This is an excerpt from Thursday’s (2/11) Point of Sale retail supply chain newsletter sponsored by ArcBest.
The retail inventory restocking thesis has been touted by nearly every industry analyst (us included) as a promising growth driver for freight given the continued strength in consumer demand (thank you, stimmy) and historically low inventory-to-sales ratios. While this holds true for the majority of segments, especially the pandemic favs (furniture, home improvement, electronics), apparel companies are a different story.
Apparel companies find themselves in a peculiar position. Unlike nearly every other retail category, apparel companies have more inventory on hand than usual. Much more.
McKinsey & Co. estimates that the value of unsold clothing worldwide, in stores and warehouses, ranges from $168-192 billion – more than double normal levels.
It would be even higher if apparel brands hadn’t conservatively ordered for fall and winter. After seeing the spring season all but ruined for every company not selling sweatpants, brands slashed orders and ran lean through year-end. This worked wonders for apparel margins in Q4 when retailers had little stock on hand and even less to put on sale.
But from February – April, clothing sales fell 87%. Many brands have an entire season’s worth of last year’s spring stock, but clothes age like milk. Apparel companies are in an even more difficult ordering environment now than the one many skillfully maneuvered last year.
There are as many uncertainties now as there were then, but brands have an added confidence boosted by a circumstantially strong end to the year, a vaccine rollout gaining steam, and a high likelihood of more stimulus on the way. Americans disproportionately spent more of the most recent stimmy on clothing.
It’s an intricate dance, balancing the desire to gain market share after a year of record bankruptcies and store closures against the lean, mean, no discount machine that powered many apparel stocks to new highs despite lower sales.
Despite the temptation, many brands are adhering to disciplined ordering. It’s putting immense strain on garment-dominant nations like Bangladesh, where as of early February, factory owners are reporting no orders for March when orders are typically placed months in advance.
“We are operating at 25% of capacity. I have some orders to run the factory till February. After that, I don’t know what the future holds for us. It’s difficult to say how we will survive,” Dhaka-based factory owner Shahidullah Azim told Reuters.
For apparel company shareholders, this disconcerting news is bittersweet. Analysts are broadly applauding the prudence, and believe it’s sticky. “The good news is that a lot of retailers have strengthened margins as they had less inventory on the shop floor during the fall/winter season and were not having to discount to shift excess stock. This is a lesson that will stick and I expect a lot of apparel retailers to take the “less is more” approach going forward,” wrote Neil Saunders, Managing Partner at GlobalData.
What’s the impact on freight? Clothing is second only to groceries as a percentage of consumer freight. In a typical year, clothing and footwear sales make up ~15% of total US retail spending excluding energy, automotive, and medicines. Consumer products account for ~45% of total ground freight, so some back-of-the-envelope math gets us apparel comprising 6-7% of total truckload freight in the US.
Not an earth-shattering amount by any means, but small changes in freight flows can cause major imbalances. We’ve become all-too-familiar with 30% tender volume swings this year, but this is not normal and barring another pandemic or an alien invasion, we won’t ever see swings of that magnitude again.
We don’t have to look too far back to see the impact that single digit volume growth can have on trucking markets. In 2017/2018, an estimated 8% growth in freight volumes imbalanced freight networks sending tender rejections and spot rates soaring.
Final Thoughts. Estimates for apparel sales range drastically from pessimistic forecasts of a 15% sales drop this year from McKinsey, to an 11% recovery from Euromonitor. I lean more towards the latter and feel there is a substantial amount of pent-up demand for clothing and accessories, given American’s reluctance to purchase new threads over the previous year.
Retailers adapted their forward orders accordingly when ordering for the back half of the year, but were left with a glut of inventory from early in the year. Given this backlog, and the fact that apparel sales volumes will remain at below historically normal levels, it is hardly surprising that factory orders are down. The industry won’t see a surge in new order volume until last year’s glut has been worked through.
Apparel is meaningful for freight flows, but brands ordering conservatively won’t derail the inventory restocking thesis. Nearly every other segment has a lower inventory-to-sales ratio now than before the pandemic, and total US inventories remain at a 6-yr low.
Additionally, there are other sectors of the economy that are promising supports for the freight bull market including a blooming manufacturing recovery, a white-hot housing market, and continued elevated consumer demand. West Texas Intermediate crude oil is now at $58/barrel, which may support an oil & gas recovery.
Our thesis remains intact, but this is one growth driver that may hit more like a 9-iron for the next several quarters.
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