Most Recent Articles In Financial
Latest Financial Articles
- Wal-Mart Restructures Management Positions
- InTurn Attracts High-Profile Investors
- Stocks Suffer Steep Declines
More Articles By
So much for “out with the old, in with the new.”
The key issues dominating the fashion and retail industries in the year ahead are likely to be the same ones they hoped they’d left behind when the clock hit 12:01 a.m. on Jan. 1. Chief among them will be the economy, followed by what could be called “the three Ps”: Politics, Production and Predicting — as in, what will consumers do next?
Having survived the financial spiral that began in 2008, the industry has seen improvement on most fronts. Both retailers and vendors are better at planning inventory levels, yet neither has figured out how to get consumers to make more of their purchases at full price. Holiday 2011 sales were up but returned only to 2007 levels, largely due to promotions linked to Black Friday and Cyber Monday, which essentially began a week earlier for some stores and e-tailers, and the relatively new Green Monday. That will likely come at the expense of margins.
After nearly four years, economic growth remains slow, with many indicators improving, even if only back to 2007 levels. It’s as if a new paradigm has emerged, one that requires growing pains before the next growth spurt.
Key issues in the U.S. will be the presidential election, health care and jobs. In Europe, the sovereign debt crisis will remain front and center. Stability in the Middle East and whether exports from China will continue to slow and costs there continue to rise are global concerns.
Of the major stock market indices, most ended up in their last trading session of 2011 on Friday. Hong Kong’s Hang Seng Index inched up 0.2 percent to 18,434.39, while Tokyo’s Nikkei 225 gained 0.7 percent to 8,455.35. In Europe, Frankfurt’s DAX rose 0.9 percent to 5,898.35, while Paris’ CAC 40 increased 1 percent to 3,159.81. London’s FTSE 100 rose 0.1 percent to 5,572.28, while Milan’s FTSE MIB increased 1.2 percent to 15,089.74. In the U.S., the Dow Jones Industrial Average slipped 0.6 percent to 12,217.56, while the S&P Retail Index lost 0.8 percent to 523.20.
Looking at the year in fashion and retail stocks, the top gainer in the U.S. was Oxford Industries Inc., whose shares jumped 79 percent to $45.12. True Religion Apparel Inc. was second, up 55.3 percent to $34.58. Ross Stores Inc. was the top U.S. retail stock, shooting up 52 percent to $47.53. Hermès was the big winner among European shares, rising 47.9 percent to $297.64, driven by the continued strong performance of the luxury sector as well as LVMH Moët Hennessy Louis Vuitton chief Bernard Arnault’s unwanted attentions. Shares of Lululemon Athletica Inc., Wall Street’s darling in 2011, just missed the top 10, ranking at the number 11 spot, while shares of Macy’s, Ralph Lauren Corp. and Dillard’s Inc. all made the top 20. Among those that lost ground, shares of The Bon-Ton Stores Inc. were the biggest loser in the U.S., down 72.8 percent to $3.37. Trading on the Hong Kong Exchange, Esprit Holdings also lost 72.8 percent, to $1.29, while sourcing giant and major acquisitor Li & Fung lost 68.4 percent to $1.85. All conversions were at current exchange.
Looking ahead, there are many who believe the U.S. could see the stock market rebound in 2012 — and maybe even climb back to 14,000. It’s a possibility given that any unresolved debt and credit issues are likely to be pushed into 2013 for the presidential administration of whoever’s in office next year to deal with.
According to Walter Loeb of Walter Loeb Associates, “The stock market remains an enigma to everybody. The Dow Jones Industrial Average could climb up to 14,000, and then head down again after the presidential election results are in. Before then, consumers could be in an optimistic mood due to the promises heaped upon them by the candidates.”
Loeb expects retailers to work harder as they fight for share of market, regardless of distribution tier. And he expects oil prices to be above $100 a barrel for most of 2012. That’s not good for consumers when they see home heating bills and gasoline prices at the pump rise. It also means retailers should expect consumers to continue to cherry-pick deals at the stores, much as they did with Black Friday sales and after-Christmas clearances, Loeb concluded.
Still, the general sense is that the U.S. economy is improving, albeit slowly, as jobless claims fell over the last four weeks. Initial jobless claims rose last week, but the four-week measure was at its lowest since June 2008. The rolling indicator is supposed to present a better picture of the U.S. labor market. It remains to be seen whether the lower claims were due in part to higher part-time employment as retailers geared up for the holiday sales rush.
Consumer confidence rose in December and is back to levels seen in April 2011. Early indications of increasing positive sentiment were seen during New York’s Fashion Week in September, if one believes fashion can predict consumer mood six months in advance. Investment banker William Susman of Susman Partners said of the shows for spring 2012 that he saw, “Clearly color was everywhere. In economic times like these, the consumer wants inspiration. She wants to feel good. The trend of colors and prints was very uplifting.”
Obviously there’s caution ahead. Kevin Logan, the chief U.S. economist at HSBC Securities (USA) Inc., said that if Congress can’t find a way to renew the payroll tax reduction and extend unemployment benefits for another year, there is the risk of “plunging the economy into a recession.” HSBC’s 2012 outlook “remains tepid,” and it forecasts sub-par GDP growth of “between 1.5 percent and 2 percent.”
Ryan Sweet, senior economist for Moody’s Analytics, expects this year to be better than last year, although still not a booming one for the economy. “It’s a tale of two halves. The first half will be weak as Europe catches up with the U.S. economy. Europe is in a recession, and that will hurt U.S. exports to the region. [In addition, U.S. consumers] went into savings to finance their holiday spending…and in early 2012 will be replenishing their savings cushion,” he said.
Sweet expects consumers to spend more in the second half, after they’ve replenished their savings buckets. And with increased demand for goods later on, it’s a good bet that job growth will pick up.
“The nonfinancial corporate balance sheet is in pristine shape. Companies are sitting on top of a pile of cash. The issue is their willingness to spend. Companies in 2012 will continue to hang onto their cash, but at some point businesses will recognize that they can’t squeeze that much more out of their [existing] workforce,” Sweet said.
David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, believes that 2012 is one of transition for the global economy, and that this year could finally provide a conclusion to the economic debate in China over “soft-landing and hard-landing risks.”
Rosenberg expects a continued deleveraging as the world moves through the year, which will be “accomplished by some combination of default and write-downs, debt repayment and rising savings rates.” All of which, he concludes, will be “very deflationary.”
Inflation and deflation naturally lead, for the fashion world, to the Production question — which leads to China. Pundits agree with the IMF’s forecast 9 percent inflation-adjusted growth for the country in 2012. Morgan Stanley’s 2012 Global Outlook report forecasts real growth of consumption to accelerate to 8.6 percent in 2012 from 8.3 percent in 2011.
Though China’s reliance on exports as a growth mechanism has lessoned in recent years, a lackluster outlook for the developed world, in particular the European Union where 20 percent of Chinese exports end up, will substantially weaken China’s export and import growth in 2012.
In Japan, the Nomura Securities economics team noted last month in a report that while the “global economic slowdown will expose the Japanese economy to considerable downside risks through mid-2012…[w]e expect the Japanese economy to avoid stalling thanks to the simultaneous stimulatory boost of post-quake demand.”
Analysts’ forecasts for Europe’s economies this year are more cautious. In the same Morgan Stanley report, the bank forecasts a return to recession for Europe in 2012 and predicts that the region’s GDP will shrink by 0.2 percent during the year. Germany is expected to enter a recession this year, as exports of goods and services account for more than 40 percent of the country’s GDP and the majority of those exports go to the rest of the troubled European region. Italy’s economy is projected to retract 1 percent as the country’s planned austerity measures weigh on consumers, the same reason Spain is likely to reenter recession, despite “sound” austerity measures there.
A report last week by British research company Verdict Research and SAS, a software solutions business, forecast a retail growth rate in the U.K. of 1.2 percent, the third-lowest growth rate recorded in the past 40 years, and predicted that sales of nonfood items will fall by $1.14 billion, or 0.5 percent, during the year. However, the outlook for clothing, footwear and beauty products was slightly sunnier. Verdict predicts that spending during the year on clothing and footwear will increase by $1.70 billion, up 2.4 percent compared to 2011, and rise 2.8 percent for health and beauty.
As far as the fashion and retail worlds specifically, one thing Marc Beckman, chief executive officer and founder of Designers Management Agency, saw in the past year was a shift in what it means to be a luxury brand, and he expects that to continue. “Luxury has retreated to its more pure definition. Items are now not so accessible, and therefore more covetable. There are more limited editions. It’s not something for everyone anymore.” Christos Garkinos, co-owner of Hollywood, Calif.-based luxury and designer boutique Decades, said that even though the vintage and luxury categories tend to be contra-recessional, these days the high-end stores are ordering just “one so everyone is running after that versus the eight [that used to be in stock].”
Larry Boland, the North American president of luxury watch firm Piaget, said his company’s Altiplano collection, an ultrathin classic style, has been a top seller. An 18K pink gold diamond unisex watch with a manual-winding movement has a suggested retail price of $49,500. “There’s nothing in stock at the moment. That’s a good sign,” Boland boasted of the overall Altiplano inventory levels in North America. For 2012, the firm will intensify its presence in the social and digital media landscape.
Fiona Dias, chief strategy officer of the members-only shopping benefits service aggregator ShopRunner.com, foresees 2012 as the year when mobile shopping takes off, thanks to the iPhone, iPad and the popularity of Amazon’s new color Kindle. “This [past holiday] season introduced many people to mobile devices that enabled them to shop anywhere, anytime and any way they wanted. Those devices have helped the forward jump to mobile shopping,” she said.
And with plenty of cash still to be put to work, expect more deals on the mergers and acquisitions front. The Gores Group, after acquiring interests in J. Mendel, Big Strike Inc. and a joint-venture stake in the Mexx business from Liz Claiborne, is still on the acquisition trail. Founder, chairman and ceo Alec E. Gores said the firm is eyeing opportunities in fashion, calling it a “great sector for us,” whether as an opportunistic freestanding operation or as an add-on to an existing platform in its portfolio.
Also keep an eye on Sun Capital Partners Inc. and its affiliate Sun European Partners, which have been particularly active in the fashion sector. Many of its U.S. acquisitions were under the Kellwood umbrella and now that former ceo Michael Kramer has left to join J.C. Penney Co. Inc., there’s speculation about Sun Capital’s game plan going forward after funding the Adam, Rebecca Taylor and Zobha transactions. It still has a sizeable retail and apparel portfolio overseas, though, with current investments including V&D, Lee Cooper, Scotch & Soda and Alexon Group Plc. Last month, British women’s wear retailer Jacques Vert agreed to be acquired by an affiliate of Sun Capital for $64 million.
“On the apparel side, there’s a lot of creative talent, more creative talent than nuts and bolts operating talent,” said Marc J. Leder, Sun Capital’s co-ceo, noting the business management skills that firms such as his bring to the table.
Initial public offerings also remain in the cards, so long as the equity markets remain steady. Brunello Cucinelli is planning on a spring IPO, with the listing in Italy. London-based jeweler Graff Diamonds is planning to raise as much as $1 billion via an IPO, possibly in Hong Kong.
It won’t be all good news, though. Bankruptcies, anyone?
Lingerie retailer La Senza in the U.K. already filed a notion of intention that it plans to appoint administrators, the U.K. equivalent of entering bankruptcy proceedings.
In the U.S., all eyes will be on Sears Holdings Corp., which said last week that it planned to close between 100 and 120 Kmart and Sears full-line stores. While Fitch Ratings said last week that Sears Holdings has adequate liquidity to fund 2012 working capital needs, the real issue could be whether vendors will give the executive team the time it needs to pull together a new game plan.