Moody’s Says Footwear and Apparel Sector Growth to Slow in 2020

As domestic and global factors weigh on company performance, Moody’s Investor Services has lowered its outlook for the U.S. apparel and footwear sector to stable, from moderate.

A slowdown in global economic growth, ongoing trade conflicts, currency woes and sourcing shifts are some of the developments impacting the outlook.

“After two strong years, industry operating profit growth will moderate from 2019 levels but remain solid,” Moody’s said in its “Outlook Update” for top public companies in the field.

Operating income growth is expected to ease in 2020 to around 4% to 5%, with sales in the same range. According to forecasts, Moody’s said 2019 operating income growth is in the 6% to 7% range, and revenue growth in the 4% to 5% range.

“While challenges are increasing, growth will remain widespread as companies continue to benefit from new product introductions and innovation, [and] continued direct-to-consumer (DTC) and international growth,” Moody’s said. “They will also benefit from improved marketing efforts and previous cost-saving steps, restructuring initiatives and synergies.”

Moody’s projects global growth to slow to 2.7% in 2019 and 2020, about half a percentage point below the level in 2017 and 2018. Risks like trade frictions and Brexit will weigh on business and consumer sentiment, which will increase promotional pressure within the sector. China, a key player in the supply chain and consumer market expansion for many large footwear and apparel companies, will see growth slow to 6.2% in 2019 and 5.8% in 2020, from 6.6% in 2018.

The strong dollar is another “looming risk in 2020,” according to Moody’s, and “will likely lead to higher costs” for the year. Since apparel companies normally source products from foreign manufacturers in dollars and sell goods in foreign markets in local currencies, a stronger dollar will increase the foreign entity’s costs of goods sold.

“From a consumer perspective, we are also seeing signs that the strong dollar is driving a decline in tourist spending in gateway U.S. cities, leading to increased promotional activity,” Moody’s said.

As for the effect of tariffs on Chinese imports, Moody’s expects them to pressure earnings. Analysts estimated that 52% of combined sales for rated U.S. apparel companies are generated in the U.S. and are at risk of increased tariffs on Chinese imports. Companies such as G-III Apparel Group that sell a greater percentage of imported Chinese goods in the U.S. would take the biggest profit hit, while Levi Strauss & Co. and Hanesbrands are well diversified or not significantly exposed to Chinese imports into the U.S., the report said.

“We estimate annual cost increases would have a 30 to 50 basis point hit on the combined operating profit of our rated entities, not including ongoing efforts to mitigate the cost increases through moving more production away from China, obtaining supplier support or increasing prices on selected product,” the report said, noting that companies have been making progress in these areas.

In its most recent fiscal year ended Jan. 31, G-III generated around 86% of its revenue in the U.S. and sourced around 61.5% of its inventory purchases from China, according to Moody’s. The company recently said it has had conversations with its vendors and retailers and that all parties are willing to share in the increased costs. G-III has also implemented select price increases and said its production in China will be down to less than 50% this year.

DTC channels and international markets will continue to drive growth in the sector, Moody’s said.

“While there are still pockets of growth, the North American apparel retail market remains challenged, with an increasingly promotional environment, which will pressure margins,” the report noted. “Retailers also continue to manage to lower inventory levels and delay product orders until later in the season.”

Moody’s said it could lower its outlook for the apparel and footwear sector to negative if its sees operating income growth falling below 2%. This would most likely be driven by further weakening in global economic conditions in key markets that would result in negative sales trends, continued strengthening of the dollar or continued tariff increases.

On the other hand, it could change the outlook to positive if it sees signs that constant currency operating income growth will grow 6% or more over the following 12- to 18-month period. This could occur if the dollar materially weakens, if tariff or other input costs decline or consumer spending strengthens.

Editor’s Note: This story was reported by FN sister magazine Sourcing Journal. For more, visit Sourcingjournal.com.

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