MARKET INTELLIGENCE SHORT READ
PART 1
2022 JULY ISSUE
Written by : Andrew Sia
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Contents:
Department Stores Reformat into Smaller Stores
Estée Lauder Sales Outlook
Luxury Brands Turn to the U.S.
Old Navy’s Attempt for the Expanded Sizes for One Price
What is the Challenge for Richemont
Dress Pants versus Sweatpants
Global Fashion Summit Meet For Fashion Sustainability Taking Shein As An Example
Rent The Runway’s Challenge
The American Circular Textiles (ACT)
Supply Chain Delay is Threatening the Fashion Industry
Department Stores Reformat into Smaller Stores – Wall Street Journal, May 4, 2022
Macy’s is accelerating its rollout of smaller department stores to attract shoppers with fewer products and more digital services at stores. It is choosing its locations to be closer to where customers are running their daily errands.
Other department stores, Nordstrom and Bloomingdales, have begun to move to suburbs to attract the millennials years ago to deal with online shopping that depressed the department store’s foot traffic. At this time of the pandemic, they also accelerate their move to suburban shopping centers where people are making more frequent visits to grocery stores and using curbside-pickup services.
Actually open-air shopping centers have been popular in the last five to ten years.
Macy’s opened five Market by Macy’s locations over the past two years in Texas and Atlanta. Each of them at 22,000 to 58,000 square feet, they are about a fifth the size of the company’s department stores. The small stores offer a frequent updated inventory and mix with trendy and staple items. The stores are providing spots for pickup and return items bought online or from other stores. Sales at these stores have already exceeded the sales expectations in the fourth quarter of 2021.
The group planned for opening ten off-mall locations in 2022, this will include Market by Macy’s, Macy’s Backstage, Bloomie’s and Bloomingdale’s outlets.
In February 2020, Macy’s announced to close 125 department stores in the underperforming mall locations, and so far they have closed half of the numbers.
Nordstrom opened its first Nordstrom Local in 2017. Now they have seven in New York City and Los Angeles. These stores are from 1,200 to 3,000 square feet compare with Nordstrom’s standard stores at 140,000 square feet. The Nordstrom Local provides non-shopping services including online pickup and returns, alterations and appointments with stylists.
Amazon.com has announced to open smaller department stores primarily focused on apparel sales. The first Amazon Style location will be opened in Glendale, California later during the year.
Other traditional mall tenants are also moving toward open-air shopping.
Estée Lauder Sales Outlook – FT, May 4, 2022
Estée Lauder has cut its full year sales and profit forecast because of the lockdowns in China which has also been the case for several international companies such as Apple and Coca-Cola.
Estée Lauder, the cosmetics group reduced its full-year outlook from a net growth between 7 to 9% from 13 to 16%. Same for the expected earnings of $6.54 to $$6.70 from $7.28 to $7.47 per share.
The group’s revenue of which a third and its operating profit are coming from China.
The lockdowns lead to consumer traffic and exacerbated supply constrain and since the group’s distribution center is in Shanghai, it is taking the effect.
The war in Ukraine has also put pressure on Estée Lauder after it has suspended its business in Russia.
Luxury Brands Turn to the US – WSJ, May 18, 2022
Another blow to the luxury brands has been caused by China’s zero-Covid policy. Shanghai, being 15% of China’s luxury stores, caused the biggest damage when the city was shutdown. It is followed by Beijing, a further 13% of the luxury stores where they are based are also affected.
Even foot traffics have dropped in cities don’t face restrictions due to a drop in domestic tourism. This resulted most of the European brands suffered from the first quarter with sales in China down 30-40% according to the UBS estimates.
Before this pandemic, luxury brands were accounted for one-third of all items in according to Bain & Company. The U.S. was followed with one-fifth of the market. But to the market’s surprise, in 2022, the U.S. became 32% of the market and China was 23%. The market has flipped.
Now the luxury brands are counting on the U.S. market to offset again the latest shutdowns in Shanghai and Beijing.
Data from the early weeks of the second quarter in the U.S. showed an increase of 8% compared with the same month in 2021, but this is the slowdown from the first quarter’s 16% in 2022. Further analysis showing the consumers that earn less than $50,000 fell 9% in April compared with same month in 2021. These shoppers in 2021 helped by the government’s stimulus checks, individuals had gains from the stock market and some excess savings, were spending in double on designer goods than 2019.
Those wealthier shoppers increased by 21% in April, but showing a slowdown from 28% for the first quarter of the previous year. This is the result of higher food cost and gasoline prices and they have also affected the affluent customers to cut back.
Europe’s largest luxury stocks are already down by 32% on average since the beginning of the year. A weak second quarter will continue to put weight on those stocks.
Old Navy’s Attempt for the Expanded Sizes for One Price – WSJ, May 21, 2022
Under the umbrella of Gap Inc., Old Navy accounts for the majority of the company’s sales and profits and helps to prop up the weaker brands—Gap and Banana Republic. Lately it decided to make cloths shopping more inclusive for women of all body types. Unfortunately it failed in its first attempt that resulted with too many extra-small and extra-large items, and too little for the rest. This mismatch caused the frustration from customers and contributed to falling sales and a management shake-up. The company’s report of net-sales of $3.44 billion for its quarterly report, down from $3.99 billion for the same period last year. It resulted the chain’s president and chief executive to step down after running the brand for less than two years.
Promoted as one of its biggest launches in the brand’s history, Old Navy began in August an offering of all women’s clothing styles in size 0 to 30, and XS to 4X. Mannequins in varying body shapes are used to display. All sizes of the same style are priced the same.
Soon the middle sizes were selling out with the very small sizes and very large sizes stacking up. In order to clear the excess merchandise, large quantity of women’s clothes went on sale this spring. It is the result of allowing customers to go through all the sizes to find her size, and very often that it was unavailable.
The industry’s practice is to sell clothes in sizes from 0 to 14. Any additional sizes would come from developing different patterns and using more materials. Consumers have found this very accommodating and reasonable.
Average American woman is a size 18 today, up from size 14 five years ago. The weight for women ages 20 and over was 170.8 lbs. as of 2018 and it was 163.6 lbs. in 2000.
In 2021, Old Navy accounted for 54% of the company’s sales and roughly 80% of profits. Gap share prices are down about 67% over the past 12 months. The S&P Retail Select Industry Index was 31% decline.
What is the Challenge for Richemont – WSJ, May 23, 2022
Compared with the other luxury brands, Richemont’s margin was 17.7%, up 6.5% compared with the previous year. It is still lagging behind with Hermès 39% and LVMH’s 27%.
Sales of Richemont’s jewelry brands are strong, the division’s operating margin was 34%. Costs for gold and diamond are up, as well as the advertising cost.
The sale of its troubled online-fashion retailer, Yoox Net-a-Porter. Another online distributor, Watchfinder.com which is a watch reseller took a loss of €210 million.
Its talk with New-York listed Farfetch for becoming a minority owner of YNAP along with other investors. Richemont took a stake in Farfetch in November 2020 as part of a three-way joint venture in China with tech giant Alibaba.
Unfortunately, Farfetch’s stock has plunged as unprofitable tech companies are suffering. Its market value has fallen from $16 billion to $3.3 billion. It has found itself unable to fund a merger, even a minority stake in YNAP. And unless Richemont can do something with YNAP, it will continue to eat into the more lucrative margin of its watch and jewelry business.
Dress Pants versus Sweatpants – Wall Street Journal, May 31, 2022
First of all brands with higher price tags are feeling much less a pinch from inflation than affordable ones. This is becoming a statement now. Take for example, Banana Republic’s sales in the quarter ended April 30 grow by 24% from a year before. Compare with Old Navy, from the same stable of Gap Inc., it declined by 19%, compounded with its inventory situation.
Same with Urban Outfitters, where its pricier brands, Anthropologie and Free People, are doing better than Urban Outfitters.
A similar dynamic happened with Macy’s department store where its last quarter sales increased by 10%, while its luxury department chain, Bloomingdale’s increased by 27%.
Nordstrom also says its sales in its quarter ended April 30 increased nearly 19%.
Those high-earning consumers who were working remotely during the pandemic are now shopping for clothes for their traveling, socializing and back-to-office plans.
The office occupancy rate has recovered since the Omicron outbreak and it remains at roughly 43% of pre-pandemic levels.
Another business is expected to takeoff, which is the wedding industry, and it is expected that there will be a record number of weddings in the U.S. this year.
And because of the increase of tourist traffic, Macy’s is already seeing its flagship store at Herald Square in New York and Union Square in San Francisco benefit from the international tourists.
Global Fashion Summit Meet For Fashion Sustainability Taking Shein As An Example – BOF, June 10, 2022
The meeting took place in the first week of June in Copenhagen. It is about the industry’s tackling of its environmental and social impact. Global Fashion Agenda, a Copenhagen-based sustainability advocacy group started 15 years ago. This summit is held in person since 2020.
This time the pandemic has exposed the poor conditions in fashion’s supply chains and the catastrophic climate change has continued to increase. The meeting opened the opportunity for more critical and challenging conversations. There were talks of leadership, collaborations but the most important was to move into actual action.
Shein, a company who is quickly becoming the industry’s new kid on the block, and because of its success, has created overconsumption that leads to overly wasteful. Although it announced to use a fund of $50 million over five years to deal with waste and offset its impact is so out of proportion to its turnover of $16 billion in 2021.
Shein is known for turning out thousands of new styles every day and it is outperforming than its peers. Part of its success is ruthless efficient and data-led approach to manufacturing. It has developed a culture of overproduction and overconsumption and ended up with discarding the clothes in the world’s largest secondhand market in Ghana.
Already there are around 15 million discarded garments being shipped to Kantamanto every week where they are sold by the bail at around $2 a piece. Many garments are cleaned, repaired, upcycled and recycled in an effort to outstrip its effort, although roughly 40% of everything that comes through is just waste and need to find the dumping ground.
The Or Foundation, a charity working in Kantamanto market in Accra, Ghana will receive $15 million over the next three years from Shein’s fund to support an apprenticeship program to move people out of the dangerous work and help community businesses to upcycle waste, improve community conditions in the market and help recycle program with Ghanaian manufacturers. It may not be enough, but it is a baby step to take towards accountability for the industry.
Rent The Runway’s Challenge – BOF, June 9, 2022
The luxury rental company reported revenues of $67.1 million for the first quarter of 2022, up from $33.5 million in 2021. Its gross margin went up by 9% year-on-year. Active users rose from 74,018 to 134,998, which is slightly above its pre-pandemic level. But its net loss was slightly up to $42.5 million from $42.3 million.
Rent the Runway still projected growth of 45 to 50% year-on-year growth in 2022. This means from $295 to $305 million.
The company suffered from demand for event-wear and office clothes, the rental service’s two key markets, vanished almost overnight in March 2020.
Its sales of $203.3 million for 2021 was up 29% from the previous year, although its peak of $257 million was in 2019 before the pandemic. Its active subscribers were paying up to $235 per month to rent up to 16 pieces of garments per month at one time.
It was making a loss of $157 million in 2019 and in 2021 it was expanded to $211.8 million.
It is hopeful for the upcoming year that there will be an unprecedented demand for wedding guest attire and event-wear. It is also hoping that its number of users will grow.
It is facing competitions from resale sites and other online fast fashion retailers who are offering a limitless wardrobe at a relatively affordable price. The competitors can offer clothes cheap enough to be worn once and thrown out afterwards.
The American Circular Textiles (ACT) – BOF, June 8, 2022
The American Circular Textiles (ACT) is a group with 11 founding members drafting policies to support textile recycling and recovery in the U.S.
This is spearheaded by the Circular Services Group (CSG) and Resource Recycling Systems (RRS) for opening the dialogues that can support efforts to establish a more sustainable and responsible system. Resale and rental companies like the RealReal, Rent the Runway, ThredUp and Fashionphile are among the 11 founding members.
The group will produce a paper for the lawmakers to scale the circular economy this year and also plan to bring in other relevant companies, organizations and agencies. It will also open up for other key circular fashion players, such as those textile recyclers in 2023.
Earlier on we reported the New York Fashion Act for a new bill introduced in New York that could help to step up disclosure and due diligence requirements for brands operating in the fashion market.
These are all parts of the acts that can put the sustainability for the fashion industry. At the moment for those companies who would want to practice the right way have found that they are being singled out as a competitive disadvantage. Hopeful this will change if the acts can reach the majority of the industry’s consent and support.
Supply Chain Delay is Threatening the Fashion Industry – BOF, June 6, 2022
Supply chain bottlenecks have disrupted product deliveries and disrupted marketing plans for the brands and the retailers. How to sell those late inventories especially for those can be identified as seasonal fashion is always a challenge for the industry.
A season is three months or 13 weeks and a delay at the port would easily mean a scenario of out-of-stock or overstocked. Moving those out-of-season would take a hefty discount and hurt into the profitability of the business.
Lately, we have read the corporate balance sheets of Abercrombie & Fitch and found that its inventory had rose 45% from a year ago. As the result, its share price had plunged nearly 30%.
But all kinds of “rebranding” for the merchandise can be created, such as those “delayed inventory” can be marketed as “much anticipate” and even “by popular demand” or “refurbish” and act as a complimentary shipment. And scarcity can sometimes work to a brand’s advantag
It is advisable to keep the communication with the loyal customers by informing them what products are coming to the stores in the most current manner.
For a long while many retailers have not introduced markdowns especially during the pandemic. But this is the time to reintroduce the discount systematically. Hoping that the limited sales can help to move out season stockpiles without alerting the customers to expect it as permanent markdowns.
A lot of thinking and strategy will need to create to turn the adverse situation to the business’s advantage.