The UK Apparel Handbook 2017 Outlook November 30 2016 · Market Growth The UK apparel market has...

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DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

Deep Dive: The UK Apparel

Handbook 2017 Outlook

D E B O R A H W E I N S W I G M a n a g i n g D i r e c t o r ,

F u n g G l o b a l R e t a i l & T e c h n o l o g y d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m

U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9

C N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

1) FashionretailershavestruggledwithweaksalesintheUKmarketinthelastfewmonths,and2016isshapingup tobe the toughest year forUKapparel sales since2009.

2) WebelievethatthesoftnessintheUKapparelmarketwill continue in 2017, although growth next yearwillbeagainstundemandingcomparatives.

3) The depreciation of the pound will increase sourcingcosts in apparel. However, the UK market facesexceptionally strong competition, arising in large partfrom growth in capacity, and this will keep a lid onpriceincreases.

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TABLEOFCONTENTS

EXECUTIVESUMMARY.......................................................................................................................................3

INTRODUCTION.................................................................................................................................................5

THEMARKET......................................................................................................................................................5The£60BillionUKApparelMarketSlowsSharply..................................................................................................5Segmentation..........................................................................................................................................................6

PrivateLabelinFashion......................................................................................................................................72016theToughestYearforUKApparelSince2009...............................................................................................8WhytheDownturn?................................................................................................................................................92017Outlook.........................................................................................................................................................10ByDistributionChannel........................................................................................................................................10

OnlineProspects...............................................................................................................................................11ProductPriceInflation:TheImpactofDepreciation.............................................................................................12BenefitsofaLowerPound....................................................................................................................................13

THERETAILERS..................................................................................................................................................14TheUK’sBiggestApparelRetailers.......................................................................................................................14TheConsensusViewof2017Performance...........................................................................................................15

MajorMarketDynamicsinCashTerms............................................................................................................16Retailers’Forecast2017GrowthinDetail........................................................................................................16

GrossMarginProspects........................................................................................................................................18WinnersandLosersin2017..................................................................................................................................18

KEYTAKEAWAYS...............................................................................................................................................20

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EXECUTIVESUMMARY

MarketGrowthTheUKapparelmarkethasenjoyedstronggrowthinrecentyears:

• British shoppers spent £60.2 billion on clothing and footwear in2015,upnearly5%yearoveryear,accordingtoouranalysisofdatafromtheUK’sOfficeforNationalStatistics(ONS).

• Between2010and2015,themarketgrewby£11.5billion,oralmost24%.

• Spendinggrewatacompoundannualgrowthrateof4.3%inthelastfiveyears.

However, theapparel category sawamajor slowdownbegin in late2015,and2016hasbeenanexceptionallyweakyear:

• Weestimate thatUK apparel saleswill grow at a subdued pace of1.0%yearoveryear,to£60.8billion,in2016.

• For the tenmonthsendedOctober2016,averagemonthly clothingandfootwearsalesgrewby1.0%.

• For2017,weforecastaminorsalesgrowthrebound,toaround2.0%.

Onepositive factor for2017 is thatgrowth in theapparelcategorywillbemeasuredagainsttheundemandingcomparativesofthisyear.However,if,aswebelieve,salesarebeingimpactedatleastinpartbyacyclicalshifttospending on leisure services instead of apparel, there is little reason toexpectastrongnear-termbounceback.

E-CommerceAlmost a quarter of all apparel sales are now made online: e-commerceaccountedfor23%oftotalUKapparelsalesasofJune2016,upfrom21%in2015.FortheperiodendedJuly31,2016,onlinefashionsalesgrewby7.5%year over year, while store sales declined by 3%, according to KantarWorldpanel.

Basedonour forecast that total apparel saleswill growby approximately2.0% next year, we anticipate that online category sales will grow byapproximately9.0%–10.0%.

Source:Shutterstock

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InflationThe depreciation of the pound will increase sourcing costs in apparel.Looking ahead to 2017, we envisage apparel inflation remaining low, atabout 0.0%–1.0%. The apparel market faces exceptionally strongcompetition,arisinginlargepartfromgrowthincapacity(i.e.,thenumberofplayers),andthiswillkeepalidonpriceincreases.

We believe that certain retailers will be able to withstand the lacklustermarket conditions and continue to post strong sales at the expense ofweaker incumbents. We also believe that pure plays such as ASOS,Boohoo.comandZalandowillcontinuetogainsalesintheUKmarketattheexpenseofdepartmentstoresandapparelspecialistchains.

Additionally,weexpecttoseecontinuedoutperformancebyretailersthatareexposedtotheathleisuretrendandbypremiumlifestylebrandsandretailers.

Figure1.UKApparelMarket:PositiveandNegativeTrends

Tourist spending: Retailers, especially those selling high-end products, will benefitfromhighertouristspendingduetoweaknessinthepoundversusothercurrencies.

Onlinepureplays:OnlinepureplayssuchasASOSandBoohoo.comareexpectedtomaintain annual sales growth of more than 20%. These retailers generate a highproportionoftheirsalesoverseas,sotheirreportedrevenueswillbeboostedbythedepreciationofthepoundaswellasbyunderlyingoutperformance.

Lifestylebrands:BrandsandretailerssuchasTedBakerandSuperGroup—whichwecharacterizeaslifestylebrands—areexpectedtocontinuetooutperformonboththetopandbottomline.

Athleisuretrend:Demandforathleisurewear isexpectedtocontinueboostingsalesof sports apparel.We see someoverlapbetween leadingathleisurebrands suchasLululemonAthleticaandSweatyBettyandthelifestylebrandssegment.

Global retailers: British retailers that derive a sizable portion of their sales frominternational markets with stronger currencies will experience a foreign currencytailwindthroughtranslationeffects.

Weak mass-market apparel spending: Mass-market apparel is experiencing aperiod of unusually weak demand. One factor appears to be that consumers arespendingmore on leisure activities, such as dining out, travel and entertainment,andarelimitingtheirfashionpurchasestopayfortheseactivities.

Weaknessofthepound:UKretailersarefacinghigherinputcostpressuresduetosourcing inUSdollars.Retailerswillbe forced toeither raisepricesandsee lowerrevenuesorexperiencemarginerosion.Inthemidmarket,weseethelatterasmorelikely,sinceweakdemandlimitsopportunitiestopushupprices.

Macroeconomicheadwinds:TheUKBrexitdecisionandDonaldTrump’selectionasPresidentoftheUSbringwiththemariskthateconomicindicatorswillbehitandthatconsumerconfidencewillsuffer.

Source:FungGlobalRetail&Technology

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Britishshoppersspent£60.2billiononapparelin2015,upnearly5%yearoveryear.

INTRODUCTIONIn this report,we bring together the latest data and forecasts for theUKapparel retailmarketand lookaheadto theprospects for themarket into2017. We provide market sizes and segmentation, discuss the ongoingweakness inUKapparelsales, lookat inflationandthepotential impactofthe depreciation of the pound, and consider the consensus forecasts forperformanceatmajorfashionretailersin2017.

Forthepurposesofthisreport,wedefineapparelasthetotalofclothing,footwearandapparelaccessories.

Source:Shutterstock

Wedividethereportintotwomainsections:

The Market: In this section, we provide data and insight into the size,segmentationandprospectsfortheapparelmarket.

TheRetailers:Inthissection,welookatindividualretailers,includingtheirexpectedtop-lineperformancein2017.

THEMARKET

The£60BillionUKApparelMarketSlowsSharply

TheUKapparelmarkethasenjoyedstronggrowthinrecentyears:

• Britishshoppersspent£60.2billiononapparelin2015,upnearly5%yearoveryear,accordingtoouranalysisofdatafromtheONS.

• Between2010and2015,themarketgrewby£11.5billion,oralmost24%.

• Spendinggrewatacompoundannualgrowthrateof4.3%inthelastfiveyears.

However,thecategorysawamajorslowdownbegininlate2015,and2016hasbeenanexceptionallyweakyear:

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WeestimatethatUKapparelsaleswillgrowatasubduedpaceof1.0%yearoveryear,to£60.8billion,in2016.

Clothingmadeupalmost79%ofthetotalapparelmarketin2015.

• Weestimate thatUK apparel saleswill grow at a subdued pace of1.0%yearoveryear,to£60.8billion,in2016.

• ForthetenmonthsendedOctober2016,apparelsalesgrewby1.0%yearoveryear.

• For2017,weforecastaminorsalesgrowthrebound,toaround2%.

Wediscuss the currentweaknessof the apparelmarket and thebasis forour2017estimatelaterinthissection.

Figure2.TotalUKClothing,FootwearandAccessoriesSales(Incl.SalesTax)

GBPMil. YoY%Change

2010 48,708 7.4

2011 51,358 5.4

2012 52,794 2.8

2013 55,224 4.6

2014 57,488 4.1

2015 60,194 4.7

2016E 60,796 1.0

2017E 62,012 2.0

Source:ONS/FungGlobalRetail&Technology

Some2.1billionunitsofclothingand253millionunitsof footwearwillbesold in the UK this year, according to Euromonitor International’sestimations.WenotethatthesefigureswerelastupdatedinJanuary2016,whichwasintheearlystagesoftheappareldownturnandbeforetheBrexitreferendumwasheld.

Figure3.TotalUKUnitVolumeSalesofApparel(Mil.)

2015 2016E 2017E

Clothing* 2,090.7 2,118.4 2,146.5

Footwear 251.1 253.2 254.3

ApparelTotal 2,341.8 2,371.5 2,400.8

*IncludingclothingaccessoriessuchasbeltsandhatsSource:EuromonitorInternational

SegmentationClothingmadeupalmost79%of the totalUKapparelmarket in2015,weestimate,basedonONSdata.Thissegmentationequatesto2015salesof:

• £47.5billioninclothing

• £9.4billioninfootwear

• £3.3billioninapparelaccessories

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Figure4.UKApparelMarketSegmentation(%)

Source:ONS/FungGlobalRetail&Technology

Within the core category of clothing, womenswear makes up the largestportionoftheUKmarket,accountingfor55%ofsalesin2015.Euromonitorsays that menswear lost share of the total clothing market over the fiveyears through2015,butawealthofother sources suggest that growth inmenswearhasoutpaced,andisstilloutpacing,growthinwomenswear.Forexample,researchfirmMintelsaysthatmenswearisgrowingatafasterclipthanwomenswear is, and thecompany’sanalysts forecast thatmenswearwillgrowby22.5%inthefiveyearsthrough2020.

Figure5.UKClothingMarketValue,byCategory(%)

Source:EuromonitorInternational/FungGlobalRetail&Technology

PrivateLabelinFashionTheUKclothingmarketisdominatedbyprivatelabelmerchandise.In2014,brandedmerchandiseaccountedforjust21.2%ofUKapparelsales,versus78.8%forprivatelabel,accordingtoKantarWorldpanel.Giventhataveragepricesarelowerforprivatelabelitems,theskewisevenstrongerinvolumeterms.

79.1 79.8 79.0 79.0 78.7 78.9

15.3 14.5 15.0 14.6 15.4 15.6

5.6 5.8 6.0 6.4 6.0 5.5

2010 2011 2012 2013 2014 2015

Accessories

Footwear

Clothing

54.6 54.8 55.2 55.1 55.1 55.0

28.5 28.4 28.3 28.3 28.2 28.2

14.4 14.2 14.0 14.0 14.1 14.2

2.4 2.5 2.5 2.6 2.6 2.6

2010 2011 2012 2013 2014 2015

Hosiery

Childrenswear

Menswear

Womenswear

TheUKapparelmarketisdominatedbyprivatelabelmerchandise.

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Figure6.UKApparelSalesDistribution,2014

MarketValue(£) Volume(UnitsSold)

Branded 21.2% 11.7%

PrivateLabel 78.8% 88.3%

Source:KantarWorldpanel

In the UK, private label is particularly dominant in the denim category,currentlyaccounting for85%of sales,byvalue, versus15%underbrands,according to Kantar Worldpanel. However, the denim category has beendecliningduetotheupwardtrendofathleisure,andsalesofjoggingpantsandtightshavebeenoutperformingsalesofjeans.

2016theToughestYearforUKApparelSince2009Thedownturnintheapparelmarkethasbeensuddenandsevere.Itbeganinlater2015,whenawarmautumninitiallyappearedtobehittingfashionsales. An exceptionally weak Christmas 2015 and a poor performancethrough 2016 have made clear, however, that the downturn is notprincipallyduetoweather.

KantarWorldpanel reported that apparel, footwear and accessories salesdeclined for four consecutivemonths up to September 25, in the biggestdownturn in UK fashion since 2009. UK apparel sales declined by £700millioninthe52weeksendedSeptember25.

ThedatachartedbelowarefromtheONS,andshowthesporadicnegativegrowthseensofarthisyear.

The latest data at the time ofwriting showed a sudden jump in categorysales, helped by colder weather, but we do not anticipate this kind ofgrowthcontinuinginthenearterm.

Figure7.UKTotalApparelSales(YoY%Change)

ThroughOctober2016Source:ONS/FungGlobalRetail&Technology

Average:1.0%

7.0%

(6)%

(4)%

(2)%

0%

2%

4%

6%

8%

10%

2015

2016

Average4.8%

Thedownturnintheapparelmarkethasbeensuddenandsevere.

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Theslowdownhasbeenevensharperforapparelspecialiststoresthanforthemarketasawhole,principallybecausethesectorhasbeenlosingsharetoInternet-onlyretailers.Invalueandvolumeterms,2016hasbeenaverypooryearforthespecialistsector.Theslumpreacheditslowpoint(sofar)inApril,whenspecialiststoressawan8.1%valuedecline.Majornamesinthesector,includingMarks&Spencer(M&S),Next,Primark,NewLookandGap,havereportedfallingunderlyingsales.

Figure8.UKApparelSpecialistStores’Sales(YoY%Change)

ThroughOctober2016Source:ONS

AccordingtoaPwCsurvey,apparelstoresclosedata fasterratethananyother type of store in the UK in the first six months of 2016. A net 95women’sandmen’sclothingstoresshuttheirdoors inthefirstsixmonthsof2016.Anadditional87fashionshopsthatcarriedaccessoriesandjewelryalsoclosed.

WhytheDownturn?Wethinkonereasonfortheweakness inapparelisthatBritishconsumersare prioritizing spending on leisure services over spending on physicalproducts. While apparel sales dwindled, in the second quarter of 2016(latestONSdata), consumersgrewtheir spendingby9.0%on recreationalandsportingservices,by5.4%onhotels,andby4.7%ondiningout.

The UK’s second-biggest apparel retailer, Next, flagged the hit to theapparelsectorearlierthisyear,whenitsmanagementnoted:

There may be a cyclical move away from spending on clothingback into areas that suffered the most during the creditcrunch…travel,recreationandgoingout.

Given the strengthof theUKeconomy, includinghighemployment levels,lowinflationandsolidwagegrowth,thereislittlefundamentalreasonwhyshoppersshouldhavelimitedtheirapparelspendingsosharply inthepastyear.Inthiscontext,theexplanationputforwardbyNextappearstobethemostlikely.

3.03.6

(10)(8)(6)(4)(2)0246810

2015 2016

Volume Value

Theslowdownhasbeenevensharperforapparelspecialiststoresthanforthemarketasawhole.

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2017OutlookWebelievethatthesoftnessintheUKapparelmarketwillcontinuein2017.Asnotedabove,webelieveUKapparelsaleswillgrowatamutedpaceofaround 2.0% in 2017, well below the average annual growth rates ofapproximately4%inthepastfewyears.

Onepositivefactorfor2017growthisthat itwillbemeasuredagainsttheundemandingcomparativesof this year.However,wesee several reasonsforweaknesscontinuinginto2017:

• If, aswebelieve, theapparel category isbeing impactedat least inpart by a cyclical shift to spending on leisure services instead ofapparel,thereislittlereasontoexpectanear-termbounceback.

• Moreover, any ongoing political and macroeconomic uncertaintyregarding the Brexit negotiations could further dent consumers’willingnesstomakediscretionarypurchases,includingapparel.

• Aswechartbelow,UKconsumersalreadyspendmoreonapparel,onaverage, than do their peers in other major European economies,suggesting that there is substantial scope for Brits to flex theirspendingdownward.

Figure9.SelectedEuropeanCountries:Per-CapitaSpendingonApparel,2015(GBP)

Source:Eurostat/ONS/FungGlobalRetail&Technology

Currency effects may provide some boost to the figures reported by theONS into2017. IfUK retailers submit their total revenue figures, includingoverseas sales, to theONS, thedepreciationof thepoundwill strengthenreportedapparelsales.

ByDistributionChannelMorethanhalfofallcategorysalesaremadethroughthebrick-and-mortarstores of apparel specialist retailers. Apparel specialists generated £46.7billioninsalesin2015,weestimate,basedonONSdata.However,thattotalincludesnonapparelsalessuchashomewaresandbeautyproducts.

517

609

799

913

928

Spain

France

Germany

Italy

UK

WebelievethatthesoftnessintheUKapparelmarketwillcontinuein2017.

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AlmostaquarterofallUKfashionsalesarenowmadeonline:e-commerceaccounted for23%of total apparel salesasof June2016,up from21% in2015.FortheperiodendedJuly31,2016,onlineapparelsalesgrewby7.5%year over year, while store sales declined by 3%, according to KantarWorldpanel.

Within store-based retailing, grocery is a slightly larger channel thandepartmentstoresandsportsgoodsstores,accordingtoEuromonitordata.KantarWorldpanel says that grocery retailers, including their online sales,accountedfor10.1%offashionspendasofJune2016.

Figure10.UKApparelSales,byDistributionChannel,2015(%)

*AllonlinesalesareincludedunderInternetRetailing;allotherchannelssalesareofflinesalesonly.Source:EuromonitorInternational/KantarWorldpanel/FungGlobalRetail&Technology

OnlineProspectsGiven that online sales grew by 7.5% in the current, weak context—andgiventhatweexpectaslight improvement in theoverallapparelcategorynextyear—weexpectonlineapparelsalesgrowthtostrengthensomewhatin2017.Basedonourforecastoftotalapparelsalesgrowthofabout2.0%in 2017, we anticipate that online sales growth will strengthen toapproximately9%–10%.

Intheapparelspecialistsector,onlinesalesgrowthhasoutpacedtotalsalesgrowthbyanaverageof770basispointssofarin2016.Inthegraphbelow,weincludeatrendlinetoshowthemedium-termpatterninonlinesalesbyspecialiststores.

ClothingandFootwearSpecialists,56.7%

InternetRetailing,21.0%*

GroceryRetailers,8.0%

DepartmentStores,6.5%

SportsGoodsRetailers,6.5% Others,1.3%

IntheUK,e-commerceaccountedfor23%oftotalapparelsalesasofJune2016,upfrom21%in2015.

Weexpectonlineapparelsalesgrowthtostrengthenin2017.

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Figure11.UKApparelSpecialists’Sales(YoY%Change)

ThroughOctober2016Source:ONS/FungGlobalRetail&Technology

ProductPriceInflation:TheImpactofDepreciationIt appears that the recent decline in the value of the British pound isbeginningtotranslateintoproductpriceinflationandhighercostsforsomeUK retailers. This is because imported goods, including imported apparel,aretypicallyboughtinUSdollars.

The pound has fallen by nearly 20% versus the US dollar since the JuneBrexitreferendum.ItrecoveredalittleafterDonaldTrumpwasannouncedvictor in the US presidential election. At the time of writing (mid-November), the pound is down 15% versus the dollar since the start of2016.

Giventhatmostretailershavehedgedtheirpurchasesatpreviousexchangerates,wedonotseethedepreciationofthepoundashavingledtorecentshiftsinclothingandfootwearinflation.

Lookingaheadto2017,wethinkthatapparelinflationwillremainlow.TheUKapparelmarketfacesexceptionallystrongcompetition,dueinlargepartto growth in capacity (i.e., number of players), and thiswill keep a lid onpriceincreases.

• Weanticipatethatapparelprice inflationwillaverage0.0%–1.0%in2017.

• The Bank of England has forecast that overall UK inflation willaverage2.7%in2017.

(10)

(5)

0

5

10

15

20

2015 2016

Total Online Linear(Online)

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Figure12.TotalUKClothingandFootwearConsumerPriceInflation(YoY%Change)

ThroughOctober2016Source:ONS

It is likely that the pound will remain at a weakened level, since theconsequencesof theBrexit referendumarestillunclearandsince there isuncertainty about Britain’s economic prospects. Thus far, the impact onproductpriceshasbeenoffsetbymanyretailershavinghedgedunfavorablecurrencyexposureinanticipationofapossiblepoundcollapsefollowingtheBrexit vote. However, the benefits of currency hedging contracts willdecreasegoingintothesecondhalfof2017,accordingtoS&PCapitalIQ.

TheBritishRetailConsortiumexpectsnonfoodstorepricestoriseinthefirsthalfof2017, as there is a limit tohowmuch retailers canabsorb in costswithoutraisingprices.

Recentcommentsfrommajorretailershavebeenmixed.Nextwarnedthatitmayhavetohikepricesnextyearbyupto5%.M&Srecentlystatedthatitwill do its best not to raise prices and to offset cost increases throughsourcingefficienciesandothermeans.Primark stated that it is verymuchcommittedtomaintaining itsvaluepropositionandprice leadershipfor itscustomers.

There is likely to be a three-way split on rising input costs—betweensuppliers,retailersandconsumers.However,thehighlycompetitivenatureoftheUKapparelmarketmeansthattheconsumerislikelytobetheleastimpactedofthese.

BenefitsofaLowerPoundSomeretailersandbrandsstandtobenefit fromthedecline in thepound.However, the beneficiaries are not likely to be big, mass-market, store-basedretailers,butratherluxurybrandsandInternet-onlyretailers.

(1.5)%

(1.0)%

(0.5)%

0.0%

0.5%

1.0%

1.5%

2.0%

2015 2016

Average0.2%

Weanticipatethatapparelpriceinflationwillaverage0.0%–1.0%in2017.

Nextwarnedthatitmayhavetohikepricesnextyearbyupto5%.M&Srecentlystatedthatitwilldoitsbestnottoraiseprices.

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According to Deloitte, the UK is currently the least expensive market inwhichtopurchaseluxurygoods,with64%ofluxuryproductssellingforlessin theUK than in theUS, China and France. Theweak pound should alsobenefittouristspendingduringtheChristmasandfestiveholidayseason.

Forretailerswithsubstantial internationaloperations,depreciationflatterstheir reported revenues. Internet-only retailers stand to benefit inparticular.ASOS,forexample,generatesapproximately57%ofitsrevenuesfrominternationalmarkets,whileBoohoo.comderivesaroundone-thirdofits revenues overseas. ASOS has stated that it is benefiting from theweaknessinthepound,andthatitisenjoyingacurrencytailwind.

AssumingUKretailerssubmittheirtotalrevenuefigurestotheONSaspartoftheretailsalessurvey,thisdepreciationeffectmayoffersomelifttothesalesgrowthforapparelreportedbytheONS—evenifitwillnotreflectthestrengthofUK-basedsales.

THERETAILERSTheUK’sBiggestApparelRetailersM&SisthelargestUKapparelretailer.However, ithasbeenlosingmarketshareinthepastfewyears.

Figure13.LeadingUKRetailers:ShareofApparelMarket(%)

Source:EuromonitorInternational

ThefiguresabovearefromEuromonitor.OurowndatagivemarketleaderM&Saslightly largershareoftheapparelmarket,andtheyshowthattheretailerhasbeenlosingbetween30and40basispointsofshareeachyearintherecentpast.

6.4

5.6

4.74.4

3.1

2.3 2.32.1 2.0

1.6 1.4 1.30.9

6.3

5.7

4.84.5

3.1

2.3 2.2 2.22.0

1.7 1.5 1.31.0

2014 2015

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Figure14.M&S’sShareofUKApparelSpending(%)

BasedonnearestfiscalyearstocalendaryearsSource:Companyreports/ONS/FungGlobalRetail&Technology

TheConsensusViewof2017PerformanceIn this section, we look ahead to the expected performance of majorretailers in2017,basedontheconsensusestimatesamonganalystspolledbyS&PCapitalIQ.

Ofthemajorretailerschartedbelow,M&SandFrenchConnectionaretheonlyonesthatareexpectedtodelivernegativeannualsalesgrowthin2017.Internet pure plays, premium lifestyle brands (such as Ted Baker andSuperGroup), sports-fashion stores (such as JD Sports) and fast-fashionretailersareexpectedtobetheoutperformers.é

The estimates below are for total sales, including any non-UK revenues,except forPrimarkandM&S.Forglobalplayers suchas InditexandH&M,thefiguresarethereforeunlikelytobeindicativeoftheirUKprospects.

Figure15.MajorUKRetailers:FiscalYear2017ConsensusRevenueForecasts(YoY%Change)

EstimatesasofNovember15,2016Source:Companyreports/S&PCapitalIQ/Citibank

8.1% 7.8% 7.4% 7.0%

2012 2013 2014 2015

(10)%(5)%0%5%10%15%20%25%30%35%

Booh

oo.com

ASOS

Zaland

o

TedBa

ker

Supe

rGroup

JDSpo

rts

Prim

ark

Inditex

H&M

SportsDire

ct

Bonm

arché

Debe

nham

s

Next

M&S

Fren

chCon

necoon

Internetpureplays,premiumlifestylebrands,sports-fashionstoresandfast-fashionretailersareexpectedtobetheoutperformers.

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MajorMarketDynamicsinCashTermsWethinkthatlookingatthebiggestchangesincashtermshelpstoillustratethescaleofthemajordynamicsinthemarket.TheclosureofBHSthisyearandtheconsensusestimatefordecliningsalesatM&Ssuggestbigshiftsincashtermsinthemidmarket.

In fiscal year 2015, fashion apparel online pure plays Boohoo.com, ASOS,Missguided and PrettyLittleThing captured combined UK net sales ofapproximately£700million;basedongrowthatpublicly tradedASOSandBoohoo.com,thistotal is likelyto jumptomorethan£900million infiscal2016andtobreakthe£1billionbarrierinfiscal2017.

Toputthisinperspective,Zara’sUKsalestotaled£495millioninfiscal2015and£535millioninfiscal2016,whileM&Slost£83millioninapparelsalesinfiscal2015.

Figure16.SelectedMajorUKRetailers:FiscalYear2017ForecastRevenueShifts,inCashTerms

Source:Companyreports/S&PCapitalIQ/Citibank

Retailers’Forecast2017GrowthinDetailThe majority of department stores and traditional retailers continue tooverpurchase inventory that has to be cleared with steep discountingactivity. Internet pure plays tend to have more nimble and customer-centric business models, which allow them to quickly adapt to changingcustomerdemandsandfashiontrends.

Comparedwithmostfashionretailers,pureplaysofferunmatchedproductchoiceandconstantstyleevolution.Theyaregainingtractionbecausetheirproduct offerings focus on currentweather trends instead of on seasonalitems formonths ahead. This is especially relevant nowadays, asweatherpatternshaveprovenvolatileinthepastfewmonths.

Infiscalyear2015,fashionapparelonlinepureplaysBoohoo.com,ASOS,MissguidedandPrettyLittleThingcapturedcombinedUKnetsalesofapproximately£700million.

OfthemajorUKapparelretailers,Boohoo.comandASOSareexpectedtoreportthehighestsalesgrowthratesin2016.

• Esomated£117milliondeclineinM&SClothingandHomerevenues

• Closurefreesup~£668millionofsales(FY14data)

• ConsensusexpectsASOStogrowtotalsalesby£348million(includinginternaoonal)

• ConsensusexpectsBoohoo.comtogrowtotalsalesby£69million(includinginternaoonal)

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In addition, these retailers keep expanding their customer delivery andreturnoptions,andtheyhaveexcelledatcustomerserviceandrelationshipmanagementbyofferingpersonalizedcontent.

AnalystsexpectBoohoo.comandASOS to report thehighest salesgrowthrates of all themajor UK apparel retailers in 2016, with annual sales foreach increasing by more than 20%. These estimates are for the twocompanies’totalsales,includinganynon-UKrevenues.

Retailers that are exposed to the ongoing trend in athleisure and thecasualization of womenswear have also sustained positive growth.According to Kantar Worldpanel, the UK women’s activewear market isworth£267millionandthecategorygrewby13.4%yearoveryearinthe52weeksendedJuly31,2016.

Wethinkthereisalsospaceinthemarketforlifestylebrandsandretailers,suchasTedBakerandSuperGroup/Superdry, andwenote thecontinuingmomentumoffast-fashionretailersInditexandH&M.

Finally, we believe that those retailers that offer product newness andinnovationandthathavefastsupplychainswillemergeasoutperformersaswell.Zara,forexample,shouldoutperformin2017.

Thedatabelowarebasedonanalysts’consensusestimates,asrecordedbyS&P Capital IQ. We do not have data for privately owned firms such asArcadianorforgeneralretailersforwhomapparelisaminorcontributortosales,suchasgroceryretailers.Thefiguresshowthecompanies’totalsales,including any non-apparel revenues and any non-UK revenues, except forPrimark,forwhichwehaveincludedUKsalesonly.TheM&SfiguresexcludeitsFooddivision.

Figure17.SelectedUKMajorPublicRetailers:FiscalYearRevenuesandGrowthRates

FY15Revenue(GBPMil.)

FY16Revenue(GBPMil.) YoY%Change FY17ERevenue

(GBPMil.)*YoY%Change

Next 3,999.8 4,176.9 4.4% 4,192.3 0.4%

M&SClothingandHome 3,987.4 3,904.0 (2.1)% 3,787.2 (3.0)%

PrimarkUK 2,940.9 3,272.0 11.3% 3,668.5 12.1%

Debenhams 2,860.1 2,938.5 2.7% 2,956.0 0.6%

SportsDirect 2,832.6 2,904.3 2.5% 3,146.4 8.3%

JDSports 1,522.3 1,821.7 19.7% 2,070.5 13.7%

ASOS 1,150.8 1,444.9 25.6% 1,793.1 24.1%

SuperGroup 486.6 597.5 22.8% 683.3 14.4%

TedBaker 387.6 456.2 17.7% 523.5 14.7%

Bonmarché 178.6 188.0 5.3% 189.6 0.8%

FrenchConnection 178.5 164.2 (8.0)% 155.0 (5.6)%

Boohoo.com 139.9 195.4 39.7% 263.4 34.8%

*Analysts’ consensus estimates except for M&S and Primark, for which Citibank estimates were used; estimates as ofNovember15,2016Source:Companyreports/S&PCapitalIQ/Citibank

Wethinkthereisspaceinthemarketforlifestylebrandsandretailers,suchasTedBakerandSuperGroup/Superdry.

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GrossMarginProspectsThe strong US dollar’s impact on sourcing costs has already affectedretailers’grossmargins.Evenretailersthatpassonsomeofthecostsarisingfromthedepreciationofthepoundwilllikelyneedtotakesomehitinordertolimitpriceincreases.Below,wechartthecurrentconsensusestimatesformajorretailers’grossmarginsin2017.

Figure18.SelectedMajorUKRetailers:EstimatedFiscalYearGrossProfitMargins

Source:Companyreports/S&PCapitalIQ

Source:Shutterstock

WinnersandLosersin2017In our view, apparel pure plays such as Zalando, ASOS, Boohoo.com,AmazonandMissguidedwillcontinuetotakesharefromdepartmentstoresandspecialtyapparelretailerssuchasM&S,Next,Matalan,NewLookandGap. Below, we highlight which retailers we believe will emerge asoutperformersandlaggardsin2017.

60% 58% 58% 57% 55%50%

45%

60%55% 57%

55% 56%50%

45%

TedBaker Boohoo Inditex H&M M&S ASOS Zalando

2016E 2017E

ThestrongUSdollar’simpactonsourcingcostshasalreadyaffectedretailers’grossmargins.

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Figure19.UKRetailWinnersandLosers

Boohoo.com:Forecaststotalfiscal2017salesgrowthof30%–35%.

ASOS:Expects total fiscal 2017 sales growthof 20%–25%, includingnon-UK sales.Planslaunchofsportswearlineinearly2017.

Zalando:Expectsglobalfiscal2017revenuegrowthof20%–25%.

Amazon:Amazon Fashion has strong ambitions to turn itself into a global primefashiondestinationanditintroducedsevenprivatelabelapparelbrandsinFebruarythisyear.

TedBaker:Continues toopen concessions in theUK, andplans toopen sixmorestores in the UK by end of January 2017. The company has hedged its currencyexposure until early 2018, and also benefits from natural hedging by generatingrevenueinUSdollarsandeuros.TedBakergrewrevenuesby14.8%in3Q17,endedNovember12.

TKMaxx:UKcomparablestoresalesincreasedby4.6%yearoveryearinfiscal2015.Thecompanyopened25newstoresintheUKin2016andwillopen24newstoresin2017.

Inditex:ZaraandMassimoDuttiwill continuetostronglyoutperformdueto theirdifferentiated product and integratedmulti-channel offerings. In fiscal 2016, ZaraUKgrewsalesby8.2%,to£535million.

H&M:ReportedUKsalesgrowthof5%(inGBP) intheninemonthsendedAugust31, 2016; the company does not report comparable sales growth, but UK storenumbers grewby1%.H&Msees continued sales traction from itsCOSandOtherStoriesbrands,andislaunchinganothernewconceptin2017.

Yoox Net-A-Porter: Forecasts that global company sales will grow by 17%–20%annuallyatconstantexchangerates.

JDSports:Willbenefitfromtheongoingathleisureandsneakertrends.

Primark:Although the company is expected to increase fiscal 2017 sales by 12%,themajority of that growth is expected to come fromnew store openings ratherthan from comparable store sales. The ultralow-price retailer looks much lessvulnerabletoasustaineddownturnthanitsmidmarketrivalsdo.

Next: Expects total fiscal 2017 full-price sales growth of (1.75)%–1.25%, at amidpoint of (0.25)%. Next’s growth could be dented by its recently announcedplantopassonsomepriceincreasestocustomers.

M&S:WebelievethatM&SwillcontinuetopostlaggingsalesintheapparelandhomedivisionsandwillcontinuetoloseapparelshareintheUK.M&Sistheonlybig apparel retailer that is expected to deliver negative annual sales growth in2017.

Debenhams:Fiscal2017gross transactionvaluesalesconsensusestimates implyyear-over-year growth of 0.4%. Comparable store sales are likely to remainnegativeinfiscal2017.

FrenchConnection:Hasnotreportedapretaxprofitsince2012andchancesofasalesrecoverylookslim.

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NewLook:Theyoung-fashionretailerrecentlypostedUKcompsof(8.8)%forthehalfyearendedSeptember24,2016,a sequentialweakening from(7.0)% in thefirst quarter of fiscal 2017. No consensus outlook is available for this privatelyownedretailer,butit looksvulnerabletotherapidgrowthofASOS,Boohoo.comandotheryoung-fashionpureplays.

Gap:RecentlyfiledaccountsshowthatcomparablesalesatGapUKbranchesfellby 5% in the year ended January 2016; comps at the group’s Banana Republicstoresslumped20%andGapwillsooncloseallofitsUKBananaRepublicstores.Thegroup’stotalUKturnoverfellby5.5%,to£306.7millionintheyear.

Source:Companyreports/FungGlobalRetail&Technology

KEYTAKEAWAYSFashionretailershavestruggledwithsoftsalesintheUKmarketinthelastfewmonths,and2016isshapinguptobethetoughestyearforUKapparelsalessince2009.

We believe that the weakness in the UK apparel market will continue in2017, although growth next year will be against very undemandingcomparatives.

Weexpectpure-playapparelretailerssuchasZalando,ASOS,Boohoo.comand Amazon, and lifestyle brands and retailers such as Ted Baker andSuperGroup, tocontinue togain sales in theUKmarketat theexpenseofdiscounters, department stores and weakly positioned specialty apparelretailers.

M&S is theonlybig retailer that isexpected to sufferadecline in sales in2017.

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DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnMercerSeniorAnalyst

EvaKubickaSeniorResearchAssociate

HONGKONG:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406LONDON:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NEWYORK:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

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The UK Apparel Handbook 2017 Outlook November 30 2016 · Market Growth The UK apparel market has...

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Transcript of The UK Apparel Handbook 2017 Outlook November 30 2016 · Market Growth The UK apparel market has...