Report Says Retailers Are Emerging From A Yearlong Apparel Slump

With consumers in home/auto-related spending mode, the apparel business at retail chains has been in a yearlong funk.

Stores have been struggling to clear excess inventory from shelves to make way for new merchandise, slashing prices and hemorrhaging profit margins as a result.

But things might be looking up for apparel merchants this holiday season, when stores can generate up to 40% of their annual sales.

For the first time since September 2013, apparel industry inventory levels are growing at a rate slower than sales growth, according to a Credit Suisse report released Friday, “CS Softlines Industry Inventory Tracker.”

“As a result, we believe that a nine-month period of excessive markdown activity and margin degradation for the group is coming to an end,” the report said.

Retailers’ apparel inventory positions improved in the second quarter, and merchants are projected to actually generate clothing sales increases in the third quarter, reversing the trend of 3.6% inventory growth ahead of sales following the first quarter, the report said.

Improving segments include teen retailers  — an embattled group that has been losing market share to fast-fast chains such as H&M  — basic apparel merchants, off-price retailers, sporting goods brands, department stores, footwear merchants, fashion chains and outdoor apparel merchants.

Among department stores, Nordstrom JWN +0.28% and Macy’s are the most competitively positioned, as the former “continues to balance growing the business for the future,” and Macy’s forges ahead with its focus on merchandise improvements, the report said.

Among mass merchants, Walmart, for which apparel has long been a weakness, is best positioned to show improvement in the category, emboldened by new management and an emphasis on general merchandise, which includes clothing.

But the news isn’t all good. Handbag retailers, kid’s merchants, and women’s apparel are among the sectors “deteriorating segments,” where inventory levels are outpacing sales, the report said.

But overall, the apparel business at retail chains is improving. “Our view remains that the inventory/sales ratio is the single most important determinant of industry merchandise margins, given high markdown requirements to clear excess inventories and long order lead times (6-9 months) which limits the ability to self-correct,” the report said.

“As a result, improving sector inventory conditions leave us more bullish on the outlook for the apparel retail sector, with comparisons particularly favorable in holiday 2014. “