It’s never been harder to make the case for a $60 sweater.
Gap / Via gap.com
It's becoming extremely clear that the middle is a bad place to be for clothing stores.
On the back of lackluster holiday sales reports from Macy's, Finish Line and Urban Outfitters, the Gap brand just reported its comparable sales fell 2% in December, for a 20th straight month of flat or falling sales. Banana Republic posted a 9% dip, and even Old Navy, its cheapest and best-performing chain, fell 7%.
The past year has seen a steady pounding of mid-priced apparel — the stuff that lives between fast-fashion and "value" clothing on one end and luxury, name-brand goods at the other. Gap and Banana Republic, prime examples of this group, performed dismally in 2015, along with J.Crew, Anthropologie and Macy's.
The erosion of the middle becomes clearer when you look at where these chains are investing. While Gap closes 26% of its North American namesake stores, it's leaving its 300 outlet locations untouched. Macy's, which just announced thousands of job cuts and plans to close 36 stores in coming months, will open 50 Macy's Backstage stores in the next two years. (Macy's Backstage is its off-price answer to Nordstrom Rack and T.J. Maxx.) And J.Crew is expanding J.Crew Factory to regular malls and shopping centers under the name J.Crew Mercantile.
Between the plethora of outlets, off-pricers like Marshalls and Nordstrom Rack and fast-fashion chains like H&M and Forever 21, it's gotten hard to make the case for a $60 Gap sweater or $85 J.Crew cardigan. And the frequent discounts at these chains, as advertised in constant emails promising 40% off for one day only, aren't helping matters.
"We noted some of the deepest and longest-running 'box-off' storewide promotions in the sector at the three Gap divisions," Adrienne Yih Tennant, a senior retail analyst at Wolfe Research, wrote in a Jan. 4 note. "While these deep promotions appeared to us to be 'on plan' and driving sales and traffic, we posit that this widespread discounting is training customers to only buy at these margin-eroding price points."
Gap has been sending frequent emails touting discounts
Gap / Via gap.com
The fear in the industry is that this is the new normal for spending on clothes and accessories. After all, the unemployment rate and consumer confidence aren't terrible, gas prices are low and while it was definitely a bizarrely warm winter, it wasn't the kind of year where it snowed so much that people could barely leave the house.
Richard Jaffe, an analyst at Stifel, believes apparel consumption is generally trending downwards, driven by millennials, who are now the biggest segment of the U.S. population with an average age of 26.
"Unlike previous generations, millennials don't need nor want three wardrobes: wear to work, recreation and going out," Jaffe wrote in a Jan. 4 note. "The casualization of the workplace has ostensibly shrunk their closet and their apparel spending when compared to the prior generation. The millennials dress more individualistically and are less likely to conform and buy into a current trend, making it tougher for apparel retailers to offer product that appeals to them."
Further, "the priorities of the millennial consumer are much more focused on technology (the smart phone!) and experiences (travel and dining out), further heightening the shift in spending away from apparel," he wrote.
It makes for an environment where a different kind of retailer ascends to dominance than the ones that ruled in the 90s. L Brands, the owner of Victoria's Secret and Bath & Body Works, is a darling of Wall Street and one of the best-performing retailers in America — not only is it a dominant player in lingerie and fragrance, but it decided to get rid of its clothing business in 2014.
The other top performer is TJX, the owner of off-price chains like Home Goods, Marshalls and T.J. Maxx. Last year, the company reported annual sales that surpassed Macy's for the first time ever. Department stores from Lord & Taylor to Nordstrom have all jumped into the off-price game in a big way.
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