Fashion stocks seek redemption after Wall Street collapse – WWD

Wall Street has always been a rollercoaster – but all the ups and downs have become very big, leaving fashion in 2023 with more than a slight stock market whip.

Investors are constantly evaluating the prospects of everything from the economy, consumers, new products, strategy and performance down to a single data point – the all-important stock price.

And while ups and downs are expected as individual companies and sectors move forward or as the economy cools, there is more going on.

The investor crowd has fundamentally changed expectations for the consumer sector in 2022 as e-commerce growth slowed, inflation and interest rates soared, and a looming recession loomed. Last year also had its optical challenges, with quarterly financial reports often pale in comparison to the go-go days of 2021 when the world first recovered from COVID-19.

The Dow Jones Industrial Average fell 8.8 percent in 2022, but fashion fell further and faster.

WWD’s survey of 104 global apparel, luxury, retail and beauty companies found that only 26 companies in the space beat Dow last year. (Elf Beauty Inc. led the way, gaining 66.5 percent, while Central American department store Dillard’s Inc. gained 38.7 percent.)

Luxury also maintained its gains from the pandemic and continued to cope even with economic problems, but 2022 was the year of decline.

Among those hit hardest were some of the biggest names from the past, either new to Wall Street or pushing newer business models that investors are still trying to grasp.

Allbirds went public in 2021 but had a big drop last year.

Companies that lost more than 70 percent of their value last year included resale specialists ThredUp Inc., brand house Aka Brands Holding Corp., sneaker maker for the tech crowd Allbirds, social media-focused beauty firm Olaplex Holdings Inc. consumer eyewear pioneer Warby Parker Inc.

This counts as a brutal wake-up call for the big wave of IPOs in 2021 and leaves doubts about the position of some newcomers.

“Darlings are failing fast and the first step is failure,” said Matthew Katz, managing partner at SSA & Co.

This reflects investors’ flight from an exciting new idea to a more tried and true business model – and it seems likely that investors will continue to seek safety.

“We’re in a period of uncertainty,” Katz said. “And some would say it’s becoming more and more certain that trouble is coming.”

So companies that are still working on their business can get caught in a squeeze.

“Where there are unfinished business, inefficiency will increase during the downturn,” said Katz.

For example, resale platforms quickly captured the imagination of investors, but now they have to prove themselves as more brands come into play and the sector evolves.

a woman filling a ThredUp cleaning bag

ThredUp helps consumers organize their closets before resale.

Courtesy

Poshmark Inc., which was valued at more than $7.4 billion after going public in January 2021, bought back $1.2 billion from Naver in October, and both The RealReal Inc. and ThredUp shares are struggling.

Jessica Ramírez, senior research analyst at Jane Hali & Associates, said: “When we looked at resale … we were also very surprised at how quickly Wall Street adapted to what we almost thought was nonsensical. It usually lasts [Wall Street] longer to warm up to some of these ideas.”

It turns out that investors quickly fell in love with 2021 and quickly moved on.

Many companies that built in private hands did not meet the high expectations of the public market.

Allbrids was next.

Ramírez said the brand “has a glass ceiling on the emotion it can create and the stir it can create.”

The brand is stepping up and even at the forefront of the sustainability movement, but still finds its foothold.

“There’s a good reason for that, but the shoe isn’t attractive,” said Ramírez. “You have to have a good product that is attractive and have a good story.”

These are stable businesses and proven models that are winning today on Wall Street, such as Ross Stores Inc. and The TJX Cos. Inc., which are feasting on the industry’s overstock after all the COVID-19 supply chain backups.

TJ Maxx Store

There are plenty of stocks on the market for bidders like TJ Maxx.

Photo courtesy

“Ross and TJX really took what was for sale and killed it with their purchases,” said Ramírez.

Dick’s Sporting Goods Inc. also proved its strength.

“The product has really grown there – the private label and the relationships they are building with all their suppliers have really grown,” said Ramírez, noting that the retailer is also benefiting from the continued increase in outdoor activity. “They’re very tight-knit and run a pretty good business.”

Dick’s, TJX and Ross not only beat the market, but saw small gains in stock last year – a time when small gains counted as big wins.

Dick's Sporting Goods store in Tucker, Georgia, USA, on February 28, 2018. Dick's Sporting Goods announced that it would end the sale of assault rifles and would ban the sale of guns to anyone under the age of 21.  Dick's Sporting Goods Gun Sale, Tucker, USA - February 28, 2018

Dick’s Sporting Goods beat the retail stock trend last year.

Erik S Lesser/photo courtesy

Many of the problems over the past year have resulted from changes in the consumer market that have been bigger than any brand.

Low-end shoppers began to choose between fashion and food as prices rose. More consumers have returned to stores, slowing the growth of e-commerce. And Russian President Vladimir Putin’s invasion of Ukraine has turned the geopolitical calculus upside down, threatened Europe and prompted many companies to close shop in the once-promising Russian market.

Perhaps equally sweeping changes will be needed to bring retail back this year – but in the second half, when the comparisons will shrink again.

John Kernan, an analyst at Cowen, said supply chain cost deflation and more normal inventory levels will weigh on sentiment in the second half of the year.

“We are in favor of low-cost stocks compared to history, given several hundred basis points of gross margin cuts from lower ocean container and airfreight rates, as well as normalization of sector inventory levels and second-half markdowns,” Kernan said. “Balancing supply chain risk, inventory turnover and gross margin is the source of value creation in the sector.”

It’s very much back to basics, a return to success on Wall Street after a very rocky year for fashion.

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