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Broad Growth Still Seen for Apparel and Footwear, Though Tariffs Pose Major Threat

For now, the apparel and footwear industry is still expected to see growth for the remainder of the year, though new and impending tariffs could have an impact on that outlook.

Moody’s Investor Services’ outlook for the apparel and footwear sector is positive for the rest of 2019, with expected operating profit growth in the 6 percent to 7 percent range and sales growth of 4 percent to 5 percent. This follows a strong 2018, when profits grew more than 9.5 percent and sales increased 6.5 percent.

“Profit growth has become more widespread among rated companies,” Moody’s said. “Companies are benefitting from an improved economic backdrop in the US, as well as cost savings initiatives, acquisition synergies, new product introductions, targeted marketing efforts, improved inventory levels and reduced inventory clearance activity.”

Foreign markets and direct-to-consumer (DTC) channels continue to drive growth, as many companies continue to develop international strategies, especially in emerging markets such as China, where greater economic expansion often spurs branded apparel purchases, Moody’s said in its report.

In the supply chain, rising input costs and currency issues are causing pressure, but appear manageable, Moody’s said, citing an uptick in cotton prices in early 2019, climbing 13 percent to 79 cents per pound from 70 cents in February, while the dollar has strengthened since mid-2018, contributing to earnings pressure in 2019.

Companies that manufacture products with greater cotton content, such as Carter’s Inc. and Hanesbrands Inc. could be impacted by significant increases in cotton prices, the report noted.

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“Tariff threats present significant risk to our positive outlook,” Moody’s said. “There are several downside risks to our outlook, with one of the biggest being increased tariffs on all China imports into the U.S. This would be a significant risk to company profitability in this retail segment.”

President Trump ordered incremental tariffs on $200 billion worth of goods from China on Friday and has said the 25 tax could extend to everything imported from China.

“Higher tariffs with China, or other countries…increase costs of goods sold for all companies that import Chinese-made goods into the U.S., including apparel, footwear, electronics, toys,” Moody’s said. “Consumers could be adversely affected by price increases, thus reducing consumer purchases and company revenues.”

Companies that sell a greater percentage of imported Chinese goods in the U.S. could take the biggest profit hit, said the report, citing for example, G-III Apparel Group, which generated around 86 percent of its fiscal 2019 revenue in the U.S. and sourced around 61.5 percent from China. Such companies will see margin pressure until they can implement ways to address the higher costs, such as moving production or cutting costs.

“While companies may also opt to increase prices, they may find it challenging to fully recoup cost increases because consumers may be reluctant to pay higher prices,” Moody’s said.

Sportswear and athletic apparel makers are benefitting from increased casualization and more active consumer lifestyles, Moody’s said.

“Jeanswear makers have responded to this shift through new product innovation, such as introducing more comfortable fabrics,” the report said. “Thus denim sales have recovered over the past two years.”

Moody’s expects modest margin expansion thanks to benefits from cost saving initiatives and restructurings, acquisition synergies, new product introductions, improved inventory levels and better expense leverage on higher sales. However, growth momentum will continue to be offset by increased investments in technology, talent and marketing-demand creation activities, along with increased costs.

Nike Inc. is expected to show strong profit growth longer term as it continues to benefit from its new product pipeline, DTC and international expansion. It also forecasts continued strong performance at PVH Corp. due to solid product offerings, marketing and the restructuring of Calvin Klein. VF Corp., after spinning off Kontoor Brands Inc., should see continued growth at Vans, The North Face and its Work businesses, while Ralph Lauren Corp. should continue to benefit from its multiyear restructuring efforts.

As Under Armour Inc. emerges from recent challenges, it is expected to realize benefits of restructuring, new product introductions and more full-priced selling on lower inventory levels.

“Smaller, less diversified companies with unsustainable capital structures will likely remain under pressure,” Moody’s said. “Many struggle with weak sales or earnings due to the inability to keep up with necessary growth investments. Those feeling such as pressures include Toms Shoes LLC or and Totes Isotoner.”

On the other hand, larger apparel and footwear companies are benefitting from being multichannel operators, Moody’s noted, because “they have the ability to sell product when and where consumers want to shop, whether that be through wholesale customer brick and mortar stores and/or websites, online retailers or through their own stores and/or websites.”