Moody’s Investors Service has increased its operating income forecast for the apparel and footwear industry from 3 to 5 percent growth to 4 to 6 percent growth for 2016. Analyst Michael Zuccaro also thinks 2017 will bring operating income growth to a range of 6 to 8 percent.
Moody’s noted that 2016 will get off to a rocky start as companies are very promotional in order to shed the winter inventory that didn’t sell due to the warm weather. “By the second half, we see inventories going down, which will help reduce promotional discounts, driving income growth up to a more robust 6 percent to 8 percent,” Zuccaro said. He also noted that wholesale customers were likely to have been conservative in their inventory purchases and that too could lead to less discounting.
The strong dollar that hurt many companies throughout 2015 is expected to stabilize as the dollar’s value begins to hit an anniversary. “Constant currency revenue growth will remain near the top end of our 4 percent to 6 percent range for 2016,” Zuccaro said. The dollar hit an 11-month low this past Friday. A weaker dollar will help many companies that sell their products overseas.
Revenue growth will also stay strong as companies benefit from the direct-to-consumer, or DTC, channel. “Nike [Nike Inc.] Brand grew DTC revenues 29 percent in the 2016 third quarter, driven by 10 percent comp store growth, 56 percent growth in online sales and new store expansion. Its DTC revenues now account for 23.5 percent, or nearly $7.5 billion, of total consolidated sales. VF [VF Corp.] grew DTC sales by 7 percent in 2015, accounting for 27 percent of revenue in the 4Q. In stark contrast, sales for department stores have declined 25 percent since 2002,” Zuccaro said. He also highlighted Ralph Lauren Corp. and PVH Corp. for their efforts in building an online business.
The analyst pointed out that the trend in health and wellness will continue to boost athletic apparel sales. He cited Nike, VF Corp. and Hanesbrands Inc. as beneficiaries of the trend.
Even though there has been sluggish global growth, there are still international opportunities. Moody’s macroeconomic board has forecast euro area growth to be in the range of 1 to 2 percent growth. This should help Nike and PVH.
China is also forecast to be a solid grower at a range of 5.5 to 6.5 percent. “While economic conditions in the region have been very volatile recently, the Chinese consumer continues to spend, which has benefited Nike, VF and PVH,” Zuccaro said.
Sector consolidation is expected to continue as global apparel firms evolve into lifestyle brands. Just last month Hanesbrands agreed to acquire Pacific Brands Limited for $800 million. Moody’s believes that many large companies have made progress on or have completed integration of acquisitions and are now ready to make more moves.
The outlook will remain at stable and Moody’s believes that risks to the forecast are mostly to the upside. The outlook could be changed to positive if foreign exchange rates stabilize and earlier price increases stick. The outlook would be changed to negative if the dollar strengthens or a recession develops in a key market.