For the first time in a year, apparel industry inventory levels are growing at a rate slower than sales growth, reported Credit Suisse, the global financial services company, in its recently released study, “CS Softlines Industry Inventory Tracker.” And in even better news, the report indicated that the nine-month period of “excessive markdowns and margin degradation” brought on by consumers unexpectedly shifting their spending priorities toward home and auto-related purchases during the second half of 2013, is coming to an end.
Retailer inventory positions improved as second quarter growth fell in line with projected third quarter sales growth. Retailers are expected to see clothing sales increase modestly in Q3, reversing the 3.6% inventory growth trend ahead of sales exiting the first quarter, the report revealed.
Surprisingly the sluggish teen retail segment has fared the best during the first half of the year, seeing a 7.2% deduction in the gap between sales growth and inventory growth, followed by basic apparel retailers with 3.2%, off-price retailers with 3.1% and sporting goods brands and footwear retailers with 2 percent each.
The report noted that Nordstrom, as it “continues to balance growing the business for the future,” and Macy’s, buoyed by improvements to its merchandising, in-store and online initiatives, are among the most competitively positioned department stores. With mass merchants, Walmart possesses the most promise, the report said, as the retailer addresses multiple opportunities, including small store formats, gasoline exposure and a renewed emphasis on general merchandise.
The demand environment in sporting goods and footwear retail sectors remains choppy, especially as promotions are expected to be aggressive in the second half of 2014, the report noted. However, DSW, which improved its inventory situation after a difficult first half, seems to be well positioned to deliver strong results for the remainder of the year. Likewise, Foot Locker and Finish Line should “benefit from healthy product trends and their own merchandising initiatives.”
While Credit Suisse stands by its initial projection that second half apparel demand growth is likely to be weak, with industry sales increasing one to three percent, the report noted that apparel retailers could rebound thanks in part to more normalized back-to-school and holiday markdowns.
“Our view remains that the inventory/sales ratio is the single most important determinant of industry merchandise margins, given high markdown requirements to clear excess inventories and long order lead times (6-9 months) which limits the ability to self-correct. As a result, improving sector inventory conditions leave us more bullish on the outlook for the apparel retail sector, with comparisons particularly favorable in Holiday 2014,” the report noted.