’s actually a POSITIVE margin event, right?

No

Think about it. The average retail price for a garment of apparel is about $10, yet the average fully manufactured/imported cost is $3.50. If costs are down 1%, then that saves $0.035 per garment. This might not seem like much, but multiply it by the 23 billion units of apparel consumed in this country last year and that’s $800mm – yes folks, that’s real money. But if consumer price is down by 2%, then we’re talking a $0.20 hit on each of those garments, or about $4.6bn. So net out the two and the industry is in the hole by $3.8bn. Not good… This is the basis for much of the multi-year call I’ve had – and continue to have – on the industry. Most CEOs I talk to cannot tell me within 5 billion units (yes, that’s 20%) how many units of apparel are consumed each year. Macro might not have mattered over the past decade. But now it does.

That’s why I track the chars below so closely. I don’t care as much about the percent change in cost vs. retail sales as I do in the dollar spread. That’s what really matters. The notable point here is that the past 6 months has actually shown a positive trend for consumption vs. manufactured cost. The latest month turned down again meaningfully. The data is on a one month lag, so we’re looking at Dec – which is hardly relevant about what is to come. But straight lining the trend throughout ’09 does not bode well for margins through mid-year.
Unit cost/revenue spreads have been so positive for so long. They even looked good for 2H08 but recently turned down.