Moody’s apparel analysts believe that operating income for the sector will slow to a growth of 3 to 5 percent from the high-single digit constant-currency range in 2015.
Apparel’s struggles have been borne out of the latest November same-stores sales report. Apparel sales excluding The Gap and Zumiez dropped 1.4 percent. Teen apparel plunged 7.7 percent. The Thomson Reuters same-store sales index excluding drugstores fell 0.4 percent versus last year’s increase of 5.3 percent.
Moody’s noted that the strong dollar was hurting margins and that foreign currency hedges that had been executed for the year would begin rolling off. With regards to specific categories of retail, department stores are expected to outperform, while off-price retailers will have stable growth. Apparel and footwear specialty retailers are expected to be laggards.
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On a positive note, Moody’s pointed out that apparel brands would benefit from lower costs with regards to oil and cotton prices. The analysts also suggested that lower gas prices would have a positive effect, but warned that an increase in spending wouldn’t be proportional.
Also, global firms will have good long-term growth prospects from the rising middle class in emerging markets. China, Brazil and Eastern Europe should have high growth rates despite choppy macroeconomic environments.
Historically low rates will allow some companies to scale up as they take advantage of low interest rates to fund strategic acquisitions. Moody’s highlighted some companies that could employ this tactic.
VF Corp. has fully integrated the acquisition of Timberland and retired the related deal debt, putting it in a position to pursue additional deals. Hanesbrands is also focused on driving significant acquisition synergies. Moody’s believes Wolverine World Wide will also likely pursue strategic acquisitions after recent deleveraging.
Moody’s said consumers remain cautious, but are showing signs of improvement. Household wealth is getting better and unemployment is lower. Lower and middle-income consumers will remain under pressure.