In its recent Outlook Update, Moody’s Investor Service lowered the 2016 growth forecast for the apparel and footwear industry to the 3-5 per cent range from 5-7 per cent in 2015, moving from a positive outlook to a stable one. Analysts also lowered their 2015 constant-currency growth forecast from 7-9 per cent.

“While the hedges taken this year will partially protect margins, the strong US dollar will continue to have negative foreign currency translation effects on the industry’s gross profits for the rest of this year,” said Scott Tuhy, a Moody’s Vice President, Senior Credit Officer.

Once 2015’s hedges have rolled off next year, provided foreign exchange rates stay the same, Moody’s said companies will experience a roughly 40 basis point drop in operating margins because of higher sourcing costs at current exchange rates. Revenue growth for the sector, however, will remain a moderate 4-6 per cent through next year.

“Apparel companies will also continue to benefit from low cotton and oil prices this year, which could help the industry’s operating margins,” Tuhy added, though negative currency effects have offset most of those benefits. When it comes to retail, he said, “The strong dollar has discouraged spending by tourists to the United States, impacting sales at brands such as Ralph Lauren and Calvin Klein, dragging on apparel sales.” And those brands are blaming part of their lackluster performance on reduced department store spend.

Sales for department stores have fallen 24 percent since 2002 and more and more apparel companies are realigning their focus and growing their online and direct-to-consumer offerings. Nike has benefitted from a shift away from department stores—the retailer has opened more of its own branded stores, and according to Moody’s, grew direct-to-consumer sales by 25 per cent in fiscal 2015 to more than $6.6 billion, or close to 22 per cent of total sales. VF Corp also grew its direct-to-consumer sales by 11 per cent in the first half of fiscal 2015 to 25 per cent of its total revenue.

“We anticipate apparel companies, particularly big names like Nike, Ralph Lauren, VF Corp and PVH, to grow sales and expand operating margins through their organic growth initiatives, which will be more recognizable in the long run without FX noise,” Moody’s said.

Nike, VF Corp and Hanesbrands have been the primary revenue and income growth drivers for the apparel sector this year, and they all sell athletic apparel, which points to the continued trend toward athleisure-focused sales. The demand for athletic wear has weighed a bit on denim, but Moody’s said denim sales from companies like PVH and Levi’s will recover. E-commerce sales in the apparel sector should grow 15.3 per cent this year, 14.2 per cent next, and online penetration will reach 16 per cent of total sales by next year. Despite China’s currency fluctuations and its economic slowdown, Moody’s said the country will still be a big growth opportunity.

www.moodys.com