Valuation of the apparel manufacturing industry

Corporate Growth Report Weekly, Jan 6, 1997

Factors affecting the growth, profitability and valuation of the apparel manufacturing industry include:

1) The first factor affecting the industry is the condition of the economy and the level of consumer confidence. In a recession it is easy for the consumer to delay most apparel purchases and make do with an old outfit for another year.

Although the economy has been in an up growth trend for a number of years, as measured by the increase in in GDP and the fabulous results in the stock market, this has not translated to much of an increase in apparel spending per consumer. The reason is real disposable income for the consumer has gone up marginally over the last decade. Because real growth in consumer income has been poor, the growth in consumer expenditures for apparel has been modest.

2) The relative desire for apparel in comparison to the desire to other goods and services. For example, because of the increasing desire for computers and software many Americans are content to spend less on major apparel purchases.

3) The "graying" of America. As the average age of the U. S. population gets older they tend to gain weight so shopping for clothes becomes less appealing.

4) The "uglying" of America A few decades ago the twenty-somethings went on a date and the man would often wear a sport coat and tie and the woman dressed accordingly Today the twentysomething group has a different definition on how to look impressive on a date.

5) The profitability level for the industry is improving. Some of the factors that have increased profits include: computerized inventory management and computerized order management systems. The better information has increased the speed of making decisions and reduced the amount of inventory on hand. Successful apparel companies keep leaner inventories than in the past because they have shortened the order-to-delivery time.

6) For any product or service customer wants to pay the lowest price and obtain the greatest value. To lower costs, successful apparel manufacturing companies have moved much of their production from the U.S. to offshore locations. Thanks to passage of NAFTA, domestic apparel companies have been able to work with manufacturers in Mexico instead of the Far East and further shorten the delivery time.

To the consumer underware is underware, so price has a very high influence on making the decision on what to purchase. Fruit of the Loom obtained a significant increase in profitability when it shifted nearly all of its sewing offshore. For example in 1994, Fruit of the Loom's after tax profit was 2.6%. In 1996 it's after tax profits are expected to be 5.7% and the forecast for next year is 72%. The reason: offshore manufacturing.

7) Another formula for success in the apparel manufacturing industry is to make your product so unique that customers are willing to pay more for it Examples include, St John Knits which specializes in high-end women's clothing and accessories and averages an 11% to 12% after tax profit each year. In the same high profit range is Tommy Hilfiger Corp.

8) Other companies are developing a stronger consumer franchise by operating their own stores. For example, OshKosh B'Gosh now receives 32% of its volume through its own stores. Jones Apparel owns 73 stores. Nautica Enterprises maintains retail identity by operating a "store within a store" format It operates over 1,000 boutiques in major department stores.

The apparel manufacturing industry is known as a sweatshop industry. But to many it is also known as an industry that provides a first job opportunity and the road to economic independence.