Women's Apparel Retailers
Date October 2016
Approximate net recovery on cost
- While declining mall traffic and increasing online competition have impacted clothing retailers across the spectrum, sellers of women’s apparel have further suffered from a mismatch between customer wants versus store styles. Major players are struggling with balancing inventory, failing to properly anticipate desired fits, patterns, and trends.
- At the same time, price pressure has squeezed margins. Both the rise of discount shopping and online rivals have increased pressure on lowering prices. As a result, many shoppers at women’s clothing stores will not buy anything unless it has been discounted. Left with few other options, some retailers have let the quality of products degrade, distancing shoppers.
Mixed results and M&A impacting industry: Despite overall revenue decline over the past five years, women’s clothing retailers have experienced mixed performance. As price competition has intensified and e-commerce has become more widely accepted, falling industry revenues and profit margins are causing many brands to struggle to compete.
Market share concentration has increased through merger and acquisition activity as evidenced recently by Ascena Retail Group’s acquisition of ANN Inc., which upped the company’s store count to more than 4,900. As retail sales have continued to struggle and profit margins remain depressed, many smaller brands have been acquired and reacquired by private equity firms as well. One example is Invus Group’s acquisition of a controlling stake in plus-size women’s clothing retailer Ashley Stewart Inc. from Clearlake Capital Group earlier this year. Over the next five years, investors are expected to continue rolling up brands, concentrating market share in this highly fragmented industry. Currently, Ascena is the only retailer controlling more than 5 percent of the market.
Many retailers out-of-step with customers: Consumers have been vocal when retailers have fallen short of expectations. This was the case in 2015 when Ann Taylor officials acknowledged that its clothing line would undergo a process to “evolve the fit” to reflect a more “modern point of view.” The same year, Gap Inc.’s chief executive Art Peck expressed disappointment in its Banana Republic product line. He said customers were clear it “doesn’t fit well. It’s not as versatile or flattering as it should be given the price point.” J.Crew also saw its sales decline after a series of recent missteps. Analysts believed the company allowed its aesthetic to deviate too far from the classic styles its customers loved while also missing on the fit of some clothes.
While these retailers may have learned from their mistakes, the damage may already be done. Banana Republic posted another disappointing quarter in November in which comparable sales fell for the seventh straight quarter. And in its latest filing in August, J.Crew Group Inc.’s sales fell in the second quarter as it continued to struggle to win back customers. Analysts will be watching third quarter results closely.
As more women’s apparel retailers experience negative sales trends, decreasing margins, and eroding liquidity in credit lines, it is especially important for lenders to appraise portfolio companies regularly to offset risks associated with declining recovery values. Partnering with an appraiser who understands the implications of deteriorating net recoveries associated with a declining customer base, loss of vendor support, or increased normal-course discounting can help mitigate risk if the company ultimately files for bankruptcy and faces either partial or total liquidation.
Plus-size demand unmet: The market for apparel in larger sizes remains underserved. An estimated 67 percent of American women are size 14 or larger, sales of plus-sized clothing accounted for just 17 percent of the U.S. women’s apparel market in 2015, according to The NPD Group. The demand is there as indicated by mall-based plus-size retailer Lane Bryant’s increase of $12.7 million, or 1 percent, in comparable sales for Fiscal 2016, representing the only positive comparable store sales trend among Ascena Retail Group brands Justice, maurices, Catherines, and dressbarn for the period. Additionally, the recent success of direct sales retailer LuLaRoe, which offers a full range of comfortable knitwear-based designs in sizes ranging from XXS through 3X and includes a Tall and Curvy size option for its massively popular signature women’s leggings, shows that there is a strong customer base for versatile, moderately priced clothing in larger sizes.
Despite the increase in demand for plus-sized clothing, in terms of gross recovery values, often sizes at either extreme of the range (whether petite, extra small or plus-sized) can have a lower gross recovery due to a smaller corresponding customer base. It is important for lenders to partner with appraisers to understand where there may be depth of inventory in less popular sizes in order to correctly assess potential compromises in recovery values on an ongoing basis.
Understand capabilities of inventory management systems: A successful disposition in the apparel space depends on several critical factors, not the least of which are the quality, quantity, pricing, and discounting of the inventory. However, the robustness of inventory management systems are crucial to maximizing value.
Today, nearly every major apparel retailer has an online component. Lenders should request appraisals that consider e-commerce channels to reflect the way retail takes place today. Ask questions about the capabilities of systems to understand whether they centrally manage online and in-store inventory, and can track inter-store transfers. This visibility enables retailers and disposition agents to see what is selling and where.
Partnering with an appraisal firm with direct experience managing the complexities of in-store and online retail dispositions gives asset-based lenders the most informed and realistic net orderly liquidation values on which to base advance rates. This experience is no longer optional but a requirement when appraising apparel today.