The pressure on margins continues. As online sales maintain their double-digit growth (15 to 18 percent, according to analysts and economists), traditional retailers are grappling with the variable costs associated with e-commerce. HRC Advisory estimates that traditional brick-and-mortar retailers who have expanded into e-commerce are seeing pre-tax profits eroded by 25 percent.
This story first appeared in the April 19, 2017 issue of WWD. Subscribe Today.
It’s also cannibalizing sales in physical stores.
While 90 percent of sales still occur in a physical store, the retail landscape remains overstored — about 53 percent in the U.S., and 27 percent in the U.K., according to industry sources. In response, companies are closing doors. Hardest hit is the specialty apparel segment.
Some of the specialty retailers shuttering stores include Abercrombie & Fitch Co., The Limited, American Apparel, BCBG Max Azria Global Holdings, Wet Seal, Guess Inc. and Bebe Stores Inc., among others. To survive, retailers need to maintain gross margins, grow the top line and streamline their inventory, experts said.
In the broader retail market, companies are pulling back on markdowns to protect margins. Time will tell if it is sustainable. But for now, a disciplined approach to promotions appears to be working. Sarah Engel, chief marketing officer at DynamicAction, a retail prescriptive analytics company, said “retailers are connecting data and tightening up operations, [and] we are seeing some positive results start to emerge in the first part of 2017.”
Engel cited her firm’s retail index, which is based on $9 billion in consumer transactions around the globe. She said “orders using a markdown (price cut) are down 9 percent thus far in 2017 versus 2016, and March is trending even more positive for retailers with a 15 percent decrease in markdowns.”
Engel said that orders featuring a promotion, such as “buy one, get one free” or “30 or 40 percent off” were up an average “24 percent in North America thus far in 2017 versus 2016, however much of this promotional activity occurred in January (up 67 percent over January 2016) as retailers were clearing overstocked merchandise.”
But for the specialty fashion retailers, margins remain tight. In an analysis by WWD using data from eMarketer, specialty retailers have experienced an average 210 basis-point decline in gross margins for the trailing 12-month period while average gross-margin rates for the segment came in at 36 percent. Average operating margins for the group were a negative 1.6 percent for the period while the basis-point change in operating margins showed a decline of 160 points.
Of the 28 specialty retailers tracked in the WWD study, 21 had gross-margin rates of 40 percent or below. This compares to average gross-margin rates of 50 to 60 percent in other segments in the market — such as retailers specializing in jewelry, accessories and footwear, according to data from S&P Capital IQ.
In the WWD analysis, the companies with the weakest gross margin rates were The Wet Seal Inc. with 20.39 percent and Aéropostale with 21.3 percent. Although Wet Seal said earlier this year that it was closing all of its stores, the retailer was included in the report because data was available for the 12-month period.
It’s important to note that having higher gross margins doesn’t guarantee fiscal success. Of the specialty retailers examined by WWD, Abercrombie & Fitch Co. had the highest gross-margin rate — 61 percent — of the group, for the trailing 12 months. But the company has struggled to post top-line growth as well as consistent same-store sales increases. Operating margins at the retailer were down more than 160 basis points for the 12-month period, and earnings for the most recent quarter declined.
Sales, gross margins and operating margins have to be consistent and robust while selling, general and administrative costs and costs of goods sold need to be managed. Engel also said retailers need to continue practicing discipline with markdowns. For fashion apparel retailers in the near term, store closings are pegged to continue. Analysts at Telsey Advisory Group said of the 11 specialty retailers it tracks, 914 store closures are expected this year, which compares to 166 last year.
“These store closings are expected to result in a sales loss of $1.43 billion in 2017 versus nearly $250 million in 2016,” analysts at the firm said.
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