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NOVEMBER 29, 2007 / APPAREL & FOOTWEAR INDUSTRY SURVEY 14 tailers offering suits at lower prices have made them more popular, according to NPD. Sporting apparel goes high-tech Athletic apparel has come a long way from the era of pairing a dowdy gray cotton sweat suit with tennis shoes. Now, athletic togs promise to hug the body with materials that insulate the wearer from cold weather, while wicking away sweat to boost performance. Running shoes are being synced with computers to measure performance. Consumers have responded to the high-tech offerings, with sportswear apparel sales rising 67% in the last 10 years to $28.8 billion in 2006, according to the Sporting Goods Manufacturers Association, an industry trade group. Other advances in sports apparel include tagless and stitchless T-shirts and fabrics that manage odors. Technological advancements allow manufacturers to maintain or increase prices and keep consumers loyal to their brands. One of the pioneers in advanced athletic apparel is Under Armour Inc. The company, founded in 1996, offers compression apparel that regulates body temperature by wicking away perspiration to keep an exerciser comfortable. Users wear the company’s HeatGear line when it is warm, ColdGear when it is cold, or AllSeasonGear for moderate temperatures. The company’s revenue has doubled in the past two years, to $431 million in 2006, as it expanded into apparel for women and footwear. Adidas AG introduced the Adidas_1 running shoe in 2005. The shoe’s technology, which is available in basketball and running shoes, uses sensors, a microprocessor, and a small motor to adjust the level of cushioning provided by the shoe. Nike teamed with computer and consumer electronics company Apple Inc. to develop the Nike+iPod Sport Kit, which allows Nike footwear to “communicate” with Apple’s iPod Nano portable music player. A user places a sensor into a Nike sneaker, which relays information on speed, distance, and calories burned to the music player, which can then be broadcast through the user’s headphones. Runners using the Nike+ system have logged more than 10 million miles since the product went on sale in July 2006, according to a March 2007 statement from Nike. Luxury and value goods both do well The strongest demand for apparel and accessories is bifurcated between luxury goods on the high end and inexpensive goods on the low end. Upper middle class and wealthy consumers are more insulated from recent trends, such as higher heating and gas prices, that have reduced spending for middle class and lower-income consumers. Companies that sell to these markets are thriving. Phillips-Van Heusen Corp., which acquired the upscale Calvin Klein brand in 2003, posted a 39% increase in net income in its fiscal year ended February 2007, lifted by demand for its Calvin Klein brand of men’s better sportswear and the licensing of the Calvin Klein name to new fragrances. Upscale department stores are experiencing strong sales growth. Same-store sales, or sales at stores open at least a year, for February 2007 rose 11% at luxury stores from the year earlier, and then rose an additional 13% in March, according to trade group the International Council of Shopping Centers. Polo Ralph Lauren Corp.’s profits have risen on demand for its upscale apparel and accessories. In March 2007, the company formed a joint venture with luxury goods maker Compagnie Financière Richemont SA to design and sell precious jewelry and watches. Shoppers are flocking to value goods — many of which are improving in quality and fashion — thanks to an infusion of top designers turning out moderately priced collections. Two European specialty retailers have been particularly successful at offering lowerpriced goods, and both are undergoing aggressive expansions into the United States. Sweden’s H&M and Spain’s Inditex have used unconventional means to expand their businesses. Inditex, for example, does virtually no advertising, relying instead on sleekly designed stores in centrally located neighborhoods in major cities. Though H&M sells inexpensive goods, it knows its shoppers are fashion-conscious. The chain, in the past few years, has featured lines from designers Karl Lagerfeld and Stella McCartney. In March 2007, H&M rolled out M by Madonna, a line of clothing designed by the pop singer.
Both H&M and Inditex are enjoying success. For the year ended November 30, 2006, H&M’s sales rose 12% to 68.4 billion Swedish krona (US$9.17 billion). Sales at Inditex, which operates under eight banners, including Zara, Oysho, Pull and Bear, rose 22% to €8.2 billion (US$10.4 billion) the year ended January 31, 2007. (Note: All currency conversions in this Survey are at average exchange rates for the period in question, except where noted.) US-based apparel retailers and manufacturers are wooing designers to produce merchandise at the low end. Discounter Target has featured lines by designers Isaac Mizrahi, Liz Lange, and Mossimo Giannulli. In April 2007, Gap introduced Gap Design Editions, selecting three up-and-coming design labels to produce their versions of a woman’s iconic white shirt. Steve & Barry’s LLC, a clothing chain known for selling T-shirts, sweatshirts, jeans, and other basics — often for less than $10 an item — signed actress Sarah Jessica Parker to help design a line of fashionable women’s clothing. Called Bitten, every piece in the collection will sell for $19.98 or less, according to press reports. Parker, known for her sense of style, said that she picked the chain because she grew up in a family of eight children that faced financial difficulties. The chain is hoping to build upon the success it has enjoyed with its $14.98 Starbury basketball sneakers, endorsed by New York Knicks basketball player Stephon Marbury, who wears them during games. Steve & Barry’s has since expanded its product line from 50 items to 200, including apparel and women’s athletic shoes. Offshore sourcing In the ongoing push to cut expenses, US apparel and footwear manufacturers increasingly have moved their production facilities to lower-cost regions outside the United States — notably Mexico, the Caribbean, Central America, Asia, and sub-Saharan Africa. Many manufacturers, though, have retained some facilities in the United States to manufacture products that require a fast turnaround time. Following the 1995 implementation of the North American Free Trade Agreement (NAFTA) and the subsequent lowering of tariffs, apparel manufacturing in Mexico and the Caribbean grew significantly. The proximity of these countries to the United States means that their facilities can offer significantly shorter shipping times compared with Asian manufacturers, while also providing low-cost production — factors that are especially important for basic goods. Legislation in the last several years has sustained the long-term shift to offshore sourcing. The Trade Act of 2002 was approved by the US Congress in July 2002 and signed into law by President George W. Bush. This legislation contains the Trade Promotion Authority, which grants the president the right to negotiate trade agreements and gives Congress the final authority to approve or disapprove those agreements. It also contains the Andean Trade Preference Act, which provides dutyfree access to most apparel, and virtually all footwear, from the Andean region of South America (Bolivia, Colombia, Ecuador, and Peru). The new legislation made certain retroactive modifications to the May 2000 Caribbean Basin Trade Partnership Act and the African Growth and Opportunity Act (AGOA), both of which carry numerous breaks for footwear and apparel from countries in those regions. Standard & Poor’s believes that, while tariff and quota preferences for apparel and footwear produced in the Caribbean basin, the Andean region, and, to a lesser extent, sub-Saharan Africa have temporarily increased sourcing from these regions, the trend is not likely to last. Over time, we expect China’s share of apparel and global manufacturing to increase dramatically, facilitated by its entry into the World Trade Or- US IMPORTS AND EXPORTS OF APPAREL (In billions of dollars) 80 70 60 50 40 30 20 10 Exports Imports 0 1990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 2006 Source: US Department of Commerce. NOVEMBER 29, 2007 / APPAREL & FOOTWEAR INDUSTRY SURVEY 15
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 and 14: Juicy Couture evolved into the prem
Page 15: crombie & Fitch), aimed at men and
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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