Solid inventory positions, investment in direct-to-consumer efforts and product innovation will help boost apparel manufacturers this year, noted analysts at Telsey Advisory Group in a report issued this Thursday. But in regard to the department store segment, the firm was more bearish.
“We remain cautious on department stores in 2020 given low visibility on a sustained and positive direction in sales despite a healthy consumer backdrop,” said Dana Telsey, chief research officer at the firm. “We see continued elevated spending on marketing and e-commerce initiatives, along with the continued shift toward digital creating margin pressures throughout the year.”
Analysts at the firm noted a “silver lining,” though, when inventories are compared year-over-year. They stated in the report that the inventory levels at the major department stores were in “relatively decent shape” as companies headed into the recent holiday shopping season.
“For instance, based on the average change in sales compared to that of inventory, department stores [J.C. Penney, Kohl’s, Macy’s, Nordstrom] showed a 140 basis point gap between the two metrics at the end of [the third quarter of 2019], followed by an expected narrowing of 70 bps in [the fourth quarter],” Telsey said. “Importantly, the direction of the metrics implies a less-worse scenario in sales with inventory remaining lean.”
One bright spot in retail is the off-price channel, researchers at the firm said, adding that 2020 will be a good one for these retailers with results being “driven by continued strong comp growth” and with traffic “being the key contributor.” Other positive factors driving sales and profits is a value proposition embraced by consumers along with “enhanced merchandising” and a “long runway for store growth” as well as a “healthy consumer environment.”
“Our top pick in the sector remains TJX Cos. given the company’s diversified business model that has a broader demographic and geographic reach vs. its peers,” Telsey said.
In the apparel manufacturing segment, Telsey and her team of analysts said they “remain constructive on the apparel space given the strength of the consumer, innovative product enhancement, healthy inventory levels and benefits from a reinvestment in direct-to-consumer businesses.”
The firm said an ongoing shift toward digital marketing along with initiatives to create greater personalization will driven conversions. “In addition, manufacturers with strong brands are better positioned in 2020 than their wholesale and retail counterparts as they have the ability to control their own destiny,” Telsey said. “Further, tariff concerns have eased as companies have worked to minimize any impact, whether it be sharing costs with factories or relocating sourcing, while the Phase One Trade Deal, which officially agreed to the rollback of tariffs, was signed on January 15, 2020.”
In regard to “favorite names” in the apparel segment, Telsey Advisory Group said it was Levi Strauss & Co., PVH, Ralph Lauren and VF Corp.