Hilfiger’s New Pricing Power Shows Apparel Profit Holding Up

Pricing Power Shows Apparel Profits Holding Up
Pent-up demand means consumers are allocating more of their dollars to apparel and less to home improvement and electronics. Photographer: Ramin Talaie/Bloomberg

Retailers are managing to increase prices and pass on higher costs to shoppers, even in the face of concern that an economic rebound is waning.

PVH Corp., which owns Tommy Hilfiger, said profit would approach the high end of its projections this year after raising prices. VF Corp., maker of 7 For All Mankind jeans, is boosting prices after raising them earlier this year had little impact on unit volume. Levi Strauss & Co. attributed 7 percent quarterly revenue growth to “select” price increases on men’s jeans, and plans to extend those to women, teens and kids. All three companies said they were positive about the rest of 2011.

“Retailers have passed through apparel price increases more successfully than most people anticipated several months ago,” said Jeffrey Klinefelter, an analyst with Piper Jaffray Cos. in Minneapolis. “Investors will have more confidence that they will hit the numbers for the second half.”

Higher apparel prices accounted for 1 percentage point of the 4.6 percent increase U.S. chains reported in sales at stores open at least a year in July, Michael Niemira, chief economist of the International Council of Shopping Centers, estimates. Those same-store sales will climb 4.25 percent in 2011, compared with 3.5 percent last year, he says.

Households will increase apparel spending by 4 percent to an average $328 this back-to-school season, according to a survey released today by Brand Keys Inc., a New York-based brand research firm.

No Escape

“I have not changed my view that the consumer would accept price increases because all the retailers would have the same cost structure and ultimately would start to pass that through,” Niemira said Aug. 5. “It’s not like the consumer can go elsewhere; there is no escape hatch. That pricing power is coming through into higher profits.”

Average prices in the apparel market rose more than 5 percent January through May from the same period a year earlier, with consumers willing to absorb them, NPD Group Inc., a Port Washington, New York-based market research firm, said Aug. 2. The higher prices followed rising costs for transportation, materials -- especially cotton -- and labor, particularly in China. The clothing industry had faced consumer resistance to apparel price increases for two decades.

Cotton futures closed at $1.0158 a pound in New York on Aug. 5, down from a record price of $2.197 on March 7 and up 27 percent from a year earlier. The core U.S. consumer price index, which excludes volatile food and energy, rose 0.3 percent in both May and June for the first back to back gain in three years.

Warning Signs

Among recent warning signs for the wider consumer sector, and the economy in general, was a 0.2 percent drop in purchases in June, according to the Commerce Department. It was the first such fall in almost two years, and provided evidence that the hiring slump is hurting household confidence. The U.S. stock market on Aug. 4 suffered its biggest decline in more than two years partly on fears of a double-dip recession.

If the economy falters, the pricing power may not be as strong, which means fewer apparel units will sell at the higher prices, Klinefelter said.

There will be clear winners and losers, too.

“It’s going to be very company-specific,” Christine Chen, an analyst at Needham & Co. said. “If you have unique product, pricing power will exist. But if you have a commodity product then, no, there will be no pricing power.”

National Brands

PVH and Greensboro, North Carolina-based VF enjoy the benefit of owning strong national brands that consumers feel are worth paying up for. Less well-positioned are Gap Inc., the largest U.S. apparel chain, whose July sales retreated 5 percent, and teen retailer Aeropostale Inc., which reported a 14 percent comparable sales drop in the second quarter.

Even the more robust apparel makers aren’t passing along all the cost increases, so their gross margin, the share of sales after subtracting the cost of goods sold, will still narrow. PVH’s gross margin, for example, will shrink 150 to 200 basis points this year, Chief Executive Officer Emanuel Chirico said.

PVH, based in New York, is seeing 5 percent to 7 percent average unit retail growth since it started increasing prices in the spring, Chirico said. It is raising its average retail ticket prices 12 percent to 15 percent after experiencing average apparel product cost increases of 15 percent, he said.

“We think there’s significant elasticity,” Chirico said. “So it really gives us a strong feeling about how the second half will progress.”

In a sign of industry price power, some retailers are reducing unit orders just 5 percent rather than 10 percent in the face of 10 percent price increases, Klinefelter said.

Pricing Agreements

In addition, the national apparel brands have passed on higher prices without major retailers breaking pricing agreements or offering deep discounts, he added. That “relative parity” across the market means the consumer is accepting the price jumps so far, he said.

Pent-up demand for apparel, one of the harder hit categories during the recession, means consumers are allocating more of their dollars to that category and less to home improvement and electronics, Klinefelter said. Freed-up budgets make it easier to pass through price increases, he said.

Apparel sales rose 6.2 percent in July from a year earlier, MasterCard Advisors SpendingPulse said Aug. 4. The increase bested year-over-year gains in the previous two months, while electronics and furniture fell, it said.

Higher Costs

Retailers including Polo Ralph Lauren Corp. plan to raise prices more on higher-end items than on less expensive goods because low-income consumers have been hurt simultaneously by higher costs for food, apparel and gasoline.

“A T-shirt going from $5.99 to $7.99, is a lot different than a shirt going from $200 to $205 or $210,” Saks Inc. CEO Steve Sadove said at an April investors conference.

The apparel industry is also adding such embellishments as bows and ribbons, then raising prices more than the cost of the additional materials, said Chen, who is based in San Francisco.

To enhance the ultimate price out the door, the industry also is controlling inventories to minimize discounts, said Madison Riley, a New York-based managing director for Kurt Salmon, a retail consulting firm.

Now that cotton prices have retreated, everyone is wondering what this is going to mean for apparel prices in the spring, Chen said.

“Will they keep the margin, or lower prices?” Chen said. “My guess is that they will keep the margin for themselves.”

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