Apparel Industry Definition Apparel Industry is represented by the companies that create and sell clothing, accessories, and footgear. Nowadays, majority of the Apparel Companies have both types of operations: wholesale and retail through which they reach their consumer.
For our group, we chose ANF Inc. (Abercrombie & Fitch), American Apparel Inc. (APP), GES (Guess), GPS Inc. (Gap), NKE Inc. (Nike), and URBN Inc. (Urban Outfitters), which are under the category of Apparel Store and Textile - Apparel Footwear & Accessories.
Since apparel companies are mostly under the category of Apparel Store, except for NKE, we calculate the percentage of the industry that our group of companies represent by using the sum of the market capital of the chosen apparel companies plus NKE’s market cap divided by the total market capital of Apparel Store plus NKE’s market cap. The result turned out to be 32.07%, which means apparel companies that we chose represent 32.07% of the apparel industry.

Wholesale Business Apparel Companies that have wholesale operations, design and manufacture products, which they then sell to either external retailers such as department stores, discounters, and small shops or through their own stores. Wholesalers often have licenses to produce certain items under a specific brand, for which they do marketing and advertisement. Apparel companies that own many licenses of well-known established brands have a competitive advantage. However, during the economic slowdown, the consumer tends to shop for less known and cheaper products, thus possessing many licenses may actually hurt wholesalers. Most of the production is outsourced to other companies, mostly Asia and Eastern Europe, developing countries where labor costs are less expensive. For comparison purposes, it is better to compare sales on annual basis rather than on monthly or quarterly basis because of the seasonal nature of the wholesale business. For the evaluation of the company’s performance, the key metrics would be gross and operating margins, sales volume, supply chain efficiency, and costs management.

Retail Operations Retail operations are a special line category. Majority of apparel companies prefer to sell their merchandise through their own stores since that gives them a better control over the brand, product’s marketing, and consumer relationship. Selling their products through their own chain of stores is also more profitable since it eliminates expenses for the middle man. Though, it might be more risky. For example, during 2008 financial crisis, when the consumer was unwilling to spend any disposal income on apparel, many companies ended to up being unable to sell its inventory while new inventory was already on the way. Internet is a huge advantage for the retailers since it allows making a direct sale with the consumer and does not require having an expensive store and shopping assistants. Thus internet sales tend to be more profitable for retailers. According to comScore Inc., an on-line marketing research firm, in 2011, an online sales during the holiday season were stronger that in 2010, up to 15% to $35.3B. As with wholesale business, retail operations are very seasonal since the majority of sales are done during the holidays and back-to-school periods. For comparison and evaluation purposes, key metrics for retail level are volume of sales, sales per square foot, gross and operating margins, cost management, and product mix.

Key Trends and Developments The U.S. apparel market is very diversified and comprised of brands and retailers of different scales and sizes. Low entry barriers, advances in technology and access to global markets make the environment highly competitive. It ensues in shifting power to the consumer. Access to the internet allows the consumer to become more informed about prices and availability. Therefore, companies have to compete for the consumer and utilize all available analytical technology that enables companies to predict and foresee new trends and demands among consumers. Nowadays, companies have to customize their offers to maintain a competitive advantage. Besides the large number of domestic brands, a large number of multinational brands are invading the US market. These brands grow in popularity among the consumer because they offer fashionable items at low price, which especially attracts young consumers who tend to spend more of their disposable income on apparel in general. Fast fashion multinational brands, despite their size, have very nimble and agile supply chains which allow them to compete with American rivals. This forces American companies to employ new strategies in better managing their inventory, improving their supply chain, streamlining their operations, and managing their expenses. According to Euromonitor, the trend among American companies will be to either grow organically through increased sales or through mergers and acquisitions of small companies. Also despite the fact that apparel market is highly crowded, new entrants will keep emerging.

Pricing Strategies In the last five year, due to the financial downturn, the consumer was reluctant to spend their disposable income on discretionary items, which forced many retailers to offer deep discounts up to seventy five percent in 2008-2009. It set up a trend for the consumer, especially price sensitive one, to wait for sales, discounts and promotions. It is still very difficult for the retailers to reverse this trend, which is why even though 2011 was noted by high cotton prices, the retailers passed only small portion of that increase to the consumer in fear of the future deep discounts.

Future Trends According to Euromonitor, due to the economic uncertainty, there is a shift among retailers toward private labels away from the established brands since it allows them to manage prices better. This trend hurts brand name companies since the order volumes have been decreased. Therefore, brand name companies have to make large investments in brand managing in order to be able to keep charging the brand premium. One of the strategies currently employed by many companies is improving customer relationship by making it more personal. The other one is improving retail outlets offering customers very pleasant special shopping experience. Retailers allocate a lot of funds to IT infrastructure, mobile applications development, and customization of the products. In the future, the wholesalers will continue to extend their product lines to the low-end consumer. Economic Outlook for the Apparel Companies
The Apparel Companies are experiencing mixed recovery which is influenced by factors such as financial troubles in Europe, high fuel and input prices (labor, raw materials, transportation charges, and the cost of doing business in general), inflation, and weak consumer demand. Nevertheless, according to Euromonitor, the economic outlook for the Apparel companies looks good due to the stabilizing prices on cotton and the advances in technology, which make companies more efficient along the supply chain and allows them to produce and transport the goods in the most efficient and economical way. Still, the companies, especially wholesaler, have to monitor input prices very closely because they might find themselves unable to borrow enough funds to cover those increases. Another challenge for the wholesalers is dollar appreciation, which makes American goods more expensive overseas, which can hurt their sales volumes and postpone their plans to expand their operations in foreign markets. The prolonged financial crisis in Europe started to affect economy in emerging markets such as BRIC countries on whose growth and consequent consumer demand many developed countries relied. Furthermore, rising wages in China, social unrest in countries such as Pakistan, Malaysia, Egypt, and Thailand, has increased risk of doing business in these countries for many companies. On the other hand, despite the consumer’s reluctance to spend his disposal income and high economic and business uncertainty, the Apparel companies were able to price their items in such a way that helped them to maintain their profit margins without losing sales volumes. According to the US Department of Commerce, sales of apparel in the first two months of 2012 increased 8.5% comparing to the same period of 2011. Though, it is unclear whether the sales were driven by deep discounts and promotions or consumer confidence.

Key Drivers
Improved employment rate in the US will drive the demand and consequently sales for the retailers up. The official unemployment rate is 8.3% as of February of 2012. However, it does not represent the real employment situation in the U.S. It is very likely that it highly underestimates the real unemployment rate because it does not include discouraged workers, temporary and part time workers that want to have a full time job. It also doesn’t show the decrease in salaries and wages among employed. Nevertheless, economic situation in the U.S. gradually though slowly is improving, businesses regaining confidence and starting hiring. All these factors will increase consumer confidence and willingness to spend.
New tactics employed by retailers such as keeping lean inventory levels encourage shoppers to buy sooner in fear that the item they want will be unavailable tomorrow.
Affluent (households with income more than $100,000) shoppers drive sales up despite the high volatility of the market. It is possible that this trend was due to the extended tax cuts on personal income, capital gains and dividends. Also there was observed a large influx of affluent foreign tourists from emerging markets such as China and Brazil, which helped luxury goods to rebound. We believe that demand for luxury brands will continue to go up due to the growing awareness among consumers in in the emerging markets and their desire of exclusivity.
We predict that 2012 Olympic Games will drive the sales of athletic footwear and related apparel and accessories. Apparel companies will present to the market their new quality and technically innovated products. The aggressive marketing campaign usually conducted by Apparel companies during the Olympic Games will also contribute to the high demand among consumers. Furthermore, during the Games, it is observed that the consumer becomes more active and health conscious which will also help to increase sales.
Industry Statistics
Market Capitalization: 1403.4B
Price / Earnings: 16.2
Price / Book: 4.4
Net Profit Margin (mrq): 5.6%
Price To Free Cash Flow (mrq): -140.1
Return on Equity: 19.4%
Total Debt / Equity: 144.3
Dividend Yield: 1.8%

Apparel Industry Performance Relatively to the Market
S&P Composite 1500 combines three leading indices, the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600 to cover approximately 90% of the U.S. market capitalization. It can be used as a representative of the market. Both S&P 500 GICS (Global Industry Classification Standard) Apparel Accessories & Luxury Goods Sub-Industry index and Standard and Poor's 500 Footwear Index are Sub-Industry groups of S&P 500. The former is the industry index for apparel industry, and latter can be used to represent the footwear industry which Nike is in. We can compare the return of these industry indices with that of market index to compare the performance of industries related to market.
Year to date through March 30, 2012, the S&P Apparel, Accessories & Luxury Goods Index advanced 26.4%, versus a 12.1% gain by the S&P 1500 Index. In 2011, the sub-industry index rose 17.2%, while the 1500 fell 0.3%. Year to date through March 30, 2012, the S&P Footwear Index was up 11.5%, versus a 12.1% rise for the S&P 1500 Index. In 2011, the sub-industry index advanced 9.8%, while the 1500 declined 0.3%.
The chart below allows us to take a longer term into consideration. The Apparel Retail Index, the orange line, was just a little bit up and down around the S&P 1500, the green line, before 2009. After that, the Apparel Retail Index gradually started to outperform the market. Until 2012, it is far more above the market. http://www.bloomberg.com/quote/S5APRE:IND. Retrieved June 3, 2012
The apparel and retail industries were among the first sectors to be hurt by the 2008 financial recession, as consumer disposal income decreased, their demand for consumer discretionary decreased sharply. That explains why the apparel index was below the market in late 2008 and early 2009. However, the sector developed many new skills to cope with the downturn. One of them was the ability to make better use of technology in order to manage inventory more skillfully. The last thing retailers want to do is to get caught with excess merchandise they have to unload at a loss, as they did in 2008.
It is this type of technology that helps protect profit margins when consumer spending turns sluggish afterward. The industry's technological innovation seems to be the primary driver of the sector's outperformance relative to the market.

PE ratio in relative method
In relative method, we compare PE ratio of our companies to the P/E ratio of the market (S&P 500) and/or peer group. The PE is calculated by taking the market price per share of common stock and dividing it by the earnings per share (EPS) over the past 12 month. Like any business, the value of a stock is directly related to the company's ability to generate cash. Thus, in a sense, a lower price-earnings ratio often suggests value. The PE ratio can reflect the ability to generate cash. The PE ratio also reflects the market's expectation regarding the future performance of the stock. Higher price-earnings ratio indicates higher expectations for the company. Using the PE ratio, we can compare the relative earning power of the companies regardless of their size or stock price.