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Weakness in Apparel Stocks and the "Brand Exhaustion" Concept

May 22, 2011 7:10 PM ETGAP, AEO
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Recently several apparel retailers have posted less than impressive gains in their quarterly reports.  GAP stores and American Eagle Outfitters are two notable examples.  Investors may want to consider a concept related to the marketing of Chinese made consumer goods.  That concept -referred to in the title of this article- is Brand Exhaustion.  Brand Exhaustion occurs when a formerly respectable name brand loses cache with consumers because that retailer attempts to charge premium prices for goods while failing to differentiate themselves in the market-place by providing a superior quality product.   Those retailers are essentially trying to earn a retail premium based solely upon their name brand.  A culture of excessive brand-pride amongst America's shopping mall retailers seems to have led to an inability to understand consumer sentiment. This appears to be an issue of retail culture that and created endless opportunities to short mall-based retail stocks.      

"You can fool some of the people all of the time; you can fool all of the people some of the time; but you can't fool all of the people all of the time." 

Abe Lincoln

Retailers should have seen this coming and prepared for this outcome.  Attempts by some retail firms to blame profit shortfalls on cotton prices and shipping costs fall on deaf ears when it's common knowledge that markups on Chinese made apparel can exceed the 1000% mark.  Also, given the massive decline in CRE values over the course of the last few years these retailers should be posting massive gains as a result of significant cost-savings through the re-negotiation of CRE leases.  For America's shopping mall retailers to have operated all these years under the assumption that consumers were desperate for brand-names and had no interest in or concern for quality was to assume a customer-base of fools. During the Cold War years Americans made fun of Russian blue-jeans because of stories about the blue dye coming off on your socks when you wore them or the crotch of the jeans tearing out if you bent or squatted over while weariing them; I've heard similar complaints about jeans from the Hollister store.  Eventually, no matter how much cache a brand name may have, if the quality of the product being sold is sub-par consumers will start to pass by the store rather than shop the store.  Furthermore, it's no secret that "Made in China" fatique is a growing issue with many American consumers and failure to diversify product lines to include products made in North America and the European Union is not acceptable to some consumers.  

I believe the issues of brand exhaustion is endemic to the majority of America's shopping mall chains, and expect weakness across this entire sector throughout Q2 and Q3 of 2011.  

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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