Apparel stores sell clothing, footwear and accessories to consumers. It is a subset of the retail industry, and these companies usually make and sell their own clothing brands (although some do sell third party merchandise). Most apparel stores are considered specialty apparel retailers, because they focus on providing an assortment of similarly themed merchandise to one particular type of customer - for example, Abercrombie & Fitch specializes in "preppy" and traditionally-fashioned apparel for teenagers and college-age consumers. However, some of these companies appeal to a broader customer group, such as Gap (one of the largest apparel retailers with over $15.8 billion in 2007 sales) which has three store chains targeting different demographics: The Gap, Banana Republic and Old Navy.
Same store sales (also called comparable store sales or "comps") is a measure of sales at stores that have been open for a specific period of time (usually at least one year). Same store sales growth is a more accurate reflection of a company's performance than net sales growth because in order to grow sales in existing stores a company must drive foot traffic and brand loyalty, whereas growing net sales by adding new stores is a poor reflection of company performance as most new stores typically garner heightened attention and foot traffic because consumers like to explore new stores when they open. Also the metric is important from the company's perspective, as it is more profitable to increase sales at existing stores than to incur the expenses necessary to open a new store. As such, companies and analysts pay close attention to the same store sales growth metric.
Profit margins in the apparel retail market vary widely as a product of price levels and discounting strategies. Usually high-priced apparel retailers benefit from large profit margins that they protect by engaging in discounting on a very limited basis. Lower-priced apparel retailers profit margins are narrower and shrink further when these stores slash their prices even lower in order to clear merchandise.
For example, gross profit margins for apparel store companies reach as high as 67% at Abercrombie & Fitch Company (ANF) where denim jeans are priced at $89.50, and as low as 35% at Aeropostale (ARO) where a similar pair of jeans costs a customer $29.99. Similarly, operating margins range from nearly 20% at Abercrombie & Fitch Company (ANF) to 8.3% at Gap (GPS).
Fashion trends appear and disappear quickly, particularly for younger customers where fashion and fads move even more rapidly, and being "hip" to key fashion trends is a major challenge for apparel retailers. Missing a single fashion trend, such as a popular theme or item like military-styled clothing or traditional vests, can be very costly for an apparel retailer as customers may go to other stores to find a fashionable item if an apparel retailer missed the trend. On the other hand, investing in the wrong trend can also be very costly for an apparel store as it must markdown the merchandise and cut its profit margins to clear the product, which may not be a viable option for some stores that avoid marking down its merchandise.
A major factor in an apparel store's performance is its brand positioning. Luxury apparel stores typically target customers in the highest income bracket who can afford to pay the highest prices for premium-quality merchandise. Apparel retailers of "near luxury" or "aspirational" brands target customers from the middle- and upper-middle class who desire to wear the latest fashions, but can not afford to pay premium, luxury prices so they settle for these "near luxury" apparel brands such as Abercrombie & Fitch and Polo Ralph Lauren. Finally, standard-level apparel stores such as The Gap target middle- and lower-class customers with average incomes who purchase lower-priced merchandise and look for clearance sales.
An apparel store's brand positioning is very important during times of economic downturns and slowdowns. During these periods, middle- and lower-class consumers cut back their spending on non-necessity items such as apparel. Subsequently sales at standard and "near luxury" apparel stores can suffer in these times as their customers trade down to lower-priced apparel from department stores and discounters such as TJX Companies (TJX) and Wal-Mart Stores (WMT). Simultaneously, luxury retailers avoid this problem because their wealth-laden customers can afford to maintain their spending habits as their high net worths are less effected by economic downturns.
This effect has been relevant in 2008 as the U.S. economy has struggled, growing at a mere 1% annual rate in Q1 FY08. Subsequently, many "near luxury" and standard-brand apparel retailers have suffered: same store sales at "near luxury" retailer Abercrombie & Fitch Company (ANF) and standard-brand The Gap fell 3% and 7% in the first quarter, respectively..