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Moody’s Offers Positive Outlook for US Apparel, With Trade Caveats

After a difficult period that saw a slew of bankruptcies and adapting to omnichannel challenges, U.S. retail is beginning to reap the rewards of investments in e-commerce and operating efficiencies, according to Moody’s Investor Service’s 2019 outlook for the sector.

American apparel companies are benefiting from the retail revival, as well as from cost savings initiatives and acquisition synergies, Moody’s said.

“The positive outlook for the U.S. retail industry reflects increasing top-line growth and operating profits, as companies’ investments in e-commerce and the in-store shopping experience continue to gain traction,” said Mickey Chadha, Moody’s vice president. “Growth is also getting a boost from a very strong macro-economic environment, which will drive consumer spending.”

Like most outlooks for 2019, Moody’s warned that tariffs could dampen momentum, as they could increased labor and freight costs. The report forecast retail operating income to grow 5 percent to 6 percent in 2019. Sales growth is predicted to range from 4.5 percent to 5.5 percent.

Department Stores’ operating income will slow its decline to 1.7 percent in 2019, Moody’s said, as the sector “continues to focus on reducing friction as convergence with online continues.” Reduced inventories and improved lead times have helped stabilize merchandise margins, the report noted. The International Air Transport Association has reported that air freight demand has slowed as companies have increased lead times on import orders, allowing them to opt for cheaper ocean cargo.

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Operating income for discounters and warehouse retailers is forecast to increase about 2.4 percent in 2019 after a strong gain in 2018. Walmart and Target is seen continuing to make long-term investments in their online businesses.

Specialty retailers, drug stores and supermarkets are also expected to see improved performance. Amazon U.S. will continue to grow, while department store losses will begin to taper. Off-price dollar stores and home improvement merchants will also continue to perform well, and “online sales will continue to outpace overall retail growth.”

Among apparel firms, Moody’s said nearly all rated companies will show some form of profit growth in 2019, with the majority exceeding 6 percent growth. More companies are seeing the benefits of “cost-saving initiatives, acquisition synergies, restructurings, reduced inventory and clearance activity.”

In line with what several companies noted during third quarter financial reports, Moody’s said international markets and direct-to-consumer channels continue to drive growth. The report said 42 percent of combined company sales are now generated outside the U.S. For example, 54 percent of Nike Inc.’s $34.4 billion in sales is generated in foreign markets, while 52 percent of Levi Strauss & Co.’s $4.9 billion in sales and PVH Corp.’s $8.9 billion in revenue comes from abroad. China continues to be a focus of brand expansion.

“DTC drives better control of brand messaging and overall shopping experience,” Moody’s said.

In the coming year, a period of what’s been industry merger and acquisition activity is predicted to continue.

With all that, Moody’s said there is “significant risk” down the road in the form of “material downside potential related to tariff threat.” It noted that apparel and footwear have largely been excluded from the current list of Chinese imports facing increased tariffs.

“Should apparel and footwear tariffs increase, companies would likely face gross margin pressure,” the report said. “It would take 12 to 24 months to diversify production and adjust costs. Price increases may prove challenging as consumers may not be willing to pay higher prices.”

This comes as companies face input cost inflation from higher raw material, freight and labor costs.

Among key firms, Moody’s sees Nike “maintaining its leading market position across products and geographies,’ with key initiatives driving continued global growth. Ralph Lauren should make “continued progress on [its] restructuring plan, with stabilizing revenues and continued margin expansion over the next 12 to 18 months.”

VF Corp. is “Actively reshaping [its] brand portfolio” and “we expect rapid debt reduction following recent transactions.”

At Under Armour, “cost savings and inventory reduction initiatives should begin to yield improvement,” while Hanesbrands Inc. stays “focused on driving synergies, improving margins and cash flow, and reducing leverage.”