Making Sense of Wall Street Retail


Investors forecast tough times for retail.

Shares of companies ranging from sportswear giant Nike to online retailers Revolve and Farfetch, PVH Corp. and Capri Holdings from accessible luxury to mall brand Abercrombie & Fitch have fallen by double-digit percentages in the past two weeks.

The confluence of supply chain issues, inflation, rising gas prices and Russia’s invasion of Ukraine spooked global markets. On Tuesday, President Joe Biden’s ban on Russian oil and gas sent crude prices soaring. The news has hit businesses in many industries, but fashion has been particularly hard hit: With US pump prices already at an all-time high, the prospect of even more expensive gasoline will mean consumers will have less money to spend on clothes.

The turmoil comes even as some brands reported stronger-than-expected financial results, reflecting booming demand for the apparel. On average, U.S. retailers saw their biggest year-over-year increase in fourth-quarter sales since 2018, according to Simeon Siegel, retail analyst at BMO Capital Markets. In Europe, where pandemic restrictions were tighter, apparel sales weren’t as robust.

E-commerce retailer Revolve, for example, saw fourth-quarter sales rise 70% year-on-year, while online luxury retailer The RealReal saw 67% year-on-year growth. on the other. Revenues for both exceeded 2019 levels. In January, U.S. apparel sales rose 19% from 2021, according to the Census Bureau.

However, the good results did little to improve the mood on Wall Street. Revolve shares are down more than 15% since the earnings release.

“Everything is business as usual and sales are strong,” said Susan Anderson, retail analyst at B. Riley FBR. “The concern is that as we look to the future, this could all come crashing down at any moment.”

The heart of the market‘s nervousness comes down to Russia’s invasion of Ukraine two weeks ago. Most global clothing brands closed their Russian stores as a result of the war. Russia accounted for about 3% of sales for companies like Adidas and Prada and less for most other European clothing brands, according to UBS. Farfetch said last week that Russia accounts for 6% of the value of goods sold on the platform.

But beyond the loss of regional sales, various sanctions against Russia are already driving up the prices of raw materials and logistics. Record gasoline prices ahead of Tuesday’s oil ban are a case in point.

Yet the most powerful players in retail will at least be able to mitigate rising costs and the inevitable drop in demand.

One area of ​​focus for the future should be inventory management, Siegel said. Despite sales gains, most retailers have found themselves carrying more inventory in their final quarters than last year, meaning promotions and markdowns could be inevitable in the months ahead. Navigating supply chain tensions while ensuring consumers will respond to the product assortment will be a particular challenge. If there is an economic downturn this year, retailers with lean inventory will be in a better position than those with a glut, according to Anderson.

Price is another hurdle. Inflation will likely be exacerbated by sanctions and other circumstances related to the war in Ukraine. Consumers continued to shop even when prices rose last year, but they can only take some shock from the stickers.

Especially if paying more than $4, $5, $6 for a gallon of gas, consumers will start delaying their purchases

“Especially if they’re paying more than $4, $5, $6 for a gallon of gas,” Anderson said, “consumers will start delaying purchases.” For retailers, this potentially means absorbing more of the rising costs rather than passing them on to the consumer.

Finally, it’s important to remember that the world is moving beyond the pandemic and into a new chapter in history, Siegel said. This means that brands can no longer report large increases in sales since 2020; instead, they will compare their performance to last year’s banner results.

“The days when we compare ourselves to the pre-pandemic days are in the rearview mirror,” Siegel said.


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