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Moody’s: US Apparel and Footwear Industry Stable Despite Currency Confusion

Current currency fluctuations and unsteady economic conditions don’t seem to be upsetting the U.S. apparel and footwear sectors much at all.

Moody’s Investors Service said, in fact, the outlook for the apparel and footwear industry remains stable thanks to various growth strategies.

“Larger companies continue to benefit from international and direct-to-consumer growth strategies, which has helped offset cost pressures stemming from the stronger dollar,” Moody’s analyst Michael Zuccaro said in a statement.

On the less favorable side, however, companies will start to see higher costs of goods as the exchange rates they hedged in 2014—before the dollar became the super dollar—start to unwind.

“This will push up costs of goods sold as companies source product in U.S. dollars and sell in local currencies in foreign markets,” the ratings agency said.

American apparel companies, more often than not, source product from foreign manufacturers in U.S dollars, especially in Asia, and those goods are then sold in local currencies. To mitigate foreign exchange risk, a lot of companies lock in foreign exchange rates up to 6-12 months in advance. But now that those hedges are unwinding and the dollar has appreciated against most major currencies, costs of goods sold in U.S. markets have been rising.

To offset rising costs, the agency added, bigger international companies like Ralph Lauren, VF Corp., Levi Strauss & Co. and PVH have put price increases in place for certain international markets.

Apparel companies that have put greater emphasis on direct-to-consumer (DTC) channels, whether new stores on online, have also realized growth, as have those supplying consumers’ increased demand for athletic apparel.

“Nike brand grew 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%, or nearly $7.5 billion, of total consolidated sales,” Zuccaro explained. “VF 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.”

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Many companies are still working down excess inventory that got left behind, namely because unseasonable weather left coats and gloves on store racks instead of in consumer closets. As retailers work to shed some of that product, promotional activity is expected to remain high in the first half of this year, which will likely weigh on earnings, causing them to fall 2-3 percent in the period.

“By the second half of this year, earnings should swing back to 6 percent to 8 percent growth as companies work inventory down and benefit from higher prices they’ve already implemented to offset higher costs,” Moody’s said.

More mergers and acquisitions are on the horizon, too.

“Sector consolidation is likely to continue as global apparel and footwear companies look to expand geographically or into lifestyle categories,” according to analysts. “Many large companies have made progress on, or completed integration of recent acquisitions, and are now poised to do more.”

Hanesbrands said last week that it entered into an agreement to acquire Australian intimate apparel company, Pacific Brands Limited, for roughly $800 million. That deal closely follows Hanesbrands’ early April announcement that it would buy Champion Europe (which owns the trademark for the Champion brand in Europe, the Middle East and Africa).

“When coupled with the recent purchase of the Champion business from a Japanese licensee, the company now has control of the Champion brand globally,” Moody’s said.

VF Corp also said in March that it is exploring strategic alternatives for its Licensed Sports Group business, and PVH recently acquired the 55 percent interest it didn’t already own in its China joint venture, TH Asia Ltd, which will allow it to directly operate the brand in its fastest growing market.

Moody’s raised its 2016 constant currency operating income forecast to 4-6 percent from 3-5 percent. If currency remains unchanged in 2017, the ratings agency said it expects operating income growth will accelerate in the 6-8 percent range.