In his 2013 book Consumed journalist Harry Wallop coined the phrase "the great democratisation of fashion": “anyone can wear anything” he argued, thanks in large part to plummeting prices and mechanised, offshore garment production which has allowed shoppers in Britain – and frankly, most of the world – to be able to afford a merino wool cardigan, worsted suits and silk shirts in the same way they can afford new 40-inch screen televisions.
Much of that argument still holds true, albeit in a broader sense – there are obviously some items of apparel beyond the budget of the average punter. But one wonders from looking at the performance of London-listed clothing retailers over the past year or two whether this part of the retail industry is becoming more stratified. Luxury retailers continue to enjoy the benefits of a weak pound – tourists have been flocking in – while fast-fashion online pure-plays arguably represent the new frontier of millennial shopping. But what of former high-street stalwarts Marks and Spencer (MKS) and Next (NXT)? Where have they gone wrong compared with the likes of Ted Baker (TED) and JD Sports Fashion (JD.)? And how will the sector hold up once online behemoth Amazon (US:AMZ) turns its attention to its fashion empire?
At the start of September, Amazon launched Find – its first own-brand fashion line. Although the site already sells plenty of clothes, this is Amazon’s first attempt at setting the fashion agenda and tapping into high-street trends. Early forecasts suggest the launch of the line could make the group the biggest apparel seller in the US this year, finally establishing primacy in the fashion sector as it has done on books and multimedia products. It already bought online shoe retailer Zappos in 2010 and owns the Shopbop website as well, but analysts argue that, up to this point, a proper fashion foothold has eluded Jeff Bezos’ company.
Prices for Find items suggest that they're pitched at a broad catchment. They're certainly towards the lower end of the spectrum, which should help maintain the company’s reputation for value and convenience. UK broadsheet The Guardian described the average price point as “less expensive than [Philip Green’s] Topshop” but “a little more expensive than Boohoo”. Shirts retail for around £30 and jeans around £35, while the first advertising campaign is said to have captured the “mood” and “glamour” demanded by fashion-conscious shoppers – arguably something that was lacking from Amazon’s former apparel offerings.
But is Amazon taking a risk with Find? Some fashion journalists believe the range is too slavish to trends, casting doubt over its appeal to more classic dressers traditionally catered to by the likes of M&S. But investors will be more than aware of the latter’s woes in recent years, particularly when it comes to its clothing and general merchandise division. M&S investors have accused management – past and present – of losing sight of the core customer base and failing to keep up with evolving tastes. Last year, chief executive Steve Rowe’s use of the phrase “Mrs M&S” to describe customers prompted widespread derision.
True, product design isn’t M&S’s only issue. Mr Rowe has been forced to completely overhaul the way in which the high-street chain sells its clothes, including severely limiting promotional and sale days, closing underperforming stores and curtailing international expansion. All of this doesn’t come without a price, so profitability has been hurt in the short term.
Close sector peer Next is also hurting, although investors appear to be responding well to the group’s self-help measures imposed earlier this year. As we said at the time of the half-year results at the start of September, few companies could tell their investors that annual pre-tax profit could fall between 5.5 and 13.1 per cent and see their market value increase by more than a tenth. But Next is a master at communicating its progress to the market, and it has a habit of under-selling itself. The fact that sales could grow around 1.5 per cent by the end of the year – admittedly a best-case scenario – has breathed new life into the share price, and makes our recovery-based buy call look well-timed.
But Next has also benefited from a couple of macroeconomic shifts that play to its – and its compatriots’ – favour. The recovery of sterling against the US dollar has prompted some City analysts to suggest the inflationary pressure felt by many apparel retailers this year will be nothing more than a temporary “bubble”, while retail sales data from the Office for National Statistics (ONS) beat expectations. This suggests consumer confidence isn’t as poor as the headlines might have us believe, which in turn implies that recovery for middle-market clothing retailers is possible if products appeal to customers.
Appeal, desirability, demand – buzzwords in the world of fashion, but they're commercial attributes that JD Sports Fashion, Ted Baker and SuperGroup (SGP) – owner of the brand SuperDry – have consistently managed to maintain. It’s arguable that each of these businesses knows exactly who their customer is, from brand-hungry teens to more affluent City-types, and their decision to stay loyal to their customers has been key to their success. They’re not interested in trends or setting the agenda. This can be left to the luxury end of the sector from which the ‘premium lifestyle’ brands then take their lead.
Looking at the performance of luxury retail stocks over the past year, you could be misled into thinking this is where consumer appetite ultimately lies. But the devaluation in the pound against the US dollar, as well as other global currencies, has been a real boon. Take Burberry (BRBY). The group has enjoyed a substantial currency tailwind in 2017, in that it earns much of its revenue overseas before translating it back into sterling for reporting purposes. But, at the same time, the weak pound has acted as a significant draw for tourists wanting to splurge on expensive items at the best possible exchange rates. How much of this has artificially flattered earnings for the luxury fashion house remains to be seen, but we still consider it a market leader, particularly when it comes to the group’s digital developments. A recent high-profile management change could also be partly responsible for the momentum currently behind the share price.
Favourites:
Of the online pure-plays our favourite remains Asos. The retailer has first-mover advantage over rivals such as Boohoo.com and market newcomer Quiz (QUIZ), while still offering future growth potential. There could even be a UK margin recovery on the cards if the pound continues to strengthen against the dollar and costs become more manageable. From the luxury side, we still like Burberry following the management reshuffle as well as conglomerate group LVMH (MC.) – owner of brands such as Louis Vuitton – which reported record results at the start of the year.
Outsiders:
For now, we see Boohoo.com's shares as overvalued considering the level of investment management is making, not least in prices to remain to competitive. There’s an outside chance that Marks and Spencer will pull off a full recovery in its general merchandise division, but we still like the shares from an income perspective given their circa 5 per cent dividend yield. Players such as N Brown (BWNG), Bonmarché (BON) and French Connection (FCCN) have much more work to do in our eyes to make their business models relevant to modern customers.
The Expert View
In August, retailers taught us a thing or two about 'Back to School', with children’s clothes and footwear obtaining top marks in terms of sales. Elsewhere, growth in home improvement sales – including furniture – point to the influence of staycations, although it could also be that home furnishing retailers are not having to compete with the likes of the Olympics for attention this year.
Mirroring the successes of the high street, online sales continued to go from strength to strength, with all categories noting growth. While retailers have managed to achieve stronger-than-expected growth, adding to this could be the fact that consumers appear to be turning a blind eye to the potential crush on spending power to come. The industry still needs to overcome further devaluation of the pound and the increased costs therein. In fact, August retail sales figures could tell a less positive story about the health of consumer spending than it might seem at first glance. Non-food sales have only just recovered to levels seen two years ago, after a dismal August in 2016; while strong figures for food are largely the result of rising prices, leaving growth in volume terms weaker than last year.
Stark challenges lurk around the corner. Purchasing decisions are very much dictated by a shrinking pool of discretionary consumer spend, with the amount of money in people’s pockets set to be dented by inflation and statutory rises in employee pension contributions in a few months’ time. It’s therefore crucial to protect consumers wherever possible from further cost pressures. For government, this includes ensuring continued choice and availability of affordable, quality products for shoppers post-Brexit, by securing a strong deal on customs and tariff-free trade with the EU.
Comment from Helen Dickenson, chief executive at the British Retail Consortium and Don Williams, retail partner at KPMG
