Feb 11 Leading clothing retailers like Gap Inc
, American Eagle Outfitters are forecast to
report larger fourth-quarter profits in the coming weeks, the
latest evidence that smart inventory management and lower costs
helped overcome sluggish holiday sales for most in the industry.
For calendar 2013, clothes retailers are expected to see
margins improve due to better control of when their products
arrive in stores, lower manufacturing costs and smarter use of
technology for online sales and price comparisons.
Ken Perkins, president of data-monitoring firm Retail
Metrics, expects fourth quarter net earnings at 18 U.S. apparel
companies he follows to increase by 18 percent on average. Ten
other retailers that sell clothes to teenagers are expected to
see a 37 percent average increase in net profit, while the
broader group of 120 retailers should see earnings rise 9.5
Lower product costs, investments in a smarter supply chain
that helps manage inventories better, and controlled discounts
are what analysts are banking their estimates on.
"Apparel retailers have lower product costs year over year,
and most companies came into this quarter clinging on inventory.
So even though top-line trends may not have been strong, margins
should grow," said Betty Chen, retail analyst with Wedbush
According to Thomson Reuters estimates, Gap's profit is
expected to rise about 34 percent over last year, while margins
expand about 3 percentage points. Nike's profits are expected to
be up about 8 percent. Abercrombie & Fitch Co, American
Eagle and Lululemon Athletica Inc are all expected to
post better profits and margins as well. Many others raised
profit expectations on Thursday.
"The fact that input prices were significantly lower than
last year because of the dramatic drop in cotton prices, and the
post Christmas enthusiasm helped on markdowns," said retail
analyst Jan Kniffen. "So, despite the only OK Christmas selling
season, margins are better than otherwise."
Kniffen said costs of manufacturing were down by about 8
percent this year, while Michael Niemira of the International
Council of Shopping Centers pegs the decline at 10 percent to 12
Analysts also said apparel retailers are getting "smarter",
and more technology savvy by the day, helping them better manage
inventory and invest in suitable fashions and markets. That,
coupled with fledgling signs of an economic recovery seem to
have raised Wall Street's expectations from the group.
"The companies are working to become more efficient and one
contributing factor (for gross margin expansion) is online
sales," said Helena Song, credit ratings analyst with S&P.
"Every single clothes retailer is investing in and working
hard to improve online sales... which contributes to margins.
It is a profitable way of selling things and contributing a
greater and greater percentage of the total sales," she said.
Retailers have also raised prices on products over last
year, another reason margins are looking up. While retailers
push up price tags when manufacturing costs go up, they seldom
bring prices down when costs go down. When cotton, which is the
clothing sector's most used raw material, rose sharply in the
past few years, almost all of the retailers and manufacturers
had to push up prices. Cotton futures have fallen off
their peak and are trading down 15 percent from this time last
Most analysts stuck to their top picks like American Eagle
and Gap, and Jefferies' Randal Konik said he also expects Ugg
maker Deckers Outdoor Corp to do well.
"UGG brand remains a cold weather staple and our checks
indicate that sales have picked up after the recent drop in
temperatures across much of country. After fourth quarter
results, we expect the business to stabilize ... due to lower
sheepskin costs and cleaner inventory levels," he said.
Gap, the standard favorite among analysts is trading at
about 14 times forward multiples, according to Thomson Reuters
data, while the broader S&P Apparel Retail Index is
trading at 15.5 times.
The S&P 500 has risen about 8.49 percent over the past
quarter. In contrast, the S&P Apparel Retail Index has risen
9.73 over the same time.
Jaime Katz, retail analyst with Morningstar, said though the
stocks are "fairly overvalued", they could still rise in the
next few months.
"People are really hesitant to put their funds in the fixed
income markets and they would prefer to put them in equities.
There could be some support to domestic apparel retailers in the
near term," she said, adding that while international markets
are not doing as well as expected, domestic clothes retailers
could still have the advantage of a somewhat improving consumer