The new world of fast fashion has led to a widening rift among clothing brands and retailers this year, one that has made it challenging for investors to pick the leaders.
At least a few have posted big year-to date gains. At the same time, consumers have turned fickle on brand loyalty. That has sent powerhouse brands like Lululemon Athletica and Nike into steep declines.
Fast fashion means styles evolve rapidly, often incrementally and aim for inexpensive price points. Many consumers have dealt with that change by setting aside their favorite brands in order to focus on a particular look, and on balancing their budgets.
For retailers and manufacturers, those most adept at managing inventories while hustling to update styles have thrived. However, analysts say big inventory-related profit gains may be waning, and are now largely reflected in share prices.
Even the trend leaders are showing some signs of topping.
Fast movers including Abercrombie & Fitch and Crocs have pulled back in recent months. The same is true for Deckers Outdoor, although it rebounded powerfully on earnings over the past two sessions. Lands' End has so far held up. Others, including Urban Outfitters and On Holding, are eyeing an upswing move.
The sector is "past the period of more unified performance we all got used to in 2020-2023," William Blair analyst Dylan Carden told IBD. "It's back to winners and losers and real stock picking."
The pandemic threw the industry out of whack in 2020. Businesses moved collectively to address "violent" shifts in sentiment and behavior, as well as interruptions to supply chains and manufacturing. Those effects rippled into 2021 and 2022.
"And now, in '23 and '24, you're seeing different recovery paths," Carden said. "Some businesses have literally doubled in three years, and they're having to digest that growth," he added, citing Aritzia (an over-the-counter stock) and Boot Barn as examples.
"So you just have to take it in more bite-sized chunks as far as understanding what companies are outperforming versus underperforming," Carden said.
Inventory Management Key
Carden says that the best explainer for current performance is to flash back to last year. He noted that in early 2023 everyone worried about a recession. At the same time, retailers were holding way too much inventory.
"So the industry bought inventory light for 2023. And you saw massive amounts of gross margin upside," Carden said.
Retailers able to sell goods at full price drove gross margins to peak levels. Now, many companies are buying much more heavily for 2024. That points to more promotional activity and sales.
"The idea is you've gotten back to a more normalized inventory model where there's a bigger risk of discounting," Carden said. "This industry never finds religion on inventory."
Going Shoe Shopping
A key part of that inventory management involves knowing where to meet your customer. For sellers of apparel and clothing, direct-to-consumer channels have been a hot spot.
For shoes, however, consumers are heading back to retail venues, which buy via manufacturers' wholesale channel, said Drake McFarlane, research analyst at M Science.
"I hesitate to say it's a massive shift, but it's definitely one we're seeing," McFarlane said. "You see that across many brands, and in fact, the ones that aren't showing that dynamic to the same degree are brands that are a little bit more affordably priced."
However, M Science's latest Footwear & Sportswear Industry report shows some weakening across the board. DTC purchases fell 9% year over year in May, worsening from a 4% drop in April and a 3% decline in Q1. Meanwhile, wholesale channel spending in May decelerated to 3% year-over-year growth from a 5% increase in April and a 12% jump in Q1.
M Science noted that as overall industry growth slows, the firm has throughout the year seen relative outperformance among "mid-tier" brands like Asics, New Balance and Skechers. And while those brands' sales are outpacing the overall industry, they still saw slowdowns into May.
McFarlane added that the core miss from Nike's Q2 results on June 28 was in its direct-to-consumer channel. Its wholesale channel beat estimates.
"Their retail partners are doing quite well," he said.
In-Store Selection
Retailers tend to offer multiple brands and, therefore, a broader selection of footwear. They also often sell at a lower price than the manufacturer. With the direct consumer channel, McFarlane said, "there's a bit more of a premium."
"The consumer might be a bit more pressured on their wallet." Retailers allow them to "do a little bit of a shift down. That being said, it's not wholly consistent across the board," he said.
He said it's also useful for customers to try on new shoes before purchasing them because sizes vary by brand.
"The reality is people shop in wholesale," meaning in retail stores, Carden said. "They want a certain amount of diversification of product offering or they need assistance."
Case Study: What Happened To Nike Stock?
That's been an issue for Nike stock. Nike spent the last five years de-emphasizing its wholesale channel, Carden said. He noted that Swiss shoemaker On Holding has said that Nike's shift gave it oxygen to gain momentum.
"With the rise of Hoka, On, or even Saucony, Asics or Brooks, a lot of these running shoes are having real moments, which is ground zero for Nike," Carden said. "To give up running is existential."
Still, unless you're a shareholder of Nike stock, don't call Nike's five-year DTC focus a failure.
"People want to dismiss their DTC strategy," Carden said. "The reality is they went from the number nine retailer of footwear to number one, so the strategy worked. It's just, at what cost as it relates to brand and competitive entrants."
New Kicks On The Block
Meanwhile, consumers have become more willing to try out new brands to keep up with ever-changing fashion trends. That makes it difficult for large brands to catch on and forecast for innovation.
"Innovation and newness is what is selling now," said Janet Joseph Kloppenburg, president of JJK Research Associates. "Core basics are not important at this point, consumers want to look special and fashion-right."
She noted that supply chain challenges hit Nike during Covid and the company did not innovate.
"This led to fast-paced growth from new players, including Hoka, On Running, Asics and New Balance," Joseph Kloppenburg said. "There are many small new niche brands which have the capital to invest in marketing and in new product research and development. As a result, the consumer has more choices."
Waning Loyalty, Lightning In A Bottle
"The consumer is far less brand loyal than they were 20, 30, even 10 years ago," M Science's McFarlane said. "For a lot of these large brands, generally speaking, fashion trends are something that they can't necessarily drive themselves. It's really from the bottom up, and then they have to react accordingly."
McFarlane said that the rise of Adidas' Sambas indoor soccer shoes is a great example. "People were buying Sambas not because they suddenly had a love for Adidas. Instead, they saw that they became popular among fashion influencers, and people went to buy something because they thought it looked good."
But it's difficult to effectively capture that "lightning in a bottle," as McFarlane called it, and capitalize.
Crocs 'Above Fashion'
He used Crocs as an example of a brand that oriented itself "above fashion" to some degree, while operating in a way where it can jump on trends.
"People aren't buying Crocs because they want to look cool. They buy Crocs because it's ironically cool," McFarlane said. He added that Crocs' now-iconic clogs are a very easy-to-modify design, allowing regular new product releases from the company.
Crocs has made waves on social media after releasing various collaborations, with themed shoes for popular characters like Shrek, Lightning McQueen and Naruto. The company also isn't afraid to lean into the silliness and has released cowboy boot Crocs as well as Busch Light-themed all-terrain Crocs.
"For brands that are oriented like that, it's really easy to capture on trends," McFarlane said.
The Beyonce Effect
Celebrity partnerships are common but "overrated" as a sales driver, McFarlane said. "I think what really drives trends are bottom-up approaches where there are key influencers that young consumers watch, even from a micro perspective."
On announced in June a multiyear brand partnership with movie star Zendaya, which featured a marketing campaign, new activewear and Cloudtilt sneakers called The Zendaya Edit. The partnership launched shortly after Zendaya's "Challengers" tennis movie premiered in late April.
"The week the partnership was announced, we saw a little bit of a bump in On spending, particularly in the apparel segment. But after that, it pretty much faded away," McFarlane said.
Beyonce, of course, is an exception. The superstar released her Cowboy Carter country album on March 29, which caused a spike in demand for denim and gave Levi's a "bit of a lift."
Levi's stock rallied nearly 22% from March 28 before falling back in June, with quarterly earnings contributing to the run and the retreat.
Keeping Up With Fast Fashion
Apparel companies have a much different dynamic than their shoe-selling counterparts.
"I think there's a lot of pressure within fast fashion, the H&M's, the Zara's of the world have to fight up against Shein, which is providing clothing, quite frankly at rock-bottom prices," said McFarlane. He added that it's challenging for middle-market brands like Tommy Hilfiger, where someone might trade down to save a bit.
Whereas Ralph Lauren differentiates itself by being premium enough while presenting a clear brand identity, but without breaking the bank.
"For Ralph Lauren, they're positioned just enough where they're aspirational for consumers to buy, but not too far out of reach where it's an ultraluxury brand," McFarlane said.
Innovation is a major factor for athleisure and lifestyle apparel as well. Lululemon customers, for example, can now choose from many more brand choices and "can diversify their active wardrobes with newer brands, especially since Lululemon's spring innovation levels have not been up to par," JJK Research's Joseph Kloppenburg said.
Meanwhile, apparel manufacturers have leaned more into direct-to-consumer channels, according to McFarlane. Unlike in shoes, customers generally know what clothes they're looking for when shopping. They're more likely to seek out a brand directly online or at a retail location, rather than browse department stores.
Also, clothes tend have a more universal fit than do shoe sizes, which makes it easier to shop online.
Abercrombie Stock Rallies, Brand 'Ages Up'
Abercrombie & Fitch rallied 123% this year in a run that peaked in late May. The company recorded triple-digit earnings growth the last five quarters. Sales growth accelerated over the last seven periods, to a 22% gain for its Q1 results in May.
Compare that to a year-to-date loss of 52% for Nike stock.
But it wasn't just a matter of "wait 10 years and everything becomes cool again," Carden said. Abercrombie made tangible efforts to reposition its brand to an older consumer, from its reputation as a teen brand in the 2000s and 2010s. Since Fran Horowitz was named Abercrombie & Fitch CEO in 2017, she has worked to age-up the product through brand and messaging. It added more occasion-based offerings for weddings and other special events.
"You've got 20-plus million incremental potential customers to the brand if you think about the teen market versus the 25 to 35 year age cohort," Carden said. "So you're playing a much bigger pool."
Carden added that Abercrombie spent the last couple of years ensuring they didn't overextend on inventory while also limiting downside by selling more at full price.
However, Carden doubts Abercrombie's roughly 20% comparable sales growth is sustainable. The company will need to manage their inventory so Abercrombie doesn't go lowering prices in order to chase sales, he said.
Abercrombie posted a 22% sales increase for its Q1 results at the end of May, which marked four quarters of accelerating growth. FactSet expects those gains to slow to a 17% increase for Abercrombie's July-ending quarter, and decelerate further to a 4% bump by Q4.
On the earnings side, analysts project a 96% rise in the second quarter, also slowing to a 4% increase for Q4. The company has not yet announced a second-quarter reporting date.
Outlook
Analysts have generally tightened up price targets for Nike stock. Bernstein is still at 112. Deutsche Bank at 92. But TD Cowen dropped its target to 71 on Thursday, largely due to exposure to China, and risk from tariffs after November's election.
Joseph Kloppenburg believes the rest of 2024 will be tough for most of the industry.
"I think the second half of the year will be challenging," she said. "Comparisons are more difficult and the holiday selling season is shorter."
In addition, prices are higher and promotions leaner thanks to strong inventory management. That could well lead consumers to not increase their purchases.
"As a result, there will be a few winners and many losers," Kloppenburg said.
Going forward, brand success will rely on their ability manage their core product base, effectively innovate on popular trends and capture that "lightning" if it does strike, according to McFarlane.
"If there are trends that appear from the bottom up, brands that are most able and nimble enough to capture those are going to be better positioned."
You can follow Harrison Miller for more stock news and updates on X/Twitter @IBD_Harrison
