Last year was another transformational year for the retail apparel sector. While the stock market rose by a respectable 13 percent, bringing the Dow to within striking distance of 20,000, prices of many publicly-traded apparel stocks soared even higher. However, an even greater number saw their values diminish—victims of changing consumer tastes, questionable management decisions, and the forward march of technology.
The big winners
Tilly’s: Tilly’s (TLYS) nearly doubled to $13.19 after the surf- and skate-inspired teen retailer delivered sales and earnings performance that beat estimates during the latter part of the year, positioning it to beat out competitors in the challenging market segment.
Children’s Place: Children’s Place (PLCE) rose by close to 83 percent for the year to $100.95, helped by improvements in the retailer’s operations, merchandise assortment and e-commerce business. In November, the company announced third-quarter earnings rose 14 percent, helped by an almost 5 percent rise in same-store sales and a 140-basis-point improvement in gross margin.
Tailored Brands: The parent company of Men’s Wearhouse and Joseph A. Banks, Tailored Brands (TLRD), saw its stock climb 74 percent to $25.55 as it finally bounced back from losses due to the merger of the two brands. As part of its turnaround, the company discontinued the “Buy One, Get Three Free” events, closed many stores and overhauled the Jos. A. Banks product line. In late 2016 the company started to see the results of these initiatives, with third-quarter sales and earnings announced in early December far surpassing analyst estimates.
Dick’s Sporting Goods: Dick’s (DKS) rose 50 percent in 2016 to $53.10, an impressive feat in a year in which the bankruptcy of its biggest competitor, Sports Authority, flooded the market with clearance merchandise. However, Dick’s has managed to gain back market share in its key hardlines, apparel and footwear categories, while maintaining tight control of inventory. In its third fiscal quarter, net sales rose by more than 10 percent to $1.8 billion, same-store sales were up by 5.2%, and net income increased slightly to $48.9 million.
Delta Apparel: Delta Apparel’s (DLA) stock price gained almost 48 percent, finishing 2016 at $20.73. The company sells activewear and accessories under its M.J. Soffe, Junkfood, Salt Life and Art Gun brands made in the U.S., Honduras, El Salvador and Mexico across a broad range of distribution channels. It grew sales in many of its businesses throughout the year and completed a manufacturing realignment to improve efficiencies and reduce costs.
Unifi: Yarn texturizer and processor Unifi’s (UFI) stock price gained almost 38 percent in the year, as its Repreve polyester made from recycled water bottles continued to capture market share and the imagination of eco-conscious consumers. In September the company celebrated the opening of a $28-million-dollar bottle processing center in North Carolina that will help it become a sustainable vertical producer of Repreve recycled products.
A significant number of apparel retail stocks underperformed the market, dogged by announcements of brick and mortar store closings, bankruptcies, continued declines in store foot traffic and increased costs associated with e-commerce initiatives.
Abercrombie & Fitch: Teen retailer Abercrombie & Fitch (ANF), whose stock dove by nearly 56 percent in the year to $12, found out how difficult it is to reposition an infamous brand image. Its new ad campaign featured less sexy, more inclusive marketing in an attempt to communicate A&F as the “accessible American casual luxury brand for today’s 20-something consumer,” according to the retailer’s chief merchandising officer Fran Horowitz-Bonadies. However, the move apparently failed to resonate with its target consumers, sending sales plunging 14 percent in the third quarter and earnings per share missing consensus estimates by a wide margin. Subsequent downgrades by Deutsche Bank and others indicate this company might be in for a long period of challenge.
Sears Holdings: Sears Holdings (SHLD) fell by almost 55 percent during 2016, finishing the year at $9.29. The company’s losing Shop Your Way business model and near-impossibility of a turnaround have finally come to light for even the most optimistic industry-watchers. Fiscal 2016 revenues are expected to drop by double digits from the prior year, with a net loss and debt load in excess of $1.5 billion each. As of the end of calendar 2016, the retailer had about 1,500 stores, down from 3,500 in 2011. Last week, the company announced the sale of its Craftsman hardware brand, to Black & Decker for a mere $900 million. The Kenmore and DieHard brands are also reportedly on the block. Many analysts believe the company’s downsizing and decline will accelerate this year.
Destination Maternity: Destination Maternity’s (DEST) stock fell by almost 4 percent to $5.17 in a year characterized by a long and public takeover battle. The maternity wear retailer finally reached a deal in late December to be acquired by the French childrenswear retailer Orchestra-Premaman for $7.05 per share. Destination Maternity shareholders will receive about a half share of Orchestra shares for each share of Destination, and will end up owning roughly 28 percent of the combined company.
Express: Shares of specialty retailer Express (EXPR) fell by almost 38 percent in 2016, to $10.76, as it failed to attract young fashion-conscious shoppers into its stores. Although it managed to sustain double-digit gains in e-commerce sales, declining mall traffic, the highly promotional fashion apparel environment and intense competition from fast fashion retailers like H&M and Forever 21 continue to challenge the brand.
What’s in store for 2017
Less than a week into 2017, news of the lackluster Holiday 2016 performance by Macy’s (M), Kohl’s (KDD), J.C. Penney (JVP) and others, had already resulted in more store closure announcements and the prediction that 2017 will be an even more challenging year for traditional retailers than 2016.
Despite strong economic indicators, including improving consumer confidence and employment data, the continued oversupply of underperforming physical stores, rapidly evolving technology, and changing consumer attitudes about spending and apparel will supply no shortage of news and drama as the year unfolds.
Although it’s far too early to even try to predict who will thrive in this difficult environment, it’s safe to say that those retailers who still rely on price discounts and other promotions to lure shoppers and grow sales will find themselves on the losing side of the share wars. If we’ve learned anything from recent headlines, it’s that today’s consumers don’t buy more stuff when prices drop, they actually spend less.
The winning brands and retailers will gain market share in this new world order by providing compelling product with an interesting and authentic brand story in a cost-effective way at understandable prices.