Bullish Fashion CEOs vs. Wall Street Stock Declines

Fashion is asking Wall Street for something investors just might not have — patience in a time of confusion.

The sector soared through the pandemic last year, with consumer demand outweighing supply chain troubles and the evolving pandemic. But now fashion is facing a much more uncertain environment with inflation at a 40-year high, China in a COVID-19 deep freeze and war raging in Ukraine.

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So chief executive officers are arguing their businesses are set up to thrive after two years of pandemic — Under Armour Inc. chief Patrik Frisk, and Adidas CEO Kasper Rorsted were the latest to make the case last Friday — while investors are in a very “what-have-you-done-for-me-lately” mood.

The dichotomy shows in the stock market, where many fashion brands are being hit especially hard as shares swing wildly and the reality of much higher interest rates starts to settle in with investors. More shakeups could be in the offing if the generally strong consumer starts to show more signs of weakness, which is starting to happen on the lower end of the income scale.

Wall Street started this week off with another jolt.

The Dow Jones Industrial Average dropped 2 percent, or 653.67 points, to 32,245.70 on Monday as investors looked for some calm in the storm and couldn’t find it in either stock or the bond markets.

So far this year the Dow Jones has fallen 11.3 percent and most fashion companies have taken an even bigger step back — from the latest darling to leaders of industry.

Allbirds Inc. is down 67.3 percent, while Under Armour is off 46.8 percent, and companies as diverse as PVH Corp., VF Corp., Kering, Moncler, Hermès International, Capri Holdings and Nike Inc. have all lost at least a third of their value so far in 2022.

Complicating the picture is the American consumer, who has hung on despite it all and by many measures is still spending away, particularly among the more well-to-do shoppers.

The Bank of America Institute’s latest Consumer Checkpoint study found that credit and debit card spending per household was up 23.7 percent last month.

“Overall transactions were up 8 percent year-over-year, a more normalized indication of overall consumer health,” Bank of America said last week.

But the study also had two callouts that could be significant for fashion.

Bank of America found that the big swing to spending on goods over services has “substantially reversed as the economy emerges from the latest pandemic wave,” marking a renewal of the tug of war between buying goods — like fashion — and spending on experiences.

And the study also noted “lower income average spending growth appears to have flattened over recent weeks, but this may represent usual seasonality.”

The slowdown in spending for lower income shoppers could be a canary in the inflation coal mine that ultimately impacts the broader economy.

Forecaster Craig Johnson, president of Customer Growth Partners, is seeing similar trends — a generally strong consumer profile that nonetheless is showing cracks on the lower end as inflation wreaks its havoc.

Johnson noted that nominal incomes are up and that household balance sheets are up, carrying “$1.3 trillion in dry powder” that’s ready to spend.

“When you dig down in some of the household demographic subsectors, that’s when you see a bifurcation,” Johnson said, noting that higher-end consumers in the upper three quintiles are “sailing right along, they may be, in fact, spending a little more.”

But the picture is changing among consumers in the bottom two income quintiles.

“We are seeing a clear pullback in their spending,” Johnson said. “We’re not sure this has showed up in the government statistics yet, but we’re seeing it ourselves.”

Higher-end consumers have much more wiggle room in their finances and, Johnson said, are less vulnerable now to any “wealth effect” from the declining stock market since the job market is so strong.

So as upper tier and luxe companies are continuing to expand, further down the line income scale, inflation — and especially gas prices — is starting to take a toll. According to AAA, the price of a gallon of regular has soared to $4.33 up from $2.96 a year ago. And there are predictions that as the summer driving season approaches, gasoline prices could go even higher.

Johnson said that change in gas prices is taking about $15 billion away from retail sales a month.

“If you have companies that are sort of in the middle range, like a Kohl’s or a J.C. Penney, the phenomenon that we’re seeing is that there’s a trade down effect from those places to the lower end,” Johnson said. “But there’s not a trade down from the upper two quintiles — the Macy’s and Nordstrom shoppers — into the Kohl’s and the J.C. Penney’s.”

In a “normal” time, that kind of shift in the consumer and potentially big losses for the midtier would be enough to keep the retail and fashion crowd on their toes.

But these are not normal times.

As Adidas’ chief Rorsted told analysts: “The reality is that we’re operating in a very dynamic environment with heightened uncertainty. The devastating war in Ukraine, the continued challenging market environment in Greater China, COVID-19-related restrictions in the East, supply chain challenges and inflationary pressure have left their mark on our first-quarter results, and they will continue to be leaving their mark on our business in 2022.”

The CEO said COVID-19 lockdowns are now affecting 45 large cities in China, dinging the company’s business there, but he asserted that the 80 percent of the Adidas’ business from Europe to North America and Latin America to other parts of Asia is slated to grow by double digits this year.

On the other side of the Atlantic, Under Armour’s Frisk made a similar case, acknowledging that the most-recent quarter “came in lighter than we had expected due to ongoing supply challenges and emerging COVID-19 impact on our Asia Pacific business.”

He said the company believes these trends are “temporary” and underscored, “Under Armour is a growth company with an incredible opportunity ahead of us. Our fundamentals are strong. Our underlying brand strength is improving, and our confidence remains unchanged.”

That will be the trick for other CEOs as they come out with first-quarter results this month: As they have to stand behind or adjust their outlooks for the year, they’ll have to convince Wall Street that their confidence is contagious.

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