Better inventory management and more disciplined markdown activity paid off for many specialty apparel retailers for the third quarter as year-over-year gross margin rates showed strong gains.
But the fourth quarter remains a concern, and at least one analyst is calling the fashion and specialty apparel segment a wash for 2015.
Of the 25 U.S. publicly traded specialty retailers tracked by WWD, 13 posted higher gross margin rates for the third quarter compared to the same period last year while 11 showed declines and one company, Chico’s FAS Inc., was flat — which was a notable feat given a steep third-quarter loss and restructuring issues.
The gainers were led by Aérospostale Inc. with a 331 basis point increase and American Eagle Outfitters Inc. with a 305 basis point gain. Express Inc. delivered a 283 point increase and New York & Co.’s margin rate rose 173 points. Aérospostale had better year-over-year margins despite disappointing top-line results. For American Eagle, repositioning efforts seem to be paying off.
The decliners included Boot Barn Holding Corp. with a 450 point drop and Christopher & Banks Inc. with a 370 point basis point decline. Bebe Stores Inc. experienced a 312 basis point drop in margins for the third quarter while Gap Inc. lost 285 points.
Overall, the results bode well for the current holiday shopping season — at least for the gainers. Heading into the fourth quarter with better margin rates could be sustained as long as these retailers maintain a reasonable markdown cadence. Over the past month, analysts noted that the specialty sector and department stores are struggling with apparel sales — especially the teens segment and outerwear.
It’s important to note that gross margin rates in the specialty segment tend to run stronger as compared to all of retail, which averages about 23 percent, according to S&P Capital IQ. But the specialty segment is challenged with shoppers who easily switch loyalties. And increasingly, the pressure from fast-fashion firms such as H&M and Zara is putting pressure on the segment.
Eric Beder, equity analyst at Wunderlich Securities Inc., said he thinks the “overall specialty retailing sector is over-stored, repetitive and, frankly, unable to register sustainable longer-term top- or bottom-line growth.”
As a result, Beder said 2015 “will go down as one of the weakest years yet again in the specialty retail and apparel space with one-time items — West Coast port slowdown, El Niño, and a strengthening [U.S. dollar] — and continuing trends — shift to e-commerce, lower mall traffic, continued relative deflation in apparel, rising costs of production, fast-fashion share gains — serving to mute returns and creating a situation where sustainable revenue and margin gains are harder and harder to register.”
In a research note today, Beder said the sector needs “material changes” to compete in the “omnichannel world” — and this shift “will take time given the nature of ‘brick and mortar’ leases.”
Dana Telsey, chief executive officer and chief research officer at Telsey Advisory Group, echoed Beder’s sentiment, but noted that retail stores “are not going away; they are evolving in how they appeal to customers.”
“The retail and shopping center industry needs to focus on metrics beyond just traffic,” Telsey said. “We consistently hear that conversion and ticket are up. Consumers seem to be doing more research online, given survey responses and the increase in in-store buying. In short, consumers still want to shop in stores.”
|Company||2015 3Q GM 2015||2014 3Q GM||Percentage Point Change|
|1. Aérospostale Inc.||21.28||17.97||3.31|
|2. American Eagle Outfitters Inc.||39.98||36.93||3.05|
|3. Express Inc.||34.96||32.13||2.83|
|4. New York & Co. Inc.||28.98||27.25||1.73|
|5. Destination Group XL Inc.||45.08||43.38||1.70|
|6. Ascena Group Inc.||59.83||58.16||1.67|
|7. Abercrombie & Fitch Inc.||63.72||62.22||1.50|
|8. Citi Trends Inc.||38.61||37.11||1.50|
|9. Cato Corp.||37.78||36.81||0.97|
|10. L Brands Inc.||41.54||40.84||0.70|
|11. Tilly’s Inc.||31.47||30.85||0.62|
|12. The Children’s Place Inc.||39.59||39.01||0.58|
|13. Urban Outfitters Inc.||34.92||34.8||0.12|
|14. Chico’s FAS Inc.||54.66||54.66||0.00|
|15. Francesca’s Holding Corp.||46.67||47.3||-0.63|
|16. The Men’s Wearhouse||43.1||43.97||-0.87|
|17. Guess Inc.||35.26||36.28||-1.02|
|18. Genesco Inc.||48.31||49.59||-1.28|
|19. Pacific Sunwear of California Inc.||25.16||26.71||-1.55|
|20. The Buckle||41.85||43.73||-1.88|
|21. Zumiez Inc.||34.29||36.5||-2.21|
|22. Gap Inc.||37.33||40.18||-2.85|
|23. Bebe Stores Inc.||28.97||32.09||-3.12|
|24. Christopher & Banks Inc.||35.81||39.51||-3.70|
|25. Boot Barn Holding Corp.||27.68||32.18||-4.50|
|Source: S&P Capital IQ, company reports.|