Discounters at Forefront of Slow Improvement in U.S. Apparel Industry

Includes: AEO, ARO, GPS, TGT, WMT
by: Research Recap

Discount apparel companies are best positioned to prosper in a sluggish economic recovery, says Moody’s.

Moody’s revised its outlook for the U.S. apparel industry to stable from negative on January 14. The ratings agency expects consumer spending on apparel to remain relatively stable, “with the worst of the recent declines now behind us, in line with Moody’s continued forecast for a hook-shaped economic recovery featuring slow and sluggish growth in 2010-2011.”

  • Discretionary spending is unlikely to rebound much over the next 12-18 months, and consumers will stay cautious amid high unemployment and elevated savings rates.
  • Retailer inventories are no longer declining sharply, adding to revenue stability overall. Inventory levels are now more in line with consumer demand, so retailers have needed fewer markdowns to sell excess goods.
  • Apparel companies will not need to incur large markdown expenses as they had in 2008. Gross margins have recovered, and today’s inventory/demand balance suggests apparel companies should be able to hold these recent gains.

The best-positioned apparel firms will be those focused on essentials and value prices, including companies well represented at discount outlet centers.