Apparel Companies’ Heavy Discounts Could Signal Inventory Hangover in 2012
With the holiday season nearing its end, the U.S. apparel market is seeing large discounts across the board. Be it aspirational luxury retailers such as Ann (NYSE:ANN), Jones Group (NYSE:JNY) or teen apparel retailers such as American Eagle Outfitters (NYSE:AEO), Aeropostale (NYSE:ARO), Gap Inc. (NYSE:GPS), retailers are offering huge last minute promotions. Gauging from the scale of the promotions, we believe that retailers are sitting on excess inventory that may weigh on results in the coming quarters.
See our full analysis for Ann | Jones Group | Aeropostale | American Eagle Outfitters | Gap Inc.
Choppy Sales Through Thanksgiving and Christmas
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“Too much or too little” has been the question that has bothered apparel retailers throughout the holidays. Retailers are not only affected by starting their holiday campaigns with big inventory levels, but the unpredictable customer behavior during holidays has made things more difficult, especially as steep discounts have led to sales spurts for a few retailers, forcing others to follow. The holiday season, which started with a bang over the Thanksgiving weekend, seems to have fizzled out near Christmas. Consequently, most of the retailers that increased their inventories after encouraging Thanksgiving weekend sales, have been left with much more inventory than they are comfortable with, which in turn has led to increased promotional activity.
We believe the inventory levels will be one of the most crucial factors to watch out for the apparel stocks this quarter. Because apart from deciding a company’s performance over the holidays, they will also decide how long the company will take to realize the benefit of declining cotton prices. For instance, a company ending with a bigger inventory will be more prone to impact from high Average Unit Cost (AUC), which may ultimately culminate into a decline in its margins.
Until now the teen apparel retailers have been saying that they should be able to reap the benefit of declining cotton prices by the second half of 2012, but should they end with higher than expected inventories this quarter, these benefits may muted in the future.
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