Clothing is back in fashion for the holidays

To be sure, not every company that sells apparel right now should be declared a winner.

Some retailers are still struggling to find the right balance between supply and demand, so that they don’t end up with too much inventory on the shelves or in stock rooms. When merchandise piles too high, retailers are forced to use steep discounts to deplete inventory and make room for next season’s goods. This has been an issue for some apparel brands, like Gap and J Crew, in the past.

For many apparel retailers, “the lost years of promotional warfare” were from 2009 to 2015, Nomura Instinet analyst Simeon Siegel said. “2016 was a collective effort by retailers to bring inventories down. 2017 was the beneficiary of that. … That’s when retail started coming back to life.”

However, Siegel said he noticed during the third quarter department stores as a group reported their first quarter of inventory growth after 10 quarters of declines. Some of that can be attributed to the fact that these companies purchased more items ahead of anticipated Chinese tariffs going into effect. But there’s also blame being cast for poor planning.

“This building inventory keeps us extremely wary of go-forward pricing power,” Siegel said. Department stores in particular have managed to pass on excess apparel inventory to off-price chains such as TJ Maxx and Ross Stores more easily in the past, he added, but it’s becoming harder for them to do this. “You can only hide the product for so long.”

Off-price retailers’ inventories (grey) vs. department stores (red)

Siegel said he fears apparel could be getting more promotional in 2019. That’s good news for shoppers looking for deals but only means more pressure on retailers’ margins, as companies already have online investments, store remodels and other costs eating into profits.

That said, there was good news for apparel retailers over the weekend: President Donald Trump and Chinese President Xi Jinping came to an agreement to delay increasing tariffs in early 2019 on many consumer goods, including clothing.

Macy’s CEO Jeff Gennette said last month the company was working “aggressively” with suppliers, anticipating the next tranche of tariffs, which included a lot of cotton-based products. A new trade truce with China would benefit a number of retailers, Wells Fargo analyst Ike Boruchow said Monday in a research note, including Fossil, Stitch Fix, Skechers and Steve Madden.

“We’d highlight the off-pricers (Burlington, Ross Stores, TJ Maxx) and Ulta as names that investors have favored of late due to their relative tariff-insulation, but now that the tariff overhang has been temporarily lifted, investors may begin to look elsewhere in our group,” Boruchow said.