Women's Apparel Retailers
Date February 2019
- The disparity between stores’ brick-and-mortar and e-commerce holiday performance was significant, with digital outperforming stores
- Even after a positive holiday period, many chains are closing underperforming stores
- Many retailers are diversifying their offerings in an effort to stay relevant and drive customer traffic offline and into stores
Approximate net recovery on cost
Mixed sales results define holiday 2018: For many retailers, holiday 2018 was a strong season, for others, not as much. For the period from November 1 through December 24, sales increased 5.1 percent to a six-year high of $850 billion, according to MasterCard SpendingPulse. E-commerce sales for the period were up 16.5 percent, on top of a 14.6 percent increase in 2017. Strong consumer spending, low unemployment, and healthy corporate profits drove U.S. economic growth to an estimated 3.0 percent in 2018. However, there is still uncertainty ahead for 2019, including the ongoing trade war with China and a trade agreement with Canada and Mexico, the United States-Mexico-Canada Agreement (USMCA), which remains to be ratified. In the aggregate, some retailers are performing well, but the news is not positive for everyone. Women’s specialty apparel chains Ann Taylor and LOFT (+12.0 percent combined), American Eagle (+6.0), Urban Outfitters (+5.0), and Anthropologie (+4.0) all generated positive comps for the season, while others including Victoria’s Secret (-8.0), Buckle (-0.2), Lane Bryant and Catherines (-8.0 combined) did not fare as well. Select retailers cited increased promotional activity as the reason for lower holiday sales, and several announced recently completed or planned closures of underperforming stores including Chico’s, Buckle, and Gap.
As many women’s apparel retailers continue to 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 sales and recovery prospects. 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 bankruptcy and faces either partial or total liquidation.
Retailers expand offerings to stay relevant: To compete with the ease and convenience of online shopping, and with mall vacancy rates at a six-year high, many brick-and-mortar retailers have implemented incentive-based and other innovative programs to keep customers coming to their stores. Women’s apparel companies have fared best when they make decisions with consumers in mind. Recent customer-centric changes are Old Navy’s partnership with Lyft to give shoppers free roundtrip transportation to and from stores, and the launch of Nordstrom Local, a chain of inventory-free locations at which customers may pick up online purchases and take advantage of hassle-free tailoring and stylist services. Target also recently launched efforts to advance its name in specialty apparel by beefing up its private label collections and incorporating a same-day delivery program for the holiday season. In the case of Abercrombie & Fitch, an aggressive rebranding and in-store experience makeover helped renew existing customers’ interest, while expanding the company’s reach to new clientele. For Abercrombie & Fitch, the move has essentially rescued its business; for the quarter ended November 3, 2018, the company posted positive consolidated comparable store sales of 3.0 percent with both the Abercrombie & Fitch and Hollister banners posting sales increases. The positive performance marked the fifth consecutive quarterly increase for the company. The move toward innovation has become a key initiative that many store-based retailers have undertaken, not only to compete with each other, but to compete against Amazon, which continues to own major market share across the women’s specialty apparel industry.
As the world continues to recognize the benefit of progressive ideas and a greener culture, retailers have begun to make adjustments and expand their offerings in order to meet the needs of a wider range of customers. Sustainability and inclusivity are two major themes that specialty apparel retailers including J.Crew (recycled denim), Reformation (green fashion), and Abercrombie (gender neutral clothing) have recently pursued. As such, adaptive clothing lines have also recently seen a surge in popularity. Tommy Hilfiger, Nike, and Target have all added merchandise that caters to disabled customers and includes Velcro straps, adjustable hems, and magnetic buttons to facilitate the ease of the dressing process. J.Crew recently joined other retailers in expanding into plus sizes to draw a more diverse range of customers into stores. Sustainable clothing company Reformation found success in adding a plus size clothing line to its collection, and Aerie has drawn praise with body positive messaging in its AerieREAL campaign that includes plus size and disabled models with no retouching. Brands that refuse to adapt to this new standard of inclusion, like Victoria’s Secret, have faced backlash and declining sales.
Apparel disposition, critical factors beyond inventory: 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, additional factors including company system capabilities, retention of key staff, and relationships with corporate and store personnel can also be determiners of value.
Fundamental to the success of a liquidation event is understanding the relationship of key corporate- and store-level personnel to the business. Retention of corporate personnel including employees involved in cash management, payroll functions, inventory allocation, and loss prevention, in addition to IT and operations directors can be critical to a successful sale. Supplementary to the agent’s supervisory staff, retention of strong store-level management and sales staff can have a critical effect on shrink levels and staff turnover, which ultimately impact profitability.
Additionally, the ability of the systems a company has in place to capture sales and inventory data, including the capability to track inter-store transfers, is essential to maximizing results. Inability to track these key metrics on a daily basis and with a reasonable level of detail can mean a lack of visibility as to what is selling and what the remaining inventory levels are on a store-by-store basis, which could impact gross recovery rates.
Partnering with an appraisal firm with direct experience managing the complexities of a retail liquidation event gives asset-based lenders the most informed and realistic net orderly liquidation values on which to base advance rates.