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U.S. Clothing Firms Predict High Profits on Smart Management and Improved Margins

American clothing retailers such as American Eagle Outfitters and Gap Inc. are on track to report strong fourth-quarter profits in February and early March, despite weak holiday sales. Their success is being blamed on lower costs and better inventory management.

Ken Perkins, president of Retail-Metrics, a data monitoring company, told Reuters that he expects fourth quarter net earnings at 18 U.S. apparel companies to increase by 18 percent on average. Ten other teen retailers are expected to see a 37 percent average increase in net profit. Overall, the group of 120 retailers should see earnings rise 9.5 percent.

Margins are due to rise in 2013 as retailers use technology to manage when products arrive in stores. They’re also capitalizing on lower manufacturing costs and better e-commerce platforms that maximize online sales and price comparisons.

Investments in a smarter supply chain that begun during the recession are finally paying off, as forward looking companies are taking advantage of better inventory management, faster product feedback, and less discounting.

“Apparel retailers have lower product costs year over year, and most companies came into this quarter clinging on inventory. So even though top-line trends may not have been strong, margins should grow,” Betty Chen, retail analyst with Wedbush Securities, told Reuters.
The profit at Gap is expected to rise by 34 percent, with margins rising by 3 percentage points. Nike’s profits should be up about 8 percent. Many other companies, including American Eagle, Abercrombie & Fitch Co., and Lululemon are also expected to post strong profits and better margins. Profit expectations were raised by many companies on Thursday.
Input costs were much lower than last year because of falling cotton prices, and a spike in sales after Christmas kept markdowns to a minimum, retail analyst Jan Kniffen told Reuters. “So despite the only OK Christmas selling season, margins are better than otherwise.”
Manufacturing costs were down by about 8 percent this year, according to Kniffen. Another estimate from International Council of Shopping Centers spokesman Michael Niemira has costs falling by 10 percent to 12 percent.
Much of the improvement is being chalked up to “smarter” practices at companies, including the more effective use of technology for inventory management and product decisions. More and more firms are able to make data-based decisions about what fashions to put in what markets. Additionally, the economic recovery is pushing analyst expectations for the retail sector.
Companies are also getting a boost from online sales, according to Helena Song, credit ratings analyst with S&P, as quoted in Reuters. These sales are associated with lower overhead costs, which boosts margins. Online sales are a more profitable category, and retailers are working hard to boost their percentage of total sales.
On top of that, many retailers raised prices and switched to lower cost suppliers in 2011 when materials costs shot up. Cotton prices are back to normal, but most retailers haven’t rolled back their prices.
Analysts are firm in their bets on firms like American Eagle and Gap, and Randal Konik of Jefferies’ is also confident that Deckers Outdoor Corp, maker of Ugg, will do well.
“UGG brand remains a cold weather staple and our checks indicate that sales have picked up after the recent drop in temperatures across much of country. After fourth quarter results, we expect the business to stabilize … due to lower sheepskin costs and cleaner inventory levels,” he told Reuters.
Gap is trading at 14 times forward multiples and the S&P Apparel Retail Index is trading at 15.5 times, according to Thompson Reuters data. Meanwhile, the S&P Apparel Retail Index is beating the broader S&P 500 by 1.24 percentage points over the past quarter.
Jaime Katz, retail analyst with Morningstar, told Reuters that the stocks are “fairly overvalued,” but went on to say that they may continue to rise for the next few months because people prefer to put their money into equities at this point. Domestic clothing retailers are expected to be the main beneficiaries of this bump, as international markets are not doing as well.

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