Will Fashion's Retail Boom Last?

NEW YORK, United States — The era of ubiquitous skinny jeans is officially over. And as a new silhouette gains prominence among mass consumers, downtrodden mall retailers are finally catching a break.

In recent quarters, a number of department stores and mall retailers have reported an uptick in sales, after years of declines. It's a stunning reversal after a disastrous decade, during which many chains lost customers to fast-fashion rivals like Zara and H&M, which beat them to market with cheap skinny jeans and crop tops, as well as online competitors.

But the fashion cycle is taking a turn — one that features a billowy silhouette — and some brands are finding themselves reaping a windfall as consumers head back to the mall to replenish their closets. Urban Outfitters, a Philadelphia-based retailer known for its mass-market hipster sensibility, said last month its same-store sales jumped 13 percent in the second quarter. Abercrombie & Fitch sales grew by a lesser 3 percent, but it was the third quarter in a row that the brand posted a store sales increase. Department stores are experiencing a revival as well, with Nordstrom and Macy's reporting multiple quarters of sales growth.

The most successful retailers are reaping the rewards after spending years speeding up their supply chains, reducing inventories and investing in e-commerce operations. They were quick to roll out wide-legged pants, fashion-forward athleisure and, in the case of American Eagle, body-positive underwear (sales of the company’s Aerie line shot up 27 percent in the second quarter). Now, they’re in front of trends that analysts say could last well into the next decade.

“The best thing that could happen is a new silhouette, because now we can give our customers a guide” to the updated look, said Abercrombie & Fitch chief executive Fran Horowitz. She said Abercrombie is using the popularity of its new styles in pants and other bottoms to guide customers to tops that match.

Urban Outfitters was an early adopter of the retro trend, collaborating with both Calvin Klein and Tommy Hilfiger, as well as Wrangler and Fila, beginning in 2016. Wide-legged pants, distressed denim and logo-heavy apparel have been big sellers, a strategy that's also worked at chains such as Abercrombie & Fitch and Express.

“Different types of denim and a wider leg are popular right now, and that’s been helpful for traditional fashion retailers — especially Urban, which is at the forefront of fashion — so they’re the first ones to benefit,” said B. Riley FBR analyst Susan Anderson, predicting that the types of clothes flying off shelves today are likely to stick around for four or five years.

Hillary Super, the president of apparel and accessories for Urban Outfitters-owned brand Anthropologie, is willing to go even further: in an earnings call, she predicted that the new fashion cycle could be here for “a decade, or maybe even more.”

Retailers are better able to track trends because they have sped up their supply chains, mimicking techniques perfected by fast-fashion chains that can bring a look from the runway to thousands of stores in weeks. These companies are also getting better at demand forecasting, so they’re left with fewer unsold clothes at the end of the season. That means fewer sales and higher profits.

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By testing out certain trends in small quantities of merchandise, retailers can adjust product mix accordingly and quickly fulfill demand for popular items. Last year, for instance, Abercrombie’s Hollister brand tested men’s T-shirts with rose-themed graphics, which sold out quickly. The company was able to then immediately design more products with rose graphics, and delivered $10 million in the next quarter all in the rose-themed category, something that had not been “on our radar when we first concepted the quarter,” Hollister president Kristin Scott said in an earnings call in April.

Abercrombie & Fitch stores are seeing strong demand for items such as side-striped bottoms, high-rise denim, track suits and palazzo pants. The company reported a 3 percent increase in same-store sales in the second quarter, the third consecutive quarter of growth, though below analysts’ average forecast for a 3.6 percent gain.

“The work we’ve done on our supply chain...and the speed-to-market initiative have allowed to us to get after these trends,” chief operating officer Joanne Crevoiserat told BoF.

The question now is whether these gains are sustainable. Some of the sales growth can be attributed to the booming economy and could quickly evaporate in a recession. E-commerce is still rising as a share of apparel sales, and much of that growth is being captured by Amazon and digital-native brands.

And not every retailer will be able to adapt to changing consumer habits, such as a desire to switch seamlessly between shopping online and in stores, or preferring brands that have a distinct point of view.

“We do expect continued sorting of winners and losers," said Matthew Shay, chief executive of the National Retail Federation. “Over time, they will be sorted on who’s able to most quickly make investments both in terms of technology and the right [personnel] to deliver that seamless experience.”

While sales may be on the uptick now for the likes of Abercrombie and Urban Outfitters, investors are not convinced that these gains are sustainable. Shares of both companies plunged after they released quarterly results, amid questions about whether they could continue to grow at the same rate. After all, digital, direct-to-consumer brands — free from having to operate thousands of stores or the need to work with licensing companies to adjust their product mix — are still faster at responding to trends.

“Forever, life is changed from a customer perspective. We’re seeing shipping times decrease. Buy-now, wear-now is common trend. I think in terms of the strong consumer, the future looks bright for one to two years,” said Cowen analyst Oliver Chen. “But what’s important is that retailers must continue to adapt their business model for continuous change.”

This means that the fashion “cycle” itself may be a misnomer when trends can emerge overnight, and sometimes the impetus could be as simple as a post on social media, he added.

“We’re no longer in a ‘cycle’ situation, we’re in an Instagram situation.”

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