In February and March 2011, the majority of US apparel companies revealed surprisingly high profits at the end of their latest financial-years. Their performances are indicative of the dramatic improvements seen in the state of the US economy in 2010. However, these strong profits are not expected to be easily repeated in 2011.
Stellar profits despite modest sales growth
In 2010, the US apparel market only grew by 1% in value terms according to Euromonitor International’s preliminary estimates. Despite this low level of growth, which nevertheless demonstrates economic recovery, considering the 1% decline in the market recorded in 2009, the overwhelming majority of US apparel retailers have achieved strong earnings growth in their latest financial-year results.
However, whilst profits for a number of companies are soaring, very few had sales growth that was equally impressive. This indicates a serious case of cost cutting in the US apparel market throughout 2010 and this is almost certainly set to continue into 2011. It also indicates that, in general, US apparel retailers were well prepared for the hike in sourcing costs seen in 2010, driven by factors such as the price of raw cotton almost doubling.
The most extreme example of a company achieving outstanding profits on weaker sales is Ann Taylor, which saw net profits increase by 332%, whereas sales grew by just 10% in its 2010 financial year results to January 2011. Whilst the company implemented a three year cost saving programme in 2008, it did not allow the increased sourcing costs in 2010 to affect its goal of making a US$125 million saving over the period.
The program included a rigorous store closure plan, which saw 137 stores closed over the three year period, including 35 in 2010. The 54% increase in Ann Taylor’s e-commerce sales in 2010 indicates that a shift from store-based sales to the internet formed an important part of its cost-saving strategy.
Similarly, net profits at upper-mid-market chain Dillards increased by 162%, whilst net sales surprisingly increased by less than 1% in its 2010 financial year results to January 2011. The company revealed that it managed its inventory strictly in order to reduce the need for markdowns on excess stock. There are a large number of US apparel companies with similar stories, although the above are some of the most striking examples.
The issues with regards to sourcing may have encouraged companies to implement severe cost- cutting measures, which have resulted in extraordinarily high profits in their 2010 fiscal year results. The lower sales growth in relation to profits shows that companies have prioritised profits over increasing sales.
Apparel brands have adopted a very cautious approach with regards to inventory management and expanding store portfolios. There has been a stronger focus on improving the management of existing stores and increasing comparable sales, rather than on driving additional sales through new stores. This approach is likely to continue into 2011.
Shoeaholics boost US footwear brands
The pattern of good sales growth but astonishing profits was particularly noticeable in the US footwear market. All of the leading US based footwear brands which released their financial year results over the past month experienced a strong performance in terms of sales but much higher levels of profit growth.
Footwear retailer Shoe Carnival achieved sales growth of 8% compared to a 77% increase in net profits for its financial year ending 29 January 2011. CEO Mark Lemond explained “we were able to take advantage of increased consumer demand for footwear, particularly in sandals, boots and toning footwear”. However, the majority of footwear brands achieved much higher sales growth than their clothing specialist counterparts, and double-digit sales growth appeared to be the norm.
Footwear specialists benefitted from a slight improvement in the US footwear market. According to Euromonitor International’s preliminary estimates the market declined by 2% in value in 2010 compared to a 3% decline in 2009.
Whilst the market is still declining, the largest players are taking advantage of an increase in discretionary spend. Outdoors and performance brands such as Deckers and Sketchers performed particularly well, achieving sales growth of 23% and 40% respectively in their 2010 fiscal years. This could indicate that the improvement in the US economy has led to consumers spending more on leisure and outdoor pursuits in addition to shopping.
Can high profits be sustained throughout 2011?
Weak fourth-quarter results for companies with financial years ending in January 2011, or December 2010, in comparison to stronger performances during the first nine months of 2010, indicate that 2011 will be a far more challenging year for apparel brands. Most industry professionals expect sourcing costs to continue to rise.
Apparel retailer, Aeropostale, experienced a 13% decline in net profits in its fourth quarter results for the three months ending on 29 January 2011, despite a 1% increase in net profits for the financial year.
The company attributes the poor performance to the competitive and heavily promotional nature of its teen market but other companies not operating in this area also experienced weak profits towards the end of 2010 or at the beginning of 2011. Even Urban Outfitters, which recorded an outstanding 2010 financial year overall, suffered from a 3% decline in fourth-quarter net profits.
Real GDP growth in the US is expected to be 3.0% in 2011 compared to 2.8% in 2010, which shows that the economy is not expected to be much stronger this year. The unemployment rate in 2011 will be static at 9.5% compared to 9.6% in 2010 so apparel retailers should certainly not be preparing for a surge in consumer spending.
A spokesperson for The Warnaco Group, owner of Calvin Klein, Chaps, Olga, Speedo, and Warner’s, stated that the company expects net revenue growth of 7-9% in fiscal 2011, compared to a posted 14% increase in net revenues for its latest financial year to January 2011.
The company’s strong sales growth in 2010 was partly due to its weak net revenues in 2009, which declined by 2%, but it will now be difficult for it to build on already strong sales in 2010. Whilst it did not provide a forecast of profits, most apparel companies have already formed a strategy for tackling continued increases in sourcing costs in 2011.
VF Corporation, which owns more than 20 brands including The North Face and Wrangler, revealed that it expects its gross margin in 2011 to be affected by increased product costs. However, it will implement a strategy of changing its product mix in order to minimise the impact, hence its decline in margins is expected to be less than one percentage point.
Whilst 2010 proved to be a great year for a large number of US-based apparel retailers, it has already been seen that 2011 presents a much tougher retail environment and few companies are expecting to achieve stronger sales than their 2010 results. However, demand for apparel is expected to continue to bounce back, so companies will need to balance controlled inventory management and cautious store expansion with capitalising on increased consumer spending. Profits should remain a priority but not at the expense of strengthening sales.