MARKET INTELLIGENCE SHORT READ
PART 2
2022 JULY ISSUE
Written by : Andrew Sia
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Contents:
Cost of Logistic Have Brought the Profit Down for the Fashion Retailers
After 90 Years, Revlon is Going for Bankrupt Protection
Revival of Century 21
RealReal Is In Real Trouble
Adidas Cuts Its Outlook on China’s Severe Covid Policy
Asian Shoppers’ Appetite of Luxury Brands
The Latest on Victoria’s Secret
Kering’s New Strategy
Inditex Goes Deeper into Online Business
Nike’s Run Club App
Nike Set to Exit the Russian Marketplace
Costs of Logistic Have Brought the Profit Down for the Fashion Retailers – WSJ, June 14, 2022
At this time during the pandemic, retailers are all suffering from different degrees. They are all caused by the inflation and one of the costs is the freight cost.
First of all, the share prices of Zalando and ASOS, who are selling clothes only through the internet, are down 59% and 48%. For those fast fashion stocks who have the mix of online and store sales like Hennes & Mauritz and Zara are down around half as much. All of them have bigger problems with transportation costs.
All retailers have to get their inventory from factories to their distribution hubs. Take for example, a pair of H&M sneakers selling at $23 per pair, the shipping cost is 8% of the final sales price. It was only $1 three years ago. For the airfreight cost, it is almost the double. Overall, costs associated to the freight is around 5% of retailers’ price in according to the analyst of Deutsche Bank.
But for those e-commerce companies, they are hit hard by the expensive last leg from warehouse to customers’ doors. This is because of the extra fuel charges and the wage inflation for couriers. This cost is equivalent from 10-15%, compared with 2-3% for the delivery from from warehouse to store.
Inditex makes a quarter of its sales online and it is using its network of stores to keep the costs down. For online return they began to charge $2.00 and this encouraged the shoppers to physically hand unwanted goods into one of their shops. Online returns are a big challenge for fashion brands and up to 40% of apparel can be sent back unwanted compared with less than 10% for purchases made in stores. It is expected to have 12% as their operating margin for this year.
For the retailers, they can bring customers inside their stores and save cost on logistics, but they can also stimulate extra sales. Inditex reported that for the first three months, for sales through April, increased more than a third year-on-year.
For Zalander and ASOS, are expected to have operating profit margin of 2% and 3% in their current year. They are still offering free returns, but would introduce minimum order values.
All fashion retailers are facing a demand crunch in the coming months. In Europe an average household spends $1,486 a year on fashion and footwear. But it is expected that the higher energy prices could mean the utility bills could be $1,050 more expensive in 2023 than in 2020. The consumers would trim their spending on fashion.
At this time the retail store rents are falling and this is the first time in many years.
After 90 Years, Revlon is Going for Bankrupt Protection – New York Times, June 17, 2022
For much of its 90 years, Revlon was the leading cosmetic empire, and since the Great Depression it is a mainstay in bathroom cabinets. But in recent decades it has strained by heavy debts and by competitions from the younger brands. The shutdown in China was the last straw on the camel’s back.
In the past years we have seen big names like Rihanna’s Fenty Beauty and Kylie Jenner-backed Kylie Cosmetics and through the social media they promote their products to their millions of followers in Instagram and TikTok. This is very unlike to what Revlon traditionally relied through the drugstores or the department stores.
During the Covid shutdown, the supply chain has been disrupted and caused production delays that lead to late shipments to retailers. This can cause loss of shelf space and sales.
Revlon has about $3.8 billion in debt and 5,700 employees which has been a struggle. In 2020, it avoided filing for bankruptcy by striking a deal with its debt holders and in that year it cut 1,000 positions in hopes for improving its profitability.
Revlon was founded in the early 1930s by two brothers, Charles and Joseph Revson and Charles Lachman. They introduced a new nail enamel and the makeup company grew to become the second largest in the United States, behind Estée Lauder. The boom years for the company came in the 1980s with its “Most Unforgettable Women in the World” campaign, shot by the famous photographer Richard Avedon and featuring many famous models of the era, Including Cindy Crawford, Claudia Schiffer, Iman and Christy Turlington.
In 1985, it was acquired in a deal valued at $2.7 billion by Ron Perelman, who was backed by junk bonds, and the acquisition started a wave of hostile takeovers.
But by then the business started to drop and soon the stock price. In 1998, the interest on Revlon’s $1.7 billion debt exceeded its operating income.
Many of Perelman’s companies went under, but he was holding onto Revlon and invested in millions of his own money and declared it as one of the “great consumer brand names.”
In order to diversify the business, he acquired the nail care brand s, Cutex and Elizabeth Arden in 2016, but largely funded by debt.
Revlon also owns the fragrance brands—Christina Aguilera and Britney Spears.
Revival of Century 21 – WSJ, May 19, 2022
Century 21, a beloved mainstay of New York City’s retail scene before its shutdown in 2020, is planning to come back at its longtime lower Manhattan flagship store from its founding family.
Century 21 is known for bargains on high-end design apparel and accessories. It will be launched at its former location across the World Trade Center next year.
During the 911 terrorist attack in 2001, the store was closed for six months.
This time the family bought the name for $9 million out of bankruptcy. In the store it will occupy the four main floors of the original downtown space and will carry men’s, women’s and children’s designer apparel, footwear, outwear, handbags, accessories and fragrances.
It is known for its higher-end brands at lower-end prices. But it wasn’t able to sustain the Covid in 2020 and seek for chapter 11 protection. It closed all its 13 stores in New York, New Jersey, Pennsylvania and Florida.
RealReal Is In Real Trouble – WSJ, June 8, 2022
RealReal, the luxury consignor, suffered a loss of $236 million on a revenue of $468 million. RealReal shares have tumbled for more than 80% over the past year, and its market capitalization is below $300 million. The company went public in 2019 with a market value of $1.65 billion.
The company was founded by Julie Wainwright in 2011 and it offers a selection of luxury goods from handbags to furniture on its online marketplace. It takes a commission on each transaction.
Julie Wainwright is stepping down now and reappoints the board chairman and members of the RealReal’s board. She will continue to serve as an advisory and interim co-CEO before stepping out end of the year.
It was the second e-commerce she took public. She was the chief executive of online pet supply retailer Pets.com but left months after joining the stock market in 2000.
Adidas Cuts Its Outlook on China’s Severe Covid Policy – FT, May 7, 2022
Adidas is already warning its shareholders that its operating profit this year would be lower than expected. It has reported about its struggling with the supply chain, closing of its shops in China and rising operating costs.
Its operating profit fell 38% to €437 million in the first quarter. Adidas, the second largest brand in the sportswear market is hit by the economic fallout from China’s strict anti-Covid policies.
Its main rival, Nike, also reported that its full-year sales in China will fall by a double-digit percentage in 2022 for the same reason.
The supply chain affected its first quarter sales by €400 million, and it is expecting a €200 million in its second quarter. In last year, the supply chain disruption wiped out €1.5 billion in annual sales.
The stringent rules of Beijing to enforce its Covid policy caused a large number of store closures and also the traffic declines. The online spending is not picking up because of the weak economy.
Its group sales will grow 11% this year, and net income is expected to be about €1.8 billion. It continued to say that 80% of its business was achieving double-digit growth, with sales in western market rising 13% year-on-year in the first quarter.
Asian Shoppers’ Appetite of Luxury Brands – FT, May 9, 2022
The exclusive Shinsegae Department Store in the Gangnam district of Seoul revealed it sales turnover in 2021 topped $2 billion, the highest turnover for a single store in the world. This is due to the result of the global travel restrictions that has brought the success of department stores such as Shinsegae across Asia. The previous shopping sprees combined with holidays in the European cities are now spent at their local department stores.
Asian shoppers are accounted for 60% of the global luxury spending in 2021. It is a market of $300 billion and it is delivering recorded profits for the luxury brands. Asian-Pacific has more billionaires than any other region of the world. But also its rising middle class are shopping for luxury goods.
In 2019, Chinese consumers bought luxury goods worth about €120 billion and 70% of this was made outside China. But in the last two years the overseas spending came to near zero. In 2021 alone, they spent $71 billion inside China, and it was a third more than what they used to do domestically.
This time the luxury companies have changed their pricing strategy, what was used to be the difference of 80% is now down to 30% and even with some brands, only 10%.
The war in Ukraine has also taken an effect on tourists. This stopped the Asians from traveling to Europe.
We have to admit that luxury market has also expanded into e-commerce, and what was accounted for 10% before the pandemic in China has changed to 80% of sales. This has cut out the commissions of 30% to 40% for sales in the department stores.
The recent lockdowns in cities in China like Shanghai and Beijing has an impact, but it is too early to tell. The slowing of Chinese economy and Beijing’s cracking down of its billionaires which can trigger a plunge in luxury demand. Talking the “common prosperity” is going to take a long time before China can really grow its middle class. There is also the shift of sentiment and spending habits and home-grown brands are coming up. Earlier on with the boycotts of Burberry and Dolce & Gabbana, also the Xinjiang cotton on H&M and Nike, are all the uncertainties for going forward.
Unemployment is something that has been brought out recently. This can be the tip of the iceberg. And talking about China’s GDP per capita of $14,096 is still far behind from the luxury sector’s next biggest market, the U.S.
The Latest on Victoria’s Secret – WSJ, June 2, 2022
It has been now ten months since Victoria’s Secret spun off from L Brand and made the brand more women-centric. But it said that its revenue fell 4.5% in the quarter ended April 30. Its Chief Executive Officer, Martin Waters, mentioned that the sales for the bras and beauty have gained good momentum, and international market has also starting to recover.
During the Covid, lounge and sleepwear were doing well, but they have now been replaced by outerwear and working attires. At that time of the Covid, they were up to a quarter of sales at Victoria’s Secret. But apparel accounts for roughly 40% of the PINK business.
In the last quarter, the company launched the largest bra collection in a more inclusive line. But it is expecting that the business in the current quarter will remain flat. Customers are getting selective and focus on their spending on lipsticks and dresses.
Currently the company has to watch closely its inventory and also the inclusive sizing rollout. They may have to watch Old Navy’s missteps.
Kering’s New Strategy – WSJ, June 10, 2022
Kering SA wants to grow their revenues with Yves Saint Laurent and its eyewear division and not to rely on its key brand—Gucci. Already sales at Yves Saint Laurent has reached $5.4 billion and eyewear sales would reach $2.16 billion in medium term.
And because of the slow growth of Gucci, Kering has to look for other brands within the company to grow its business. Gucci revenues grew 13% year-on-year in the first quarter of 2022 which is underperforming in the group of Kering which grew 21%. The recent lockdowns in China due to the Covid has further exposed the vulnerability of the company under the crisis.
Kering’s last year’s sales was $19 billion, 13% higher than 2019 when it was free from the pandemic. At that time Gucci contributed 55% of the revenues, or $10.45 billion. It has plan to grow it to $16.2 billion in short to medium term.
Compared with the industry leader, LVMH, whose revenues grew 20% last year relatively to 2019 to $69.3 billion.
Going forward, Kering will grow its business of Yves Saint Laurent, its second-largest brand, and new stores will be opened. It is looking for growing its stores from 267 today to 300 and 350 in the medium term. The store policy is more catering to local consumers rather than focusing on tourists.
Kering acquired Danish eyewear company Lindberg A/S which can lead them to grow their business in eyewear.
Gucci’s business is still more appealing to male consumers and it is going to boost its image to the younger generation for young and luxury trend. With the new shops, it is going to enhance the brand’s sales network in the U.S. and Europe. I would say that the potential is great.
Inditex Goes Deeper into Online Business – FT, June 9, 2022
Inditex is going to grow its online business to a third of its total business. Its new Chief Executive Oscar Garcia Maceoras said that the total sales by 2024 will be up to 30% from last year’s 25.5%.
Inditex whose main brands include Zara, Massimo Dutti and Pull&Bear, reported a 36% in sales to $7.24 billion in its first quarter. The group posted a net profit of $820 million, a gross profit of 60.1% which is the highest in a decade. Its operating costs rose 24% but it was offset with price increases.
Its net income would have been over $1 billion if not for the provision of $233 billion for the Russian and Ukraine war. Stores in both countries and the online business had closed. Inditex has 500 stores in Russia, its second-largest market in physical stores.
Its sales at the 67 stores in China has also been affected because of the lockdowns.
Inditex is under the Chairwomen, Marta Ortega, daughter of the founder, Amancio Ortega.
Nike’s Run Club App – WSJ, June 9, 2022
Nike will stop operating its Nike Run Club app in China in July. It was an app introduced in 2010 and has eight million registered users in China. Users are logging to the app to record their exercise and running.
Nike didn’t explain why it is stopping the app. Users in China are shifting a mini app on WeChat, a tech platform run by Tencent. It is used to record the time users are spending on these sessions. It can be Nike’s latest restructuring by American businesses of digital services offered in China.
Nike is one of the biggest athletic sportswear brands in China. It is also the world’s biggest consumer market but Nike is receiving severe competitions from its local sportswear makers like Ante Sports Products who is gaining market shares.
From Nike’s most recent market report of February, it reported its year-on-year third quarter sales ended February, dropped 5% to $2.16 billion in Greater China.
Nike Run Club is not without competition from the locals, Keep, Joyrun and Codoon all have larger market shares.
The recent China’s tougher control for businesses, and also the worsening U.S.-China relation, its more stringent Covid control, the law mandating customer data collected on the mainland and its data-privacy laws.
Last year we have saw the closing of LinkedIn, a social media service in China, and now Amazon.com is going to close its Kindle digital bookstore in China. Doing business in China is struggling with the strong headwind in these days.
Nike Set to Exit the Russian Marketplace – Just Style, June 24, 2022
After suspending their business operations in Russia for three months, Nike is prepared for a full exit. It is one of the first apparel players to make the full exit from this market.
Its business through their owned stores and digital commerce operations only represent less than 1% of the total company’s revenue.
It is believed that other brands will also follow.