This could be it for one of the least likely bull runs in fashion.
While the early COVID-19 lockdowns hit the industry hard, forcing scores into bankruptcy, many companies took the opportunity to retool and come back stronger. Some, including DKNY parent G-III Apparel Group, posted their best year as the sector bounced back in 2021. And luxury in general has been going from strength to strength.
But this could be as good as it gets.
Companies across the retail spectrum are priming investors for a change, acknowledging the risks of war and inflation and saying the consumer is holding on.
“We haven’t seen much change in customer shopping behavior yet,” said Brett Biggs, Walmart Inc.’s chief financial officer, at an investors conference this month. “Typically, when fuel prices go up, for us, you’ll see some consolidation in trips. Traffic might go down a little bit, transaction dollars will go up….When you look at all the metrics, you look at unemployment is low, wage rates are high, customer balance sheets are still pretty good. Savings rates are still pretty good. There’s a lot of things that still feel pretty good from a consumer standpoint.”
On the other end of the price spectrum, luxury coat brand Moncler addressed the commercial toll of the war in Ukraine, noting, “Although the uncertainty regarding the development of the situation and its possible impacts on global economies remains very high, significant consequences on full-year 2022 results are currently not foreseen.”
That message of “So far, so good” stretches almost uniformly from Walmart to Moncler and beyond. But after a year of such strong gains amid pandemic, supply shortfalls and more, it’s probably too much to ask that the trend continues.
Consumers are already feeling the strain.
A Suffolk University/USA Today poll recently found that 30 percent of respondents felt the economy was already in recession, while 21 percent felt a depression had started.
The general understanding of those terms could be fuzzy, but the direction of sentiment is clear.
And in February, before the Russian invasion, the closely watched Surveys of Consumers from the University of Michigan saw consumer sentiment falling 8.2 percent from the prior month to its worst level in a decade. The entire decline was attributed to households with incomes of $100,000 or more.
“The impact of higher inflation on personal finances was spontaneously cited by one-third of all consumers, with nearly half of all consumers expecting declines in their inflation-adjusted incomes during the year ahead,” said Richard Curtin, director of the Surveys of Consumers.
It all adds up to trouble ahead for fashion.
“Now we are in a place where it’s a cycle that’s not going to keep going,” said David Bassuk, global co-leader of AlixPartners’ retail practice. “We’re at a kind of inflection point today where the future looks harder.
“It was a good holiday, it’s been a good start to the year,” Bassuk said. “But we have a lot of disruption ahead. The ripple effect from the global crisis with Ukraine, coupled with inflation…the supply chain crisis is not over. You keep putting all these things together … it all ends with the consumer. It’s going to be more challenging for the consumer.”
That might go double for the companies trying to sell to those consumers.
“The bar keeps rising,” Bassuk said, noting retailers and brands that retooled to thrive during the pandemic are going to have to keep moving.
Key to winning in the new environment will be to successfully use bricks and clicks together in an omni fashion and to contain and manage costs, he said.
“If you fall short on both of those things, it’s game over,” Bassuk said.
It’s hard to know what’s going to happen tomorrow or the next day — in business or in guessing at the whims of consumers — but the world might well be primed for its next big tipping point.
Certainly, forces with the power to shape history are on the move.
• The war in Ukraine has heated the Cold War back up dangerously with global ramifications and a potential geopolitical reordering.
• The pandemic still looms large with a new variant threatening the West’s resolve to return to a more normal life as well as China’s zero-COVID-19 approach.
• The COVID-19 supply chain backups that ratcheted up prices on key goods are being compounded by the war.
• The economic powerhouse of China is changing tack and turning within after a generation of looking to integrate into the global system.
While the raging land war in Europe with a nuclear-armed Russia is the warning light flashing most vibrantly right now, the dramatic spike in prices could be the most widely felt herald of change.
A recent report by analysts at investment bank Cowen pointed to the breadth of the inflationary pressure.
During the pandemic, oil prices roughly doubled, pushing gasoline over $4.20 a gallon, while synthetic textile prices are up by about 25 percent and the spot price on cotton has increased by nearly 70 percent.
The list goes on, with the war also pushing grain prices higher and threatening food supplies. This is an inflation that’s not just sapping spending power, but seeping into everything.
“Significantly higher gas prices will impact all consumers, but will be a particularly heavy burden for lower-income consumers whose inelastic energy expenditures make up a large component of their income,” the Cowen report noted. “Further, higher gasoline prices will also drive higher transit/supply chain costs, as Fedex, UPS, and other carriers begin to implement fuel surcharges to help combat the fuel cost inflation they’re witnessing in their businesses.”
After two years of unprecedented change around the pandemic, the impulse at first was to see price increases as a reflection of supply chain backups or temporary factory shutdowns, rather than a broader shift.
But the ripple effects of the Russian invasion, which are just starting to be felt globally and most prominently in gasoline prices, seems to have forced a turning point.
Erik Lundh, principal economist at The Conference Board, said the economic outlook has changed “pretty significantly over the last six weeks,” with the research firm cutting its U.S. GDP projection to growth of 3 percent from 3.5 percent.
Prior to Russia’s invasion, Lundh was sensing that inflation was at its peak. Now it’s a much different picture.
“We are worried about what’s happening in the Ukraine, we are very concerned about oil prices and energy prices broadly,” he said. “We’re concerned about agricultural prices. The Ukraine and Russia export about 17 percent of the world’s grain, so there’s the potential for a very big shock in grain prices and food prices. Inflation is going to continue to be bad and probably get worse.”
It’s a trend that has rapidly overwhelmed other more positive aspects of the consumer balance sheet.
“There’s all this news about wages going up and disposable income rising, but it’s being eroded more rapidly than it’s expanding,” Lundh said. “That creates a bit of a headwind in terms of consumer spending moving forward through the rest of the year.”
Even the Federal Reserve — which last year viewed the price increase as a temporary phenomenon — has been moved to action and has started inching interest rates higher to tamp down prices while trying to not cool the economy.
How long it all lasts is still a very open question.
“Something big is going on here,” said Matt Dines, chief investment officer at Build Asset Management. “Currencies don’t usually go through this type of erosion in their purchasing power. It hasn’t happened in just over 40 years.”
That lens makes the best historical comparison for today not the financial crisis and the Great Recession or any of the slowdowns in recent decades but the 1970s, when China emerged onto the world stage and currencies were decoupled from the gold standard.
Dines said that was a moment when the world transitioned out of the system that had been in place since the end of World War II and into a headlong rush of globalization.
Now, with Russia being pushed off the world economic stage by sanctions and China reordering its priorities, globalization itself could be at a turning point.
“Has this global system kind of maxed out?” Dines wondered. “Are we at peak capacity?”
If so, he said the world has a lot of practice — stretching back to the Renaissance — of innovating over tough patches.
“Sometimes growth is a messy process, but you go through decades where you have to absorb some pain, reset and go from there,” Dines said. “This is probably kind of a bigger, broader kind of shift taking place.
“If you look at the big picture goals that kind of the world is aligned on — solving the climate problem, the transition to electrification — all of those things are going to be big, expensive, capital intensive processes,” he said. “[And] there’s not productivity gains like you saw turned on in Industrial Revolutions one and two, when you saw output increase.”
So there’s a slowdown in the offing. The question is, how long does it last and how bad does it get?
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