Men's Apparel Retailers
Date January 2018
Approximate net recovery on cost
- The Consumer Price Index for total men’s and boys’ apparel was -1.6% for November 2017 over 2016, driven by declines for suits and outerwear (-2.3), shirts and sweaters (-2.7), and boys’ apparel (-5.2); the one bright spot was in the men’s pants and shorts category, which was up 3.0% for the same period
- The annual growth rate for U.S. men’s apparel was 0.6% for the five years ended 2017 and it is projected to be -3.5% for the five years ending 2022
- Tailored Brands Inc. commands 21.3% market share in the men’s apparel industry; total company net sales decreased 5.5% for the year-to-date period ended October 28, 2017
- U.S. retail sales for all clothing and accessories stores increased 1.1% in the first eleven months of 2017
Tailored brands’ slow turnaround: Since 2014, Tailored Brands, the largest menswear retailer in the U.S., has worked to right-size its store base and capitalize on synergies within its diverse portfolio of brands. A challenging 2015 and 2016 paved the way to a (comparatively) better 2017. However, Creditntell notes that the last few quarters have remained challenging for the company due to multiple initiatives. These included shifting the Jos. A. Banks business model to align with the Men’s Wearhouse model, as well as disappointing results at its Macy’s tux store-within-a-store concept, which forced the company to close all 170 shops. The company’s new Corporate Apparel segment has also run into its own issues. The division did not ramp up as quickly as expected in the wake of a disastrous rollout of uniforms supplied by Twin Hill to American Airlines (“AA”), which resulted in a class action lawsuit filed by AA employees siting defective product. Ultimately, AA elected not to renew its contract with Twin Hill when it expires in 2020. More broadly, a decline in traffic from rapid changes in corporate apparel as a younger generation seeks a distinctive shopping experience, and the $10 billion North American workwear and uniform market remaining fragmented with low single-digit growth rates. Finally, as with many other traditional retailers, brick and mortar sales competed fiercely with e-commerce spending in 2017.
Recent trends do suggest that the company is making progress with its operations initiatives and profitability goals. The Company has closed a total of 283 unprofitable stores since the second quarter of 2016. However, just 68 of those closures occurred from October 2016 to October 2017 making for a more stable store base for 2017. Additionally, management has invested heavily in its custom fitting business, which has proven to be a smart move as revenue has increased significantly for that channel as younger men have responded positively to a more accessible bespoke option for tailored clothing.
When Tailored Brands released its Q3 report for 2017 at the beginning of December, the company’s CEO, Doug Ewert, stated “while we still have more work to do, we are pleased with the progress in our business in the third quarter.” Year-to-date for 2017 (through Q3), total company net sales were down 5.5 percent. For Q3 2017, total net sales decreased at a slower pace of 4.3 percent to $810.8 million. Retail net sales decreased 2.1 percent for the quarter due to the impact of last year’s store closures, with retail segment comparable sales up 0.1 percent, showing signs of promise. Corporate apparel net sales decreased 24.0 percent for the quarter; in line with expectations due to the anniversary of last year’s rollout of a large new uniform program.
It is important to note that despite industry challenges, specific retailers may not necessarily be subject to falling recovery values in a liquidation scenario. To the extent that retailers’ mix of branded goods and stock availability remains in line with customer demand, gross recovery rates could remain strong even if sales or gross margins decline slightly. Should a brick and mortar retailer begin a strategy of aggressive discounting to offset sales losses, the same cannot be said for changes in net recovery values. Partnering with an appraisal firm to understand the implication of excess discounting or significant loss of sales capacity due to a dwindling customer base becomes more critical as retailers face ongoing competition from e-commerce retailers, while trying to manage increasing sourcing, manufacturing, and overhead costs.
Online channel strong: U.S. retail sales for non-store retailers increased 10.4 percent in 2017 compared to 2016. Annual growth for the five years through 2022 is forecast to increase 9.4 percent, indicating another few years of growth for the channel.
In a highly fragmented industry Massachusetts-based Destination XL (“DXL”) comes in second behind Tailored Brands in the men’s apparel space, at almost 4 percent of market share. DXL’s third-quarter 2017 sales increased 1.8 percent driven primarily by non-comp stores and e-commerce growth. This sales growth came at the expense of a 0.8 percentage point drop in year-to-date gross margin, but with inventory turnover up and inventory days on-hand down over last year, trends are looking positive for DXL relative to the difficult overall industry performance for menswear.
The bright spot for DXL in 2017 has been its online business. At 20.5 percent sales penetration through Q2 2017 as compared to 19.4 percent the year before, the online channel represents a growing piece of the company’s overall business. To enhance its online shopping experience DXL has added guided selling features to its direct channel to replicate the high-touch in-store experience for direct consumers. In response to an overall shift toward the e-commerce platform, brick and mortar stores are increasingly focusing on superior customer service to differentiate themselves and add value over their online counterparts.
As the internet continues to comprise a larger percentage of many companies’ sales, it’s important for lenders to engage appraisers with experience valuing e-commerce platforms. Including the internet channel as part of the appraisal sale capacity can enhance net orderly liquidation values (“NOLV”). However, there are additional sales and advertising metrics, operational capabilities, and expenses that must be considered as part of the appraisal process, which are distinct to e-commerce.