Fast fashion edges out older brands in US

Primark is an Irish clothing company that carries womenswear, menswear and children's apparel.
Primark is an Irish clothing company that carries womenswear, menswear and children's apparel.PHOTO: AGENCE FRANCE-PRESSE

'Euro fast fashion' labels such as Primark and Zara are taking the United States by storm

Visitors to the newly redeveloped Kings Plaza shopping mall in Brooklyn later this year will encounter brand-new, multi-level Primark and Zara stores.

Names not on the directory? Debt-laden older brands such as J. Crew, Rue21 and True Religion.

"Euro fast fashion", featuring trendy clothing that can move from catwalks to stores in mere weeks, has taken the United States by storm and distressed speciality apparel retailers are among the biggest casualties.

Their business models and balance sheets are in tatters, especially at smaller and slower chains that jacked up debt during leveraged buyouts.

That has left them short on cash just when they need it to buy updated systems and keep their shelves constantly refreshed to keep pace with their newer, nimbler rivals. The result has been the biggest spate of restructurings and bankruptcies since the Great Recession.

"Companies that have the highest leverage are going to be the least able to address those challenges and invest the capital necessary to explore different strategies and evolve the business models," said Mr Chris Grubb, a managing director in Greenhill & Co's restructuring group, who focuses on struggling retailers.

Moody's Investors Service lists 18 retail and apparel names as "very high credit risk". That is "the highest number I can remember since certainly the recession and I don't recall us getting to that level even then," said Moody's analyst Charles O'Shea.

Besides fast fashion, traditional chains are being hurt by the quickening shift to online shopping as competitors led by Amazon.com lure away consumers with free shipping and the convenience of buying from their sofas.

Younger shoppers have gravitated towards fast fashion brands not only because they are more affordable, but also because they are able to quickly capture the latest looks and make them available in a fraction of the time traditional merchants need.

Lower prices also mean customers of these brands, sometimes referred to as disposable fashion, have come to expect an ever-changing assortment.

The competition exacerbates the crunch at companies such as J. Crew Group as they scrounge for cash to respond. The most immediate risk is for chains that are smaller, highly levered and often private-equity-owned, Greenhill's Mr Grubb said.

J. Crew, Claire's Stores, Gymboree, Rue21 and True Religion Apparel, the five most troubled companies on S&P's list of retailers on negative outlook, all fit that profile with credit ratings deep in junk territory.

Some have sought breaks from creditors such as debt swops and extended loans or hired financial and legal advisers for restructurings.

J. Crew, backed by private-equity sponsors TPG Capital and Leonard Green & Partners after a 2011 buyout, added two directors with restructuring expertise to the board last month as the value of its US$1.5 billion (S$2.1 billion) term loan was sinking towards US$0.55 cents on the dollar.

High leverage is also squeezing chains less affected by fast fashion. Claire's, bought by Apollo Global Management in 2007, has repeatedly squared off with creditors over new terms, and Gymboree, labouring under debt from its Bain Capital buyout in 2010, has said it is looking into refinancing or repurchasing senior notes.

Fast fashion is an expensive proposition for traditional speciality merchants, who are often lagging behind on replacing stale inventory or are sacrificing merchandise quality, S&P's analysts said. "A lot of them are hamstrung by their supply chains," S&P's Mr Robert Schultz said. "Even high-end brands are going into fast fashion."

Less-indebted apparel names, while still facing the same secular pressures, are better equipped to adapt. American Eagle Outfitters Inc, for example, managed to keep last year's revenue growing through Oct 29. The teen fashion merchandiser has virtually no debt, with just US$8 million drawn on a US$400 million revolver.

Speciality apparel should not expect a break anytime soon. Holiday retail sales increased 4 per cent last year to US$658 billion, according to the National Retail Federation, with online sales growing faster than forecast at 12.6 per cent. Department stores are struggling to face the changing industry too, with Sears Holdings Corp, Bon-Ton Stores and Neiman Marcus all on the S&P list of highest-risk companies with negative outlooks.

Many of the chains are closing stores to cope with sluggish mall traffic, with Sears planning to shutter another 150 locations.

Malls may also come under pressure as closing retailers leave them with empty storefronts and broken leases. More than 10 per cent of US retail space or nearly 1 billion sq ft, may need to be closed, converted to other uses or renegotiated for lower rent in the coming years, according to data provided to Bloomberg by CoStar Group.

Trade policy reform under US President Donald Trump's new administration could cause further pain by making it more expensive to import apparel, Bloomberg Intelligence analyst Poonam Goyal wrote in a report this week.

More than 90 per cent of apparel bought in the US is produced abroad and additional import costs could hurt retailers' margins, according to the report.

The larger companies may be able to survive longer as their size and balance sheets afford them more flexibility, but they will have to face the changing times too, said Greenhill's Mr Grubb.

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A version of this article appeared in the print edition of The Straits Times on February 02, 2017, with the headline 'Fast fashion edges out older brands in US'. Print Edition | Subscribe