Attention fashion designers: It’s better to both wholesale and retail than to retail alone.
Fashion brands that wholesale are generating stronger growth than the retailers they once depended on — and in many cases they’re doing it at the expense of those very same retailers.
A study of five years of data on retail and wholesale performance by analysts at Wells Fargo Securities compared figures from 11 branded apparel and footwear companies with those of 42 retailers, from specialty stores to department stores, discounters and even groceries. The branded firms included PVH Corp., owner of Calvin Klein and Tommy Hilfiger; VF Corp., owner of Seven For All Mankind, Vans and Timberland as well as Wrangler and Lee; Nike Inc.; Hanesbrands Inc. and Ralph Lauren Corp. Among the retailers were Macy’s Inc., Kohl’s Corp., J.C. Penney Co. Inc., Gap Inc., The TJX Cos. Inc. and Urban Outfitters Inc.
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The study, led by senior analyst Evren Kopelman, found the wholesale group benefited more from expansion into international markets and picked up market share as they developed and built their own retail operations and other direct-to-consumer initiatives such as e-commerce.
What were once suppliers are now competitors — and imposing ones, too.
Plus, the wholesale brands, as they’ve become more vertical, have less exposure to the slowdown in mall and store traffic in the U.S. Through their choice of product assortments, such as handbags, or lifestyle emphases, such as athletic or athletic-inspired product ranges, many have outpaced the performance of retailers with broader, less-focused offerings.
“We wanted to see how well the conventional wisdom held up that the wholesale group was generating more growth and even stock appreciation than the retailers and attach some numbers to it,” Kopelman, who covers the brands for Wells Fargo, told WWD. “I was surprised at how well the data supported the thesis and how, even among the wholesalers, the parts of the business that are lagging are those with more exposure to the pressured performance of U.S. retailers.”
She pointed out that some of the largest companies in her wholesale sample, including the two largest U.S.-based companies in the brand group, PVH and, to some extent, VF, have been encumbered by their “heritage” businesses, whether those be PVH’s Heritage Brands group or VF’s older denim brands, such as Wrangler and Lee. These businesses have greater dependence on wholesale than some of the more recently acquired brands.
“VF is growing in direct-to-consumer and international faster than it is domestically,” Kopelman commented. “I’ve liked PVH [as a stock] for a long time, but before the acquisition of Warnaco [completed in February 2013], they faced limits on what they could do in e-commerce and DTC. They’ve made progress in those areas, but they still have more exposure in the U.S. wholesale channel than many of their competitors and they also had exposure in outlets, which are slowing now, but were a good growth story for a long time.”
VF’s DTC revenues accounted for 22 percent of its $11.42 billion in 2013 volume, up 1 point from 2012, and international for 38 percent of sales, also up 1 point from the prior year. At PVH, international grew to 45 percent of its $8.19 billion in 2013 revenues from 39 percent, lifted by the acquisition of The Warnaco Group Inc. PVH has described its e-commerce business as being in its infancy. Except in the Heritage Brands unit, it doesn’t break out retail revenues.
The Wells Fargo team looked at store count data spanning the years 2007 to 2012 and at sales, earnings and stock data back to mid-2012. The branded apparel and footwear group consistently generated stronger sales growth for every quarter since the second half of 2012 and superior growth in earnings per share for every quarter but one, the third quarter of last year, when the two groups were essentially identical.
In the second quarter, the average sales increase among the wholesalers was 18 percent, exactly three times the average increase among the retailers. In terms of profits, the quarterly growth rate was 19 percent, while the retailers, on average, declined 4 percent.
The differences in stock performance over the recent past were similarly glaring. In 2013, the branded apparel and footwear companies saw their stock values increase 53 percent, better than the 30 percent gain recorded by the S&P 500. By contrast, the retailers underperformed the wholesalers as well as the S&P with growth of 22 percent.
So far in 2014, the gains have been harder to come by, but the rankings are the same — the brands are up 11 percent, the S&P up 8 percent and the retailers down 5 percent.
By dollar value and percentage, the wholesale group has provided large upside surprises in quarterly profitability, while the retailers have either produced smaller ones or disappointments. The median “surprise” on a percentage basis for the second quarter was 11 percent above consensus estimates for the wholesale group versus 5 percent for the retailers. In the first quarter, when inclement weather and post-holiday lethargy led to depressed traffic counts and poor sales at retail, the retail group was 5 percent below consensus estimates, on average. Yet, despite the challenges confronting retailers, the wholesale group’s earnings on a per-share basis were on average 17 percent above consensus levels.
As if to underscore the maturity of the U.S. market at retail, the Wells Fargo team looked at the brands’ growth generators in the years since 2011 and found international growth outpacing domestic expansion, although by a narrower margin in the three most recent years than in 2011, when international grew at a 41 percent clip and domestic at a 23 percent rate. So far in 2014, international growth for the wholesale sample has been 13 percent versus 10 percent for the domestic portion of the brands’ businesses.
Kopelman believes that the move to DTC has yielded another advantage not previously enjoyed by wholesale entities. “In the past, the wholesalers relied on whoever they sold through to tell them what was and wasn’t selling,” she said. “Now, they have their own data from their own stores and they get constant data on their Web sites and social media pages. They’re much closer to their end customer in lots of ways, whether they’re getting feedback in their stores or [on] e-commerce sites, conducting their own research or collecting comments on a social media site.”
Although figures for 2013 still haven’t been tabulated for all companies studied, Wells Fargo collected data for the five years ended in 2012 on the retail expansion activities of 23 wholesale brands, including individual brands and groups of brands owned by larger players like VF and PVH. Among this group were five — Hanes, PVH’s Heritage Brands group and VF’s Lee/Wrangler, Nautica and Timberland units — that had reduced their store counts and retail square footage during that five-year span.
Even including these “leaner” operations, the total number of stores operated by the group expanded during that period to 9,743 from about 5,700, nearly 71 percent higher, and the number of square feet added was more than 10.5 million. In descending order of square-footage added, the top numbers came from Nike (1.7 million), Hugo Boss (1.4 million), Ralph Lauren (1.3 million) and Levi’s (1.2 million). The figures for Nike and Ralph Lauren were for the five years ended last year, and the Levi’s number was aided by the 2009 acquisition of Levi’s and Dockers outlets previously operated by the Anchor Blue Retail Group.
In its analysis of compound annual growth rate for DTC sales among the brands over the five-year period, Wells Fargo found the leaders were Under Armour (51 percent), Deckers (43 percent), Columbia (36 percent), Levi’s (30 percent) and Hugo Boss (23 percent). All had lower CAGRs for their wholesale operations during those years, ranging from Deckers’ 22 percent growth to Levi’s 2 percent decline.
Kopelman conceded that brands face difficult choices as they plot their international expansions. She contrasted the performance of Tiffany & Co., which faced a long road to profitability in Europe by opening its own stores, with that of L Brands Inc., which is “doing a lot of partnering and licensing because they prefer that ‘capital-light’ model. Certainly it helps to pick the right partner or partners if you go that route.”
What can retailers do to reverse their ailing domestic fortunes? Kopelman advises a more flexible approach to consumer preferences. She made the point that specialty retailer Citi Trends Inc. led all companies in the study, wholesale or retail, with the strongest increase in consensus estimates versus a year ago, a whopping 45 percent leap.
However, she noted that Citi Trends faced several difficult years before it started to see signs of a turnaround, including a more than 50 percent reduction in its second-quarter loss. Sales in the quarter rose 5.2 percent and comparable-store sales were up 5.3 percent.
“It’s working,” Kopelman said of the Savannah, Ga.-based operator of 509 stores in 29 states, all of them emphasizing value pricing. On the company’s second-quarter conference call on Aug. 20, Ed Anderson, chairman and chief executive officer, reported that the 5.3 percent comp increase was the “best in over four years” and provided comps by merchandise category: accessories and footwear up 24 percent, men’s wear up 1 percent and children’s and women’s apparel down 1 percent and 4 percent, respectively.
“They saw that footwear and accessories are selling better than apparel and they adjusted their space and buying accordingly,” Kopelman noted. “They did it incrementally, but they didn’t move slowly. Since J.C. Penney’s recent experience, a lot of people want to move slowly, but it really seems to be more a matter of the direction you move in than the speed you move at.”
