Industry Surveys

(salaries, commissions, advertising, and so
forth), it usually is easier to control than the
gross margin. The company may derive a
certain degree of expense leverage from increased
sales levels, thereby improving operating
margins. Consequently, an increase in
the operating margin typically indicates that
management is using its resources more efficiently,
allowing fixed costs to be spread
across greater volumes. On the other hand, a
trend of narrowing operating margins may
be a warning sign that management is not
operating at its most efficient level.
Balance sheet
The balance sheet reports major categories
and the stated values of assets, liabilities, and
stockholder’s equity at a specific point in time.
◆ Cash and equivalents. A company’s
cash position needs to be analyzed concurrently
with its ability to generate cash. If a
company continually operates with net cash
outflows because of working capital needs
and capital spending, one should look at the
level of cash and marketable securities on the
balance sheet to determine how long the
company can fund operations before it will
need to tap the capital markets.
◆ Inventory. Inventory management is
crucial to retailers and manufacturers alike.
They must have the right products on hand
in the right amounts; failure to do so could
lead to fashion misses or being caught short
during an important selling season. Having
too much inventory raises costs and ties up
capital. It also may signal impending gross
margin declines, in cases where the products
must be discounted in order to sell them before
they go out of style.
Inventory levels are generally available
from a company’s balance sheet. The effectiveness
of inventory management can be
measured by the inventory turnover ratio.
This ratio, calculated by dividing the cost of
goods sold by its average inventory, should
be reviewed for trends and compared with
peer averages.
Inventory turnover ratios for apparel and
footwear companies, while generally comparable,
could vary widely from company to
company. A high turnover rate indicates that
goods are selling well relative to the average
amount of inventory kept in stock. Converse-
ly, a low turnover rate indicates that goods
are not moving rapidly. Inventory buildup is
less of a concern for basic merchandise,
which can be sold throughout the year, than
it is for fashion-oriented products.
Statement of cash flows
It is necessary to estimate cash inflows (or
sources) and outflows (uses) to determine the
net cash flow generated (or used) by a company’s
operations. How does the company
plan to raise and utilize its cash? The cash
flow statement has three sections: operating,
investing, and financing.
The operating section reflects cash generated
from, or used in, operations, after adjusting
for noncash items (such as depreciation and
amortization), and including changes in
working capital components. For example,
if a manufacturer anticipates higher sales
from seasonal activity, it may need cash to
build inventory levels.
The investing and financing sections capture
other sources and uses of cash outside the
company’s operations. Possible sources include
the issuance of debt, or equity capital and dividends
received from affiliated companies. Potential
uses include repurchasing shares of
common stock, paying dividends, reducing
debt, or reinvesting in the business via either
capital expenditures or acquisitions.
Other factors
In addition to the income statement and
balance sheet items outlined earlier, several
other factors are important to consider when
analyzing an apparel or footwear company.
A company’s order backlog indicates what
its sales will be like over the next few months.
Although this information is not included in
the financial statements, some apparel and
footwear companies report it separately.
Certain companies in the athletic footwear
and apparel segment report worldwide “futures
orders.” This measure covers products
scheduled for delivery between certain dates,
usually over the next three to six months,
and is another way to project revenues. In
the apparel industry, deliveries scheduled for
future seasons are reported as “bookings.”
Corporate governance
Before the scandals at Enron Corp.,
WorldCom Inc., and Parmalat Finanziaria
NOVEMBER 29, 2007 / APPAREL & FOOTWEAR INDUSTRY SURVEY
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