Brands — especially those with roots in the 1990s — are threatening fast-fashion dominance.
Names such as Ralph Lauren, Calvin Klein and Tommy Hilfiger ruled the racks decades ago, but ultimately they were pushed aside as consumer tastes changed, precipitated in part by the entrance of fast fashion.
Now it seems the pendulum might be swinging back in their favor.
In its latest report, “Cracks in the European Fast Fashion Model Highlights Evolving Landscape,” financial services firm Cowen and Co. notes the ways in which the market is changing, how brands are taking advantage of the shift and how much share is really at stake.
The recent earnings reports from both H&M and Zara owner Inditex revealed that the once-dominant players might be vulnerable. Same-store sales at Inditex slowed from a 10 percent lift in 2016 to a 5 percent increase in 2017. Total sales growth at H&M has decelerated from a 14 percent increase in 2014 to just 3 percent in 2017. The company’s most recent issues were brought on by consumers’ preference for e-commerce as well as an inventory pile–up that has necessitated ongoing markdowns.
While the fast-fashion leaders slow, Cowen notes same-store sales at lifestyle brands are improving, “albeit off of easier compares.”
These brands have been helped by a more disciplined approach to buying, the firm noted. “Both the larger lifestyle brands and their wholesale partners, especially on the apparel side, took steps to tighten inventory supply and were more disciplined in placing forward orders over the past year, such that the spread in sales-to-inventory growth sequentially improved in Q4:17 over Q3:17 across much of the sector,” according to the report.
In addition to their behind-the-scenes machinations, these brands are seen as offering value and sustainability, two factors that resonate with both millennial and Gen Z consumers. Fashion’s current fascination with all things ’90s is also fueling a shift toward brands.
“We think this 1990s retro movement has enabled the large lifestyle brands to fight back against new entrants, including fast fashion, as they are able to draw from their rich history and deep retro archive,” Cowen said.
According to the 2017 Cowen Millennial Tracker Survey, when it comes to 18- to 24-year-olds, Calvin Klein is on equal footing with H&M, with 24 percent of respondents saying each of the brands is their first choice when shopping for clothes. By comparison, Zara was the top choice for only 6 percent of those polled, putting it behind Michael Kors (13 percent), Polo Ralph Lauren (12 percent) and Tommy Hilfiger (7 percent).
These labels are capitalizing on the moment by stepping up their social media content and aligning with influencers like the Hadid sisters, the Kardashian/Jenner family, as well as artists like Justin Bieber and The Chainsmokers.
As both brands and fast-fashion retailers look to expand, Cowen said all must focus on shortening the product development cycle.
“While product cycles and innovation are critical, effectively managing working capital will be critical in defining sell-through rates, gross margin and share price performance,” according to the report. “Superior data analytics, combined with speed in design and merchandising supported by robust supply chain capabilities and shorter lead times, will define margin and return on capital.”
Though this is an area where fast fashion has always had an advantage, the report suggests consumers’ preference for digital is creating a new challenge that even those stores are ill-equipped to handle.
“Retailer and Brands will therefore require ongoing digital initiatives focused on mobile platforms, supply chain capabilities and distribution centers which many of our companies continue to invest in but could also pressure their EBIT margin in the near term,” the authors noted.
Going forward, Cowen sees opportunity for brands to take share in both Europe and Asia, which represent the lion’s share of sales for both H&M (83 percent) and Inditex (84 percent).
The firm forecasts PVH, fueled by labels like Tommy Hilfiger and Calvin Klein, will achieve a 12.7 percent non-GAAP earnings per share compound annual growth rate with mid-single-digit sales CAGR. The outlook for VF Corp., with brands like Timberland, The North Face and Vans, is a 13 percent non-GAAP EPS CAGR with mid-single-digit sales CAGR. Ralph Lauren is expected to achieve a 6 percent non-GAAP EPS CAGR on low-single-digit sales CAGR.
On the other hand, Inditex is forecast to hit an 8 percent non-GAAP EPS CAGR on an 8 percent sales CAGR.