The Fashion Retailer Fashion Industry Update Q4 2022

Stephen J. Arias

I’ve been following RBC Capital Markets, specially their retail insights, for a while. During my last expert call with their European team, we discussed about how important is to be agile in such uncertain times. Fast and agile from design to delivery, implementing new processes boosted by digital assets and developing a new corporate culture.

The latest report “European General Retail primer; sector on sale” (Richard Chamberlain. RBC Europe Limited. October 2022) is worth reading for everyone interested on general apparel information including sales by activity and geography, market sizes and shares, margins and cost structures, pricing surveys, industry and ESG themes, macro trends, historical valuation ranges and SWOT analyses for each company under coverage. Broad insights to faster react to volatile scenarios.

In these uncertain times, experts agree on one thing: nobody knows what might happen next… So, there are 2 options:

  1. Analyze all kind of historical data, analytics modeling and forecasting, trying to identify black swans and contributing to analysis paralysis
  2. Prepare your company to be flexible and fast to react to new opportunities or to overcome new challenges.

Both options require decision analysis but there is a big difference on how to take advantage of data. The competitive advantage is not data itself but how your company’s culture, talent and processes are orchestrated to drive agile decision making models. Retailers are adapting to digitization but the big challenge is not implementing technology but adapting the organization to new working dynamics. This is what I understand by business transformation. Obviously, data is key and tech is allowing to automate and centralize information to improve decision-making.

The following insights, from RBC report, should guide retail executives from design, planning, to supply chain or marketing areas.

Cost of living squeeze to bite more in 2023…and 2024. We expect another year of pressure on real household incomes next year. Although a consumer collapse should be avoided, due to energy price caps and the nature of the UK housing market, consumers are still likely to feel poorer, as most cost lines are rising in excess of wage growth. A tough year in 2023 is widely expected though. What is of more concern to us is a consumer recession lasting into 2024, as the lagged effect of rising interest rates works its way through, and due to falls in employment. We see a broader based consumer downturn next year and in 2024, rather than being concentrated amongst lower-income shoppers. However, there remains a substantial pool of built-up savings to be released, which should cushion the blow for middle to upper mass market brands in the sector.

FX headwinds to be followed by more discounting. Year to date the USD has strengthened versus the Euro by 13% and versus the GBP by 16%. This creates a material sourcing headwind in 2023, particularly for companies reliant on the Far East for sourcing. There is some mitigation, e.g., weaker local supplier currencies, lower freight costs (now 6-7% of COGS for a typical apparel retailer), some lower commodity prices, e.g., cotton, and for some companies overseas revenue exposure. We expect retailers to try to pass on cost pressure. But the extent of price rises required runs the risk of a greater adverse volume response. With consumers becoming more price conscious, we see the biggest threat to margins as higher discounting, as a result of price rises and elevated inventories in the sector.

Leverage and balance sheets in focus. One of the most important questions to ask about early cycle retailers, is whether a company’s balance sheet is strong enough to survive a downturn and a rising interest rate environment. Compared to before the Financial Crisis (2007-09), leverage ratios in general are lower in our sector, and several companies have a net funds position. There is also little variable interest rate debt, and potential for higher interest income on cash balances. However, we do see potential for higher net interest costs on refinancing for some of the more cyclical, lower margin, UK general and online retailers.

Strong to get stronger again; channel shift normalising, consolidation potential further on in the cycle. In previous economic downturns, the stronger retailers have gained more share than usual from weaker specialists and independents. We are starting to see this play out again in markets like Spain and Germany. Stronger retailers are able to benefit from their scale, supplier relationships and pricing power. This year we saw a better-than-expected performance by stores and a weaker-than-expected performance by online retailers, but we expect this to even out now and for online to start to outperform again from next year. We also see potential for consolidation further on in the cycle, perhaps by US companies taking advantage of the strong USD to buy European/UK assets at a lower price”.

RBC report is very complete and this is a “curated” selection for TFR readers:


Margins and Cost Structures : European leading retailers selection

Cost breakdown of a garment


Cotton Price Chart

Polyester Price Chart

Viscose Price Index Chart


Freight Cost trends


Theoretical gross margin headwind and required price increases (ex hedging)

“We note that the retailers facing the highest degree of USD margin headwind are Primark and H&M, which source the highest amount of product in USD and also have fairly low gross margins. We note that the least exposed under our coverage are the travel retailers, who source relatively little in USD. As ever it should be the level of full price sales and associated discounting that will have the biggest impact on margins in the sector, which will likely be driven by volume-related impacts as a result of price increases.

We note that a number of retailers should also benefit from currency translation offset on the topline. We believe that JD Sports is the best positioned to benefit from this, given its relatively low proportion of USD sourcing (c.10%) and c.30% sales exposure to US now. Both Inditex and Hugo Boss also source relatively small proportions of the product from Asia in USD and also both should see offset from an increasing natural USD hedge from their toplines (Inditex and BOSS have c.10% and c.19% sales exposure to the US, respectively)”.

“The exhibit above shows the results of our latest entry point apparel relative pricing survey, which we run at the start of each season for the UK, and periodically in other major markets. This measures relative pricing across a range of categories in womenswear, menswear and kidswear based on a sample of c.45 products.

In general, we are seeing strong price increases for a number of retailers, to protect margins given significant input cost pressure from higher raw material and freight costs this season, as well as the relatively stronger USD vs the EUR/GBP.

We note that both Uniqlo and Zara have moved up in relative pricing. We believe that their higher-end price positioning and more middle-income customer demographic should make it easier to pass on price increases to customers”.


Arctic Oscillation indicator suggests a colder winter this year – a potential positive for apparel retailers.

This states that the level of snow coverage at the end of September provides a guide as to the average winter temperatures expected in Northern Europe and the eastern USA. Without going into detail it’s all about pressures and effectively states how far south the ‘cold’ arctic weather can travel. It has been accurate over 80% of the time and 100% of the time over the last decade.

According to the snow coverage, the winter of 2022/23 should be colder than last year, i.e., more helpful for retailers, provided the colder weather comes more this side of Christmas, and there isn’t significant snow disruption. We wonder also whether apparel may receive a boost from people looking to save on heating bills this winter.


Given macro headwinds, including elevated freight and raw material costs, and now the strong USD leading to cost inflation in products sourced from Asia, we have been seeing a number of retailers looking to offset pressure through price increases. We expect this trend to continue into 2023. Coupled with this, we note that pressures on discretionary income are also leading to a reduction in consumer spending power and consumer confidence.

We expect these factors together to lead to reduced demand from consumers and, as such, we see potential for higher-than-normal levels of discounting in the sector in 2023. We expect that this will be especially prevalent amongst retailers who source a relatively large proportion of product from Asia, and also those operating at the value end of the sector, where price competition remains fierce and price rises are more noticeable by price conscious consumers.

Inventory levels versus sales forecasts

Nike’s 1Q23 results demonstrate that it is also not immune, with material inventory build (+44% yoy). Donahoe, Nike’s CEO, explained that when Nike factories in Vietnam and Indonesia had to close after Covid-19 outbreaks, goods arrived late for this year’s spring, summer and fall seasons. Then Nike’s upcoming holiday season orders arrived earlier than planned. Meanwhile, the brand still has merchandise orders in transit. Nike will discount items to move them, and those promotions will weigh on its profitability for the coming quarters, he added (September 2022).


Circularity H&M in particular has been an early mover in terms of embracing circularity. The company aims to introduce sustainability across the value chain by reusing packaging waste and using 100% recycled or sustainably sourced materials. Through shifting to using materials like Lyocell, recycled polyester and Circulose, H&M has reduced its impact on the environment and workers. Processing less raw material means a lower water and chemical usage and generally better conditions for factory workers.

Inditex is committed to using 100% sustainable cotton (i.e., organic, Better Cotton Initiative and recycled) by 2025 and is actively working with the Textile Exchange and the Better Cotton Initiative to promote organic cotton usage and improve living conditions of growers. The company has also collaborated with MIT to fund a $4m multi-year agreement for research initiatives into the circular economy and new sustainability technologies, and created two MIT fellowships to promote study and research into operations, management, material sciences and engineering.

Climate Change – Retailers and distributors are looking to reduce the impact of their operations on the environment and are leveraging business relationships to encourage change from their partners and the wider industry. A good example of this is Zalando, who have set their own targets of cutting carbon emissions by 80% by 2025, but is also working towards an aim to have 90% of key partners set similar science-based targets (SBTs) until 2025.




Hugo Boss


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