For some apparel retailers, Q3 was a comeback quarter
Published Nov. 25, 2020
The pandemic has complicated an already tough market, but a few players managed to get it right in the period.
Stripping consumers of their last reasons to buy new clothes — the need to dress up for work or play — was not exactly what the apparel industry needed, in light of the sector's already ebbing growth and cloudy future. But that was exactly the environment created by the pandemic in the last several months, leaving retailers to scramble to change their assortments, store protocols, inventory management and fulfillment services.
For some, that paid off in the third quarter.
It's been brutal, month after month, with the segment suffering a series of year-over-year declines. In March apparel sales fell 52.5%, in April they plunged 89% and in May they were down 63.7%. In subsequent months the declines moderated, though they would be considered significant in any other year: June down 25%, July down 19.9%, August down 23.7%, September down 13.1%, October down 12.1%.
That's how overall sales went. It was already apparent by the second quarter, however, that some individual clothing retailers are doing better than others. Now as several specialty apparel retailers and department stores report on their third quarters, some may be staging a comeback.
"Q3 was much better and the trend is improving," GlobalData Managing Director Neil Saunders said by email regarding apparel sales. "This now leaves the department stores as the one part of retail that's really struggling."
Abercrombie & Fitch Co.
The largely mall-based clothing retailer saw mixed results in the quarter, with sales at its namesake brand (41.8% of total sales) down 2% to $343 million, while sales at Hollister (58.2% of the company's sales) fell 7% to $477 million. Overall, net sales were down 5% to $820 million, as e-commerce rose 43% to $382 million, the company said in a presentation to analysts. Net income was $42.3 million, with gross margin expanded by 390 basis points and costs down, beating many analysts' expectations.
While the overall sales decrease also beat analyst expectations, the steeper decline at Hollister may have surprised some. The more casual, less expensive brand has prospered in recent years while Abercrombie struggled to break away from its exclusionary, cool teen vibe to appeal to maturing millennials. Hollister still out-performed other apparel brands, but the relatively better success at its sibling shows that these days, it's not enough for apparel to be "casual."
"[W]hile Hollister is known for its relaxed and everyday style, it is less associated with the cozy vibe which explains its relative underperformance to its sister brand," GlobalData's Saunders said in emailed comments Tuesday. "The recent focus on very soft, high quality materials and linings has helped Abercrombie to stand out in a market that has become more crowded with these sorts of garments."
American Eagle Outfitters
Mall-based brand American Eagle has the benefit of a growing lingerie business, Aerie, that has been bringing new customers to the namesake banner and just happens to offer many of the cozy styles that are so in demand.
Third-quarter total net revenue fell $35 million or 3% to $1.03 billion, largely due to "mall traffic declines related to COVID-19, offset by strong online sales," according to a company press release. By brand, American Eagle revenue fell 11%, with e-commerce up 11%, and Aerie revenue rose 34%, with e-commerce up 83%.
Gross profit rose to $415 million from $407 million last year, as net income fell to $58.1 million, from $80.8 million, with a $7.9 million interest expense siphoning profits.
In emailed comments, Saunders said the apparel retailer "is on a clear path to recovery," but noted its two brands' topline results indicate they appear to be on different trajectories.
"Looking in more detail at Aerie, we remain impressed by the brand’s traction with consumers," Saunders said. "Not only is Aerie selling more to existing customers, it has also been incredibly successful in attracting new shoppers. Compared to more established peers like Victoria’s Secret, Aerie is still a relatively immature retailer and so some degree of brand discovery by new consumers is normal. However, the pandemic has accelerated this significantly and Aerie is picking up a substantial amount of market share."
The off-price retailer put forth a strong third quarter, much like rivals TJX and Ross in similar time periods. Total sales fell 6% to $1.7 billion, as comparable store sales declined 11%, beating analyst expectations in both measures. Gross margin expanded to 45% from 42.4% last year, thanks to lower markdowns and higher markup, which were partially offset by higher freight costs, according to a company press release.