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NOVEMBER 29, 2007 / APPAREL & FOOTWEAR INDUSTRY SURVEY 12 US RESIDENT POPULATION PROJECTIONS (In thousands) % CHANGE AGE GROUP 2007 2015 2025 2007–15 2007–25 Under 5 yrs. 20,817 22,358 23,518 7.4 13.0 % of total 6.9 6.9 6.7 5 to 14 yrs. 40,113 42,607 46,051 6.2 14.8 % of total 13.3 13.2 13.2 15 to 19 yrs. 21,655 20,243 22,457 (6.5) 3.7 % of total 7.2 6.3 6.4 20 to 24 yrs. 20,961 21,810 22,052 4.0 5.2 % of total 7.0 6.8 6.3 25 to 34 yrs. 40,104 44,053 44,345 9.8 10.6 % of total 13.3 13.7 12.7 35 to 44 yrs. 42,882 40,793 45,351 (4.9) 5.8 % of total 14.3 12.7 13.0 45 to 64 yrs. 76,533 83,711 82,141 9.4 7.3 % of total 25.4 26.0 23.5 65 yrs. & over 37,850 46,791 63,524 23.6 67.8 % of total 12.6 14.5 18.2 Total population 300,913 322,366 349,439 7.1 16.1 Racial composition (%): White 79.8 78.4 76.8 Black 13.0 13.3 13.7 Asian 4.4 5.0 5.7 Other 2.8 3.3 3.8 Hispanic (any race) 14.7 16.6 18.9 Totals may not add due to rounding. Source: US Department of Commerce, Population Series P-25. in December. The stores complement the existing Tiffany boutiques in each city. By 2015, about 27% of Chinese households will be upper–middle class or better, according to consulting firm McKinsey & Co., up from 10% of the population in 2005. Coach also has opened stores in Beijing and Shanghai, which the company considers its two “beachheads” in the Chinese market, according to chief executive officer Lew Frankfort. The company plans to operate 10 freestanding stores in China within the next three years. Coach currently operates about 110 locations in Japan. Foreign retailers enter the US At the same time that US retailers are looking abroad, international competitors are moving into the United States — and often bringing with them unique ways of operating. Two examples are Sweden’s H&M Hennes & Mauritz AB (H&M) and Spain’s Industria de Diseño Textil SA (Inditex), which owns the Zara clothing chain and others. The two companies offer fashionable clothing for inexpensive prices, and they turn over their inventory more rapidly than competitors — thus encouraging shoppers to visit often and buy items that they like on the spot. Both companies have grown their brands by offering what some call “disposable chic” or “fast fashion” — exceptional fashion quality at affordable prices. Both retailers enjoy healthy margins and growing sales. H&M’s gross margin reached a record 59.5% in fiscal 2007 (ended November 2006), with sales rising 12%, while Inditex’s sales jumped 22%. By comparison, The Gap Inc. had a gross margin of 35.4% for its fiscal year ended February 2007. H&M operated 114 US stores as of November 2006; Inditex operates about 20 Zara stores in the United States. More European competition might be traveling across the Atlantic. The United Kingdom’s Topshop, another low-cost, high-fashion retailer, is reported to be opening three US stores in the spring of 2008. There are signs of interest in Topshop across the Atlantic. The retailer, a unit of Arcadia Group, reportedly sold out a line of clothes inspired by supermodel Kate Moss at Barneys New York Inc. department store within hours. Demographic trends Because specialty retailers usually target a narrow market, they must pay close attention to the age distribution, ethnic background, and priorities of potential customers in their markets. Teens entering adulthood Teenagers aged 15 to 19, who represent about 7.2% of the US population, have been a powerful force in retail over the past decade. Gap, Abercrombie & Fitch Co., American Eagle Outfitters Inc., and Urban Outfitters Inc. have been among the leading beneficiaries. Today, a large share of the 71 million Americans born between 1977 and 1994 — a group dubbed “Generation Y” by market researchers — have entered adulthood. This is an attractive group for retailers. Shoppers aged 25 and older, for instance, often have more to spend on apparel and may need to expand their wardrobes to include professional clothes for the office. Consumers aged 20 to 34 accounted for about 26% of spending on apparel in 2006, according to estimated consumer data from research group NPD Fashionworld. Retailers that appeal to teens are trying to hold onto those consumers as they enter their twenties. Some examples of new stores for this demographic are Ruehl (from Aber-
crombie & Fitch), aimed at men and women aged 22 to 35, and Martin + Osa (American Eagle Outfitters), a chain that debuted in the fall of 2006 for shoppers aged 25 to 40. As Abercrombie and other teen-targeting retailers seek to hold onto these shoppers, rivals such as Ann Taylor Loft, Gap’s Banana Republic, and Express LLC are trying to pull them away. Children’s clothing sales rise As members of Generation Y get older, they are starting to have children — to the benefit of specialty retailers that target infants and young children. Annual sales have risen the past several years for The Children’s Place Retail Stores Inc. and The Gymboree Corp., both of which sell apparel, generally in mall-based or shopping-center–based stores. Sales of children’s clothes rose 8% in 2006, besting the gains seen in both men’s and women’s apparel, according to NPD. Discount retailers Target Corp. and Wal- Mart Stores Inc. are big players in the children’s clothing market. Hoping to grab a piece of that market, Gymboree is adding a third retail chain, Crazy 8, which will debut later in 2007. The new stores will offer clothes for lower prices than Gymboree’s namesake and Janie & Jack stores, in hopes of pulling business from the discount giants. Retailers struggle to draw older women Female shoppers, particularly those over the age of 35, spend the lion’s share of retail dollars, making them the most desirable target for retailers. Much of this group belongs to the baby boom generation, those nearly 76 million Americans born between 1946 and 1964. This segment has more disposable income than any other population group and tends to spend it freely. Specialty retailers are striving to reach shoppers in this segment who may be looking for fashionable clothes that are not too provocative or youthful. Still, apparel retailers have had mixed results catering to women over 35, who previously have been neglected by the sector. Unlike her mother, this consumer has turned to specialty retailers to build her wardrobe, rather than relying exclusively on department stores. She has more money to spend on clothes and likes to update her wardrobe to add new clothes and to reflect shifting tastes. Women aged 35 and older made up 41% of all apparel spending by women in the fourth quarter of 2006, according to NPD. Specialty retailers have launched a number of chains targeting this group, but several have failed to catch on with shoppers. Gap, the largest US apparel retailer, shut its Forth & Towne chain of 19 stores aimed at women over 35 in June 2007 after its brief 18-month foray. In early 2007, Gymboree closed Janeville, a chain of stores for women over 30. American Eagle is reported to be retooling Martin + Osa after disappointing sales. Chico’s FAS Inc., which owns a chain of stores targeting women over 35, closed Fitigues, an upscale casual clothing chain, in 2007; the company had acquired Fitigues in 2006. The specialty retailers are losing shoppers to department store chains that have overhauled selection to bring shoppers back. Chains such as J.C. Penney Co. Inc. and Kohl’s Corp. are offering more exclusive private-label goods that are fashionable. In the case of Gap, company executives decided to focus instead on the company’s existing Gap and Old Navy chains, which are struggling. Young men dressing up The casual look began its ascendance in the early 1990s, when corporate America started emulating the less-rigid dress policies of high-tech industries. Often, the philosophy behind the switch from suit-and-tie to casual attire was that, if employees were working long hours, they should be allowed to do so comfortably. Gap rode the success of khakis for a decade but ultimately became a victim of its own success: by 2000, khakis were ubiquitous, and the wearer no longer needed Gap’s stamp of approval (i.e., the Gap brand) to feel appropriately dressed when wearing khakis. The casual look is one factor that drove deflationary apparel pricing in the last decade. In the aftermath of the Internet bust, the American workplace has been reverting to more formal attire. Retail trends reveal that suits are again selling. For women, the business suit has been tweaked to convey femininity; for men, its construction has become more form-fitting. Sales of slacks rose 7.2% in 2006, compared with growth of 5.4% for jeans. Men aged 25 to 34 increased purchases of suits by 13%, and suit sales rose 12% for men aged 18 to 24. Mass-merchant re- NOVEMBER 29, 2007 / APPAREL & FOOTWEAR INDUSTRY SURVEY 13
Page 1 and 2: Marie Driscoll, CFA Esther Kwon App
Page 3 and 4: CURRENT ENVIRONMENT Challenges, hea
Page 5 and 6: inging in more fashionable private-
Page 7 and 8: woman’s transit shoe of choice, f
Page 9 and 10: with retailers’ private-label goo
Page 11 and 12: INDUSTRY PROFILE The industry that
Page 13: Juicy Couture evolved into the prem
Page 17 and 18: Both H&M and Inditex are enjoying s
Page 19 and 20: adopting new technologies and restr
Page 21 and 22: ing on opportunities to expand or s
Page 23 and 24: asis in 2006-07 and was expanded to
Page 25 and 26: consumer. Many retailers report tha
Page 27 and 28: overall retail sales growing or con
Page 29 and 30: uying raw materials, creating desig
Page 31 and 32: (salaries, commissions, advertising
Page 33 and 34: GLOSSARY Allowance from vendors —
Page 35 and 36: INDUSTRY REFERENCES PERIODICALS AAp
Page 37 and 38: DEFINITIONS FOR COMPARATIVE COMPANY
Page 39 and 40: Operating Revenues (continued) Mill
Page 41 and 42: Return on Revenues (%) (cont’d) R
Page 43 and 44: Current Ratio (cont’d) Debt / Cap
Page 45: Earnings per Share ($) (cont’d) T

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