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Accessories Are the Latest Fashion for Investors


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Retailers That Primarily Sell Apparel Fare Worse Than Those With Other Offerings

 Nov. 29, 2014

Clothes may still make the man. But increasingly it seems any retailer’s duds will do.

Amid cheaper gasoline and stronger economic data, a sense of optimism surrounds retail sales in the all-important fourth quarter.

But not all retailers are created equal. That is true even within the subset of specialty stores—outside the big-box retailers, in which a divide appears to be emerging between companies that primarily sell clothing and those that don’t.

Over the past two years, apparel retailers have largely seen shrinking same-store sales and operating income, while those more focused on accessories, such as Michael Kors Holdings and L Brands , have been mostly shielded from the storm, according to Nomura analyst Simeon Siegel. He estimates the 10 apparel retailers he covers will see an average decline in operating income of 16% in 2014 versus average growth of 24% for the five “nonapparel” companies, as he labels them. The gap was even more stark in 2013, when apparel firms saw profits drop 35% on average versus an 85% jump at the nonapparel firms.

Mr. Siegel chalks this up to e-commerce lowering the barriers to entry for new apparel companies. This has led to a proliferation of online competition for teen retailers such as Aéropostale and Abercrombie & Fitch , as well as those targeting older consumers such as Ann, which operates Ann Taylor stores, and Chico’s FAS .

Indeed, no apparel company has generated positive same-store sales growth for the past three quarters. This is the first period since the beginning of 2005 during which none of the publicly traded specialty clothing retailers has won market share, according to Mr. Siegel.

Accessories makers have fared better, thanks, it seems, to their differentiated offerings. Signet Jewelers , Tiffany , Michael Kors, Kate Spade and L Brands all posted solid same-store sales growth in the first nine months of fiscal 2014. Fossil Group ’s sales have been roughly flat. Only Coach has seen declines.

Michael Kors and other retailers more focused on accessories have better weathered a storm in apparel sales in recent years. Above, a Michael Kors store in Tokyo.ENLARGE

Michael Kors and other retailers more focused on accessories have better weathered a storm in apparel sales in recent years. Above, a Michael Kors store in Tokyo. Bloomberg News

Granted, retailers, including apparel firms, have reduced inventory over the past year. But one year of historical data may not show the complete picture. Looking at the range of specialty retailers’ inventory per square foot going back to 2010, Aéropostale and L Brands were the only two heading into the second half of 2014 with inventories below trough levels, according to Wells Fargo .

For Aéropostale, such an adjustment makes sense given recent steep declines in sales per square foot. But it is unclear when that decline will be arrested. And lower inventories aside, apparel retailers may have to cut prices just to lure people in the door amid higher online competition.

For investors seeking to get ahead of the latest fashion, now looks a good time to accessorize.

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