According to a Moody's analyst, if tariffs go into effect, companies can find ways to offset these taxes within the organization, e.g. they can move production.

Moody’s has turned positive on apparel and footwear for the first time in two years thanks to increased international business and direct-to-consumer operations across multiple brands.  

The firm updated its outlook on Wednesday from stable to positive for the next 12-to-18-month period, and nearly doubled 2018’s operating growth profit expectations to a range of 8 to 9 percent, up from 3 to 5 percent.

The apparel and footwear industry has “begun to accelerate at a greater rate than we had expected,” a note released to investors read.

While mall traffic continues to dwindle in U.S.-centric companies, international business allows companies to outsize growth across multiple channels, including in-store, online and wholesale. 

In fact, of the 22 companies that Moody’s tracked, both large and small, the firm found that 42 percent of combined sales comes from overseas, especially in emerging markets like China, “where greater economic expansion tends to fuel branded apparel purchases.” In the case of Nike, more than 50 percent of sales are international.

Earnings pressure caused added headwinds between 2016 and 2017, but many companies still invested in direct-to-consumer operations, which allow them to reach customers faster and retain control over the brand image.

“Now the companies are starting to see the fruits of their labor,” said Michael Zuccaro, an analyst at Moody’s. “They’re speeding up the supply chain and technology to put out better products.”

Companies benefiting from this trend include Under Armour, the VF Corp., PVH Corp. and Ralph Lauren. The majority of apparel companies listed are expected to grow at a rate of more than 6 percent in 2019.

In addition, efforts to reduce inventory over the last two years resulted in increased promotional activity across several brands, which impacted the bottom line. And the spike in the U.S. dollar, particularly in 2016, meant international companies were paying more. Zuccaro said many of these headwinds have subsided.

Tariff tensions persist, but the majority of apparel products have been excluded thus far. Items that have been affected, such as some leather goods like handbags and gloves, as well as textiles and cottons, have already been factored into companies’ current apparel growth forecast.

“If tariffs go into effect, then companies are going to find ways to raise prices as little as possible,” Zuccaro said. “They can find ways to offset tariffs within the organization: they can move production; they can talk to manufacturers about getting a discount.”

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