NEW YORK — If you want to make money in the fashion game today, go big in accessories — and get into mass market apparel.
Don't rule out luxury just yet, though. The sector is still going gangbusters thanks to ever-expanding wealth, with no end in sight. Just ask Neiman Marcus Group Inc. president and chief executive officer Burt Tansky, long a proponent of the luxury boom.
"For our purposes, luxury is here to stay," he said at a conference Friday organized by Altagamma, the group of high-end Italian companies. "The wealth factor is growing here in the U.S. And once you enter the world of luxury, you don't want to leave."
Accessories continue to fuel growth for Neiman Marcus in part because the category is less volatile than apparel and is not affected by the markdown factor, he said. Aside from having a "phenomenal" shoe business and an accessories business that has been going crazy for the past five or six years, Tansky said Neiman Marcus has seen increasing interest in precious jewelry, including million-dollar pieces.
"There has been a surge for more and more important jewelry," he said.
The key, though, is to define luxury. "Affordable luxury is not luxury — it wants to be," he added.
But the fashion business generally has been booming across all categories, according to a new study. In fact, business has been so strong for the 39 publicly traded international companies polled that, on average, 2006 sales were up 14 percent, EBITDA rose 13 percent and EBIT climbed 15 percent, compared with the previous year.
Those were among the financial highlights detailed in the latest Fashion & Luxury Insight survey, which was compiled by Milan-based SDA Bocconi School of Management, Altagamma, and Ernst & Young. Combined, the survey's brands posted $200 billion in annual sales for fiscal year 2006. During that same period, the return on investment increased 15 percent and the return on equity jumped 17 percent.
Perhaps the most surprising statistic — and there were many —was the claim that best performing apparel companies cater to the mass market, with the average return on investment being 19 percent compared with 10 percent for more high-end firms. And having a total or partial retail presence is essential to a company's future, according to Altagamma's executive director Armando Branchini."Companies that have been created as manufacturers or designers have to become more and more retail-focused," extending their reach from the U.S. and Europe to Asia and India, he said. Regardless of their specialities, the 39 companies surveyed are centered on the U.S. and Europe, which account for more than 50 percent of their sales. With the exception of Luxottica SpA, all of the companies that are focused on the U.S. market are based in the States.
During a series of presentations and a panel discussion, speakers pointed to upbeat shoppers, including younger ones and Baby Boomers, who are focused on high-end items as key factors in bolstering brand recognition. In addition, a wave of store openings fueled growth more so than acquisitions. For example, top performers Coach Inc. and Abercrombie & Fitch Co. increased their number of freestanding stores by 18 percent and 14 percent, respectively, in fiscal year 2006. As a result, Coach ended up with an EBIT of 36 percent and A&F wrapped up 2006 with a 20 percent EBIT margin.
All in all, accessories lived up to its reputation of being a high-return business with margins well above those of apparel, said SDA Bocconi School of Management's professor of finance, Barbara Rovetta. The sector had EBIT margins of 21 percent, well above the 10 percent in apparel.
During the panel discussion at Ernst & Young's headquarters here that followed Rovetta's analysis of the survey, Altagamma's Branchini noted how women in America, Europe and Asia would rather buy accessories than clothing. Contrary to psychologists' opinion that these shoppers use accessories to change their appearances and feel as though they are not spending as much as they would for apparel, the latter is often not accurate. "In many cases, the price of a bag or a pair of shoes can be the same as a beautiful dress," he said.
Co-director of Bocconi's Masters in Fashion, Experience & Design Management program Giorgio Brandaza also spoke on the panel, along with Valentino's chief financial officer Carmine Pappagallo, Gap Inc.'s director of central merchandising, Felix Del Torro, and Luxottica's marketing director, Fabio D'Angelantonio.
On average, companies that relied on M&As for growth showed a lower capacity for generating cash through their operating activities. And companies with high investment ratios performed better. For the last fiscal year, there was a strong increase in core investments from fiscal year 2005, up to 142 percent on depreciation. Investments driven by the opening of new stores rose 12 percent from fiscal 2005, the study said.U.S. companies Coach, American Eagle Outfitters Inc. and Abercrombie & Fitch were among the American companies leading the charge in terms of overall top performers for fiscal year 2006 compared with the previous fiscal year. The fact that each is heavily dependent on the domestic market, vertically integrated in retail and quick to respond to trends was not lost on the panelists. Gap's Del Torro noted how Abercrombie & Fitch's international expansion is just getting rolling, with a London flagship being its only store overseas. Abercrombie & Fitch, like Coach, has built a business model based on affordable luxury, he said. Another similarity is how each brand contains its collections to spring and fall, using small pieces to refresh their stores. That strategy also means only two huge sales a year.
While affordable luxury shoppers are an opportunity for Luxottica, so is the ultraluxury segment, D'Angelantonio said. Experiential retail poses another opportunity for growth, Valentino's Pappagallo said. "We like to say we're not in the luxury business, we are in the industry of making people feel good about themselves," he said.
Knowing that buying a pair of Valentino shoes or a handbag is one way to lift a shopper's spirits, Pappagallo said the company is looking to increase its presence in other stores by opening more concept shops.
The Gap plans to branch out overseas. Del Torre said the retailer has expansion plans for Southeast Asia, the Middle East, Turkey and Saudi Arabia. For Luxottica, China could prove to be a windfall. Seventy-five percent of the Chinese are myopic by the age of 25 and Chinese consumers adore brands, D'Angelantonio said. Needless to say, the company is gearing up to open stores in China, as well as South Africa and the Middle East.
Before the talk wrapped up, Altagamma's chairman, Leonardo Ferragamo, cautioned attendees about any overzealous retail expansion and suggested focusing on merchandising, innovative products and presentations, and strengthening buyer relationships to refine a brand. "Too much retail [expansion] can be very risky when the socioeconomic [dynamic] changes."
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