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Moody’s Upgrades US Apparel and Footwear Sector on Upbeat Earnings

Though still in a cycle of store closings, tariff fears and increased integration and materials costs, things seem to be looking up for the U.S. apparel and footwear industry.

Moody’s Investors Service has upgraded its outlook for the U.S. apparel and footwear sector to positive from stable thanks to higher-than-expected earnings across the companies it tracks. Moody’s said earnings growth following two challenging years is accelerating beyond the rating agency’s previous expectations and is expected to remain robust over the next year to 18 months.

“The positive outlook for the U.S. apparel and footwear industry reflects faster-than-anticipated revenue and profit growth,” Moody’s apparel analyst Michael Zuccaro said. “We expect nearly all our rated companies to show some form of profit growth next year as they realize benefits from cost-saving initiatives, acquisition synergies, new product introductions and targeted marketing, as well as improved macroeconomic conditions.”

Moody’s has revised its 2018 operating profit growth forecast for the industry to be between 8 percent and 9 percent from it previous estimate of 3 percent to 5 percent. This represents a dramatic improvement over the tough times in 2016 and 2017, when operating profits fell on average due to high markdown activity, retailer bankruptcies and weak retail traffic.

Moody’s did note the latest forecast growth rate will be difficult to sustain and is expected to decelerate to a still strong 6 percent to 7 percent in 2019 and 4 percent to 5 percent in 2019.

Companies are expected to continue expanding locally and internationally, especially in emerging markets such as China and other Asian countries, where greater economic expansion tends to fuel branded apparel purchases. The report noted around 42 percent of the combined sales of rated U.S.-based apparel manufacturers are generated outside of the United States.

Several large U.S.-based companies, including Nike Inc., PVH Corp. and VF Corp., are “finally seeing concurrent growth,” Moody’s said. Nike is expected to start showing improved profit growth, “supported by its new product pipeline and direct-to-consumer growth, as well as ongoing international expansion and an improved local apparel retail market,” the report said.

Nike’s revenue in the three months ending Aug. 31 increased 10 percent, to $9.9 billion. The core Nike brand, also up 10 percent, to $9.4 billion, was boosted by double-digit growth internationally and in Nike Direct, as well as strong results in North America. Net income in the quarter increased 15 percent, to $1.1 billion, on strong revenue growth, solid gross margin expansion and selling and administrative expense leverage.

PVH Corp., which posted a 13 percent revenue gain in the quarter ending Aug. 5, to $2.3 billion, and a 37.9 percent hike in net income, to $164.7 million, is expected to continue its strong performance thanks to solid product offerings and marketing. VF Corp., which is spinning off its jeans unit, can expect to see continued growth at Vans, The North Face and its Workwear businesses, Moody’s noted.

“For many U.S. apparel and shoe companies, a focus on growing their own direct-to-consumer channels, including both online and brick-and-mortar stores, has led to better positioning in terms of where consumers are shopping, while also giving them more control over brand messaging and the overall shopping experience,” Moody’s said.

Downside risks remain, however, for American apparel and footwear companies, including a dependence on continued U.S. economic growth, as well as rising tariffs. Moody’s forecasts gross domestic product growth in the low-single digits for the U.S. and Europe, and in the mid-single digits for China, in 2018 and 2019.

“Should any future tariff increases include U.S. imports of apparel and footwear made in China, companies would likely experience gross margin pressures for 12 to 24 months, because it will take time for most to further diversify operations away from China and adjust costs,” the report added. “While many companies have the ability to increase prices to offset rising costs, it may prove challenging because U.S. consumers may not be willing to pay higher prices for goods.”

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