In analyzing where the US apparel industry is in its earnings cycle, I come up with the view that NTM earnings growth will go negative. While there are trade-offs between sales and margins, the end result is the same. Down earnings. Consider the following...
- 1. Revenue still has a long way to go to secure the inevitable 'downtrend' a. As I've been posting, I believe we are on a multi-year consumption downtrend. With that, could the public companies print average revenue growth rates in the mid-single-digit range for the foreseeable future instead of the 10-12% 10-year average? ABSOLUTELY! b. Importantly, one of the drivers to above average top-line growth in this space has been $30+bn in sourcing savings injected into the supply chain over 8 years to stimulate per capita consumption. As that factor unwinds, growth goes into hiding. c. Consider that from a top-line perspective, the industry is still a good 3 quarters away from reaching the new trendline growth, and 1-2 years away from setting a new baseline.
- 2. Margins: I am absolutely convinced that margins will continue to trend down 100-200bp on both a 2 and 3 year basis for at least the next 1-2 years. Check out my posts on the supply chain squeeze for full color. Bulls will respond that even though the industry is likely never to post a positive margin comp again for another 3-5 years, the 1-year erosion should get 'less bad' in 2H.
- 3. In the context of troughy valuations and weak earnings expectations, a 'less bad' margin trend piques my interest. That is, until it is squashed by the simple math that even a 'less bad' margin trend coupled with slower consumption nets out to around a -10% EBIT growth rate for the space. That puts the earnings revision and industry valuation analysis into a new perspective.