Valuations of fashion retailers

Valuations of fashion retailers

Jurek, Walter

In September of 1991 we reviewed the valuations of companies in the retail fashion industry. Back then, fashion retailers were still attractive to the investment market. For example, the top thirteen fashion retailers in 1991 had total sales of $22 billion dollars and average tax profit of 4.8%. Their “effective company valuation,” (the company’s stock market value plus total liabilities) was 130% of annual revenue. By 1995 the top thirteen had dropped to become he top nine (three of those four having gone bankrupt) and valuations had declined substantially. In 1995, the top nine fashion retail companies did $28.7 billion dollars in revenue but after tax profits declined to 4.0%. The effective company valuation is now just 82% of annual revenue.

In the 1980’s, the average consumer either had extra money or was spending like he or she had extra money and the fashion retailers benefited. The average fashion retailer had a valuation that was 20% greater than the average Value Line composite company. (Value Line gives an index of the top 1700 companies representing 75% of the sales of all U.S. industry). Since 1991, the average fashion retailer is now valued at 40% below the average Value Line composite company.

Why have the values of the fashion retailers declined so much? One reason is because of the erratic consumer spending patterns of the last five years. This was caused in part by the 1990 recession and the fact that the real wage growth for most Americans over the last five years has been sluggish at best.

The number two reason is the aging of America. As the baby boomers become middle-aged, they reevaluate their priorities. In their twenties and thirties they spend money on clothing and entertainment because life is a party-type atmosphere. The baby boomers are now ages 45 and 50 years old. They are devoting a much greater percentage of their income to educational and medical needs than to fashion clothing. The baby boomers are using more of their disposable income to improve their home environment and are not going out as much as they did in the 1980’s. For example, they are upgrading their home entertainment systems and buying computers, so less money is being spent on fashion apparel.

The third reason is called the “uglying of America.” Many offices nay allow their employees to “dress down” on Fridays. When 20% of the work year moves to the “dress down” category there is less e of a demand for business suits and fashion apparel. Because of the declining fashion styles and loss of a real wage growth, people are buying down to a lower priced, low quality apparel.

The fourth reason is the growth of the service sector. As we continue to have fewer engineers and middle management people in society and more jobs saying “Would you like fries with your order?” workplace fashion apparel declines.

The fifth reason is that there are more stores chasing the fashion spending dollar. Over the last four years the number of stores have increased by 6% to 42,000 fashion retail outlets.

Lastly, below the top nine companies in the retail fashion industry lie a number of marginal retailers whose financial statements are strained. They are more actively discounting their merchandise to generate revenue with the hope of preserving market share. The result is that the gross operating margin for the fashion retail industry has deteriorated from 34% in 1991 to 31% in 1995.

The bottom line is, the value of the fashion retailers have declined from an effective company market value of 130% of annual revenue in 1991 down to 82% in 1995. No improvement is expected for a number of years, even though we expect to see more acquisitions, mergers and consolidations within the industry. Fashion retailers misjudged the demand curve for their products and added too many stores to chase a stagnant retail dollar. Except for a few companies such as The Gap and The Limited, values of fashion retailers are expected to underperform the norm of U.S. industry.

Copyright Quality Services Company Dec 26, 1995

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