The outlook for US apparel and footwear manufacturers has been changed to positive from stable, Moody’s Investors said in a new report. After two challenging years, earnings growth is accelerating beyond the rating agency’s previous expectations and is expected to remain robust over the next 12 to 18 months. Companies will continue to expand both locally and internationally, especially in emerging markets.
“The positive outlook for the US apparel and footwear industry reflects faster-than-anticipated revenue and profit growth,” said Moody’s apparel analyst, Michael Zuccaro. “We expect nearly all our rated companies to show some form of profit growth next year as they realize benefits from cost-saving initiatives, acquisition synergies, new product introductions and targeted marketing, as well as improved macroeconomic conditions.”
Moody’s has revised its 2018 operating profit growth forecast for the industry to 8 percent to 9 percent from 3 percent to 5 percent, though this high growth rate will be difficult to sustain and decelerate to a still strong 6 percent to 7 percent in 2019. Sales are expected to grow 6 percent to 7 percent this year and 4 percent to 5 percent in 2019. Moody’s sales figures include international sales, which are expected to continue to grow at a solid pace, particularly in Asia.
Several large US companies, including Nike, Inc., PVH Corp. and VF Corp., are finally seeing concurrent growth. NIKE is expected to begin to show strong profit growth, supported by its new product pipeline and direct-to-consumer growth, as well as ongoing international expansion and an improved local apparel retail market. PVH Corp. will continue to post a strong performance on the back of solid product offerings and marketing, while VF Corp. should see continued growth at Vans, The North Face and its Work businesses.
For many US apparel and shoe companies, a focus on growing their own direct-to-consumer channels, including both online and brick and mortar stores, has led to better positioning in terms of where consumers are shopping, while also giving them more control over brand messaging and the overall shopping experience. Further, Moody’s expects companies to continue to take advantage of international growth opportunities, particularly in emerging markets such as China.
Risks to the downside for US apparel and shoe companies include a dependence on continued US economic growth, as well as rising tariffs. Moody’s forecasts GDP growth in the low-single digits for the US and Europe, and in the mid-single digits for China, in 2018 and 2019. However, these assumptions could founder if additional tariffs are imposed on imports from China, in which case apparel companies would be negatively impacted by both increased costs and, potentially, dampened US consumer spending.
Moody’s research subscribers can access this report, “Outlook Update: Apparel & Shoes – US: Going positive as broad-based profit growth takes hold” at www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147229.
