There could be good news ahead for apparel and retail after a bleak 2016: Moody’s Investors Service says prospects will be bright (read: more profitable) in the coming year.
A strong dollar, weak traffic, too much-inventory—which led to too many promotions—and conditions that were tougher than expected, set retailers up for a lackluster 2016, Moody’s said in a report out Thursday. Analysts said apparel sector performance will likely swing to a 5.5% decline, far below projections earlier in the year for 1 percent to 3 percent growth.
On a more positive note, analysts said, “We expect prospects to brighten next year, when constant currency operating profit growth resumes on the back of easier comparisons to this year.”
Operating profit growth is expected to accelerate to between 5 percent and 7 percent in 2017, though slightly lower than the 6 percent to 8 percent Moody’s initially projected.
International growth will lead the profit uptick, especially in emerging markets where stronger GDP growth has translated to more branded apparel buys. Nike, PVH, Levi’s and Under Armour are all expected to benefit from international growth opportunities.
Direct-to-consumer will also be big in 2017.
“Many apparel companies, such as Nike, Ralph Lauren, VF and PVH, have been directing more resources into direct-to-consumer (DTC) channels such as new stores, websites and mobile applications,” Moody’s said. “This not only positions them where the shoppers are, it helps them better control the brand.”
Nike’s DTC revenue grew 22 percent in the first quarter ended August 2016, driven by 8 percent comparable store growth and 49 percent growth in e-commerce sales and new store expansion, according to Moody’s.
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As has been the trend for 2016 with companies filing bankruptcy left and right, consolidation in the industry will continue in the coming year.
Hanesbrands recently acquired Australian intimates company Pacific Brands Limited and Champion Europe, which owns the trademark for the Champion brand in Europe, the Middle East and Africa. This month, G-III Apparel Group completed its acquisition of Donna Haram International and VF Corp and Wolverine Worldwide, according to Moody’s, are looking to “actively” manage their portfolios with acquisitions or selling off subsidiaries.
“We expect that U.S. apparel and footwear companies will continue to pursue acquisitions to expand both geographically and into lifestyle categories,” Moody’s said.
Though input costs for labor and raw materials like cotton and oil are rising, Moody’s said the increases won’t shake things up too much.
“We think these costs are manageable, particularly in light of company efforts to reduce costs and improve manufacturing and supply chain efficiencies,” Moody’s said. “Price increases taken in late 2015/early 2016 provide some offset, but further increases will remain challenging.”
Sales in the apparel sector are expected to grow 6 percent to 8 percent in the next 12 to 18 months, double the projections for sales growth in the overall U.S. retail sector.
“Companies will continue to introduce innovative new products, cut costs and realize acquisition synergies, while they’re also seeing growth from investments in direct-to-consumer and international channels,” Moody’s said. “We also assume companies will maintain a steady hand on inventory coming out of the 2016 holiday season, and that cotton and FX pressures will remain manageable.”