Apparel Margins: Underlying Cross-Currents
Talk about weather, penned up demand, and pretty looking products all you want. The margin structure for Apparel retail just went through a statistical abnormality. Be careful what you own, folks.
It’s tough to miss the fact that consumer discretionary was the worst performing sector yesterday, and it’s not exactly knocking the cover off the ball today either. Chalk it up to market beta, or whatever you want. But don’t forget that there are fundamental headwinds that parts of Consumer discretionary will start to bump against starting, well… now.
Take apparel, for example. We don’t think enough people watch the spread between the prices consumers are paying for apparel vs. the cost of the goods coming in from Asia. The growth spread between these two items has a direct impact on the pot ‘o money that retailers have available to pad margins, and drive unit demand. Consider this; using a mere 147 month benchmark, 8 of the past 12 have been 2 standard deviations above the mean. Yes, a statistical anomaly.
It’s a good thing that this does not have any margin implications. (That was a failed attempt at sarcasm).
Check out the second chart below. The relationship between apparel industry margins and this cost spread is pretty tight, to say the least. Is this doomsday? No. Companies that are proactively preparing and have been investing in growth when times were tough will benefit now. That’s NKE, RL, PSS and UA. We also like BBBY and FL. Those that have benefitted by the luck of the draw and have mirrored/leveraged Industry margin trends are gonna have a tougher go at it. That’s JNY, CRI, JCP, M, ROST, DG and FDO.