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NOVEMBER 29, 2007 / APPAREL & FOOTWEAR INDUSTRY SURVEY 4 offerings in moderate-priced channels. Brands such as Dana Buchman, Ellen Tracy, and Anne Klein are on the decline, while contemporary and lifestyle brands, such as Juicy Couture and The North Face, are garnering more floor space. At Liz Claiborne, sales of its Partner Brand labels, which include Dana Buchman and Ellen Tracy, were down 13% in the second quarter of 2007. At VF Corp., sales of its outdoor brands, which include The North Face, were up 20%. Not surprisingly, Dana Buchman and Ellen Tracy are among the 16 brands that Liz Claiborne has under strategic review (to sell, discontinue, or license) in order to focus on its faster-growing brands, which include Juicy Couture, Kate Spade, Lucky Brands, and Mexx. Contemporary and lifestyle brands gain traction The boomer and bridge (between moderate and high-end designer) markets are challenged by lower-end merchandisers offering special limited-edition items by guest designers who typically command premium prices. Target has been at the forefront of this trend, with fashions by Proenza Schouler, Behnaz Sarafpour, and Luella Bartley; fast fashion chain H&M has worked with Karl Lagerfeld, Roberto Cavalli, and Stella McCartney. Department stores are using designers to head their own proprietary label initiatives on a more permanent basis, while continuing to expand private-label efforts to drive traffic and profits. In the fall of 2007, Kohl’s has been rolling out apparel, footwear, and accessories by Vera Wang; American Living will be in J.C. Penney in 2008. Macy’s has been experimenting with its O Oscar label by Oscar de la Renta. Increasing penetration of exclusive or private-label merchandise is highly attractive to department stores that want to differentiate themselves from the competition and justify higher mark-ups and fewer markdowns in the highly competitive apparel segment. This was one of the key rationales driving Federated’s acquisition of the May Company in 2005 and, ultimately, the rebranding of the new combined chain as Macy’s in 2007. Across the department store floor, the “contemporary” category (more modern design that appeals to younger women) is still on a hot streak. Estimated at a $16 billion retail market, it has enjoyed steady growth in the past five years by offering newness and a mix of styles at varying price points. New designers are entering the contemporary market, and prices have not been an issue; in fact, in distinct opposition to apparel generally, contemporary brands have not exhibited deflationary pricing. The convergence of entertainment and fashion With the launch of InStyle, Time Inc.’s monthly magazine that celebrates the lifestyles of entertainers and other public faces, the convergence of fashion and entertainment accelerated. Unlike previous celebrity-focused titles, InStyle was one of the first publications to use full-length photos showing an entire outfit. Asking “Who are you wearing?” has become de rigueur on red carpets with the proliferation of celebrity TV news coverage. At MAGIC, the fashion and apparel trade show of the Men’s Apparel Guild in California, vendors typically display press mentions of stars wearing their apparel to appeal to buyers. Tom Ford — formerly at Gucci Group NV and more recently featured on Project Runway, Bravo’s reality show focusing on fashion design — have made designers themselves a point of interest. Both old and new technologies are driving demand and around-the-clock availability. Cable channels such as QVC, Home Shopping Network, and ShopNBC are dedicated to selling around the clock, extending the reach of brands to new audiences. High-speed Internet connections have made shopping online a less risky proposition by enabling greater detail and multiple views of an item, along with 24/7 availability. Celebrity news Web sites, such as TMZ.com, post images and videos of celebrities who are out and about, sometimes shopping at their favorite retailers, while starbrand.tv enables viewers to purchase clothing and accessories worn by their favorite TV characters at any time. Comfort over style: casual seasonal footwear has legs Flip-flops and Crocs are staying out of the closet and on people’s feet much longer. People are wearing seasonal footwear in transitional months as well as during warm weather. Replacing sneakers, the working
woman’s transit shoe of choice, flip-flops continue to reign. Believed to have been developed from traditional Japanese sandals, flip-flops can be made with a variety of materials, ranging from cheap rubber to leather, and may include various embellishments to dress them up. Flip-flops even made a publicized (albeit somewhat criticized) appearance at the White House in 2005, when some members of Northwestern University’s women’s lacrosse team wore them during their meeting with President Bush. Originally intended as a boating/outdoor shoe due to its slip-resistant, nonmarking sole, Crocs (produced by Crocs Inc.) became known by word of mouth for their comfort and lightweight design. The company, which holds four patents covering various aspects of its footwear, intends to transform itself into a lifestyle company based on two proprietary products: Croslite, a closed-cell, odor- and bacteria-resistant resin that molds to foot shape, for footwear, and Croslite rt, a lightweight, durable, and heat-resistant material, for apparel. Styles have been recommended for gardeners, nurses, and food service workers for comfort and have been popping up on the feet of men, women, and children. Sales in the first half of 2007 more than tripled over the same period in 2006, with 30% of sales from international markets. Sales for full-year 2007 are expected to approach $1 billion. Whether Crocs turns out to be another footwear fad remains to be seen. Sports apparel goes upscale It is well understood that most athletic apparel and footwear is typically worn for nonathletic occasions, but the fashion industry is now partnering more frequently with traditional sports apparel companies. Perhaps one of the most visible moves in this area was the acquisition of a controlling interest in Puma AG Rudolf Dassler Sport in April 2007 by PPR SA (formerly Pinault- Printemps-Redoute). Designers Alexander McQueen and Philippe Starck are each working with Puma on different projects. Stella McCartney is working with Adidas AG for the fifth time, and Nike Inc. has partnered with John Varvatos. Sometimes the fashion industry incorporates textile and other innovations used in athletic apparel. In this realm, we are seeing fashionable clothing that has details like enclosed zippers and is made of material that wicks away sweat and fights bacteria. Fabrics with these elements have been available in sport clothing for some time. Specialty retailers follow shoppers to lifestyle centers Since 2000, mall growth has been stagnant, with only a handful of new openings to compensate for closings, so it is no wonder that retailers looking for growth are flocking to lifestyle centers. About half of the more than 150 lifestyle centers in the United States have opened since 2002, according to data from the International Council of Shopping Centers, a trade group. Lifestyle centers are upscale, outdoor shopping areas designed to look like an urban street and are typically located near affluent suburbs. Developers are finding it difficult to find large parcels of land for malls, and retailers find rental maintenance costs lower for lifestyle centers than at traditional malls. According to Poag & McEwan, the developers who first coined the term lifestyle centers, sales tend to be about $400 to $500 per square foot in lifestyle centers, compared with $330 per square foot at traditional malls. The boom in luxury goods also may have played a role. Affluent shoppers seem to prefer a boutique-like atmosphere, which is very different from enclosed, 100,000square-foot malls anchored by a few department or discount stores. Often, tenants at lifestyle centers include stores from companies such as Banana Republic (owned by Gap), Coach Inc., Chico’s, and Pottery Barn (owned by Williams-Sonoma Inc.), as well as higher-end restaurants. Brands use “shop-in-shop” to grow In conjunction with opening their own stores, apparel and accessory brands have used shop-in-shop concepts to take more control of merchandising. In a shop-in-shop arrangement, floor space is dedicated to the display of products from one brand and typically includes special signage and fixtures. The proposition is attractive to both the manufacturer and the retailer in that the concepts help differentiate from competition; this allows the brand and the retailer to bring in higher-end merchandise and a broader selection, and cycle out slow NOVEMBER 29, 2007 / APPAREL & FOOTWEAR INDUSTRY SURVEY 5
Page 1 and 2: Marie Driscoll, CFA Esther Kwon App
Page 3 and 4: CURRENT ENVIRONMENT Challenges, hea
Page 5: inging in more fashionable private-
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 and 16: crombie & Fitch), aimed at men and
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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