Rose Colored Kool-Aid

07/26/08 09:02PM EDT
Brian McGough has been clear about our negative multi-year apparel thesis, where the industry will lose 3 points of margin over 2-3 years. As noted in his post yesterday ‘The Song Remains the Same’ it’s clearly playing out this quarter -- organic sales are under pressure, order cancellations ticking up, FX benefits are easing, cost inputs are rising, pricing power is nil/negative, GM% eroding, and SG&A is heading higher. This has been extremely consistent with most companies thus far.

While it might be tempting to think that our view is now consensus – guess again. These headwinds are going to strengthen before they subside. This is not a fast moving storm front, and the Street still does not get it.

Current estimates across every publicly-traded apparel retailer and brand suggest that the worst is already over. Consensus is looking for a 31bp decline in margins this year, and for nearly all of that to be recaptured in FY09. It looks like most analysts are keeping on the rose-colored glasses and drinking managements’ Kool-Aid.

Stay tuned for further developments on the earnings front, but expect downward revisions as analysts ditch the glasses, dump the Kool-Aid and start to see the light. Until then, be very cautious about which EPS estimates you believe.


Casey Flavin
Director
Global Softlines Team
RESEARCH EDGE, LLC
Gross Margin expectations are looking past the fact that a massive sourcing tailwind reverses.
Same holds true for Operating Margins.
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