- With the world reopening, albeit in fits and starts, and many consumers venturing out of their homes again, luxury apparel and accessory retailers have been seeing strong sales momentum.
- This spending trend could be poised to continue, bolstered by meaningful wage growth, higher levels of employment, and healthy consumer balance sheets.
- Retailers currently carry low levels of inventory, and the inventory they carry is fresh and in style—creating an unprecedented opportunity to sell at full prices.
Compared with the early months of the pandemic—when many people were stuck at home and had little reason to dress to impress—consumers have returned in a big way to spending on apparel and accessories.
Luxury retailers have seen a particular boost. Over the course of 2021, some global luxury apparel and accessory companies repeatedly beat earnings estimates, while also raising earnings guidance for future quarters. Profitability has generally been improving, with luxury retailers also reporting strengthening revenue momentum quarter to quarter. In fact, despite the lingering challenges posed by the pandemic, luxury retail sales are poised to surpass 2019's pre-pandemic levels, and even set a new record in 2021.1
Runway for growth
Indeed, consumer spending is likely to continue to recover over the next few years, supported by higher levels of employment and meaningful wage growth. Moreover, consumer balance sheets remain strong. The U.S. household debt service ratio (which measures debt payments as a percentage of disposable income) recently hit its lowest level on record.2
Higher-income households, in particular, may be in the strongest shape. While U.S. households have been saving more, on average, during the pandemic, most of those savings have gone to the wealthiest 20% of Americans.3 Many consumers are still hesitant to spend on travel and entertainment—given lingering threats from COVID variants—so instead, wealthier consumers are spending some of that cash on high-end fashion and accessories.
Equally as important, consumer discretionary companies, or companies that sell nonessential goods and services, are generally in strong financial shape. The pandemic prompted many global luxury retailers to improve efficiency by significantly cutting costs, closing less-profitable retail locations, focusing on digital sales, reducing the variety of inventory they stock, and cutting the number of promotions and sales they offer. As a result, many companies sport solid balance sheets and could be in a strong position to return capital to shareholders, such as through dividends and buybacks.
Unlike their U.S.-only counterparts, international brands within the consumer discretionary sector also benefit from booming sales in fast-growing countries like China, which generally helps boost profit margins.
Fresh looks, full prices
In the first months of the pandemic, many retailers were desperate to unload excess stale inventory, and so were forced to run aggressive promotions and sales—leading to depressed gross margins (which measure income after accounting for the cost of goods sold (COGS) ). However, current inventory levels are low, and the inventory in stock is generally very fresh. This freshness signals a potentially unprecedented opportunity to sell at full prices—a trend that could sustain itself for quite some time.
Source: FactSet Research Systems, Empirical Research Partners Analysis. Drawn from the largest 1,500 stocks. Value-weighted data for companies reporting in all periods. Apparel-related includes department stores, apparel retailers, and textiles, apparel, and luxury goods. Freshness is purchases growth less inventory growth. Purchases defined as current period COGS plus the sequential change in inventory level.
Investors may have good reason to continue to be bullish on luxury apparel and accessory retailers. As the world continues to reopen (albeit in fits and starts) and people gradually head back to more pre-pandemic activities, many consumers may be looking to refresh their wardrobes. While some stocks have experienced recent weakness on concerns over manufacturing and supply-chain disruptions, these periods of weakness could prove to represent buying opportunities.