The Apparel Industry consists of companies that design and sell clothing, footwear and accessories. Product categories include everything from basics, such as underwear, to luxury items, for example, cashmere sweaters and alligator-skin handbags. Traditionally, apparel companies were wholesalers, selling large quantities of goods to retailers, which then marked-up items and sold them to consumers at a profit. However, it's become more difficult to draw a line between wholesalers and retailers; most apparel companies now have both types of operations.

Wholesale Business

Wholesale business is what separates companies in Value Line’s Apparel Industry from those in our Retail (Special Lines) category. Apparel companies design and produce/source items that they sell to retailers, including department stores, specialty shops and discounters. Often, a company owns licenses to manufacture goods under particular brand names, and will market and advertise these lines. One license can cover many products. In some instances, an apparel company may only have the rights to produce specific items under a brand, such as ties and shirts, while excluding other product lines, for instance pants or sleepwear. Production is often outsourced to developing countries, where labor costs are inexpensive, relative to those of the United States and Europe. The wholesale market is seasonal. Retailers stock up on merchandise before shoppers hit the stores during the peak back-to-school and holiday periods.

Brand names, in particular familiar offerings with a good reputation for quality, style or value, are popular among shoppers. A clothing company possessing a broad line-up of well-known brands has a competitive advantage over its peers. This is not always the case, however. In tough economic times, consumers might turn to similar private-label goods to save money. Private-label goods are found in department stores and discount chains. Though they are less expensive than branded items, such goods are often more profitable for the seller. Brand-name items and private-label goods compete against each other for shelf space throughout the business cycle.

Because of the seasonal nature of the wholesale market, it's better to compare sales on a year-to-year, rather than sequential-quarter, basis. Gross and operating margins are the best gauges of a company's health. Sales volume, supply chain efficiency, sourcing costs, and selling, general and administrative (SG&A) expenses determine profitability.

Retail Operations

There are a number of reasons why companies in the Apparel Industry establish retail divisions. Having stores dedicated to a single brand gives a company control over a line's image and identity. Apparel companies relinquish some control over branding and merchandising at department stores, and their influence is diluted further at the boutique level. Dedicated retail stores allow a company to highlight its own merchandise, without worrying about competing labels.

Retail stores are typically more profitable than their wholesale brethren. By selling its own merchandise at retail, an apparel company can cut out the middle man and increase profits. However, this strategy can be risky. Instead of simply designing and producing clothes, and filling wholesale orders, companies with retail operations have the added burden of finding store locations with good potential and managing inventory, while avoiding big markdowns.

The Internet is another important platform for retailers, especially since consumers are increasingly Web-savvy and have access virtually anywhere. Shoppers want to quickly find what they are looking for online, and demand fast processing and shipping. Direct sales via the Internet can be a boon to a company. These sales do not entail expensive storefronts and related staffing and, thus, are more profitable than traditional business.

Apparel sales at the retail level tend to be highly seasonal, with the majority of revenue booked during the holiday and back-to-school periods. Industry analysts review total year-to-year sales to identify trends. Notably, market watchers focus on "comparable-store" sales, which indicate the year-to-year performance of locations open for a year or more. Sales-per-square-foot is another important metric that measures how efficiently a retailer utilizes its floor space.

As with wholesalers, the success of retailers is visible in their reported gross and operating margins. Retail margins are influenced by several factors, including markdowns and promotions, and SG&A expenses. Product mix also plays a role in determining profitability. For instance, a weighting toward accessories is favorable, thanks to their high margins, since accessories' one-size-fits-all nature involves lower costs than do fitted clothes.

Investment Considerations

The Apparel Industry is fragmented and highly competitive. There are a number of major players, but there are also countless niche stores and private companies that cater to specific demographics. Too, general merchandisers and foreign companies bring more competition to the sector. Consequently, companies in the Apparel Industry need to be nimble and highly efficient in order to survive. Having the right product is also essential; fashion trends change frequently, and companies need to adapt to varying consumer tastes quickly.

Apparel stocks are economically sensitive. Although clothing is a basic need, people have wide discretion as to when they update their wardrobes and how much they spend. When times are good, apparel sales are usually brisk. However, during periods of economic uncertainty and contraction, clothing is an area where people can easily trim outlays.