Inhuman Volatility…
September 26, 2011
No Hurry To Buy If There Is No Growth…
October 10, 2011

It All Looks The Same To Me….

As a Floridian that’s recently moved to Mongolia, I have wizened up. Winters in Mongolia are cold, and I need a new wardrobe. My Florida ensemble (shorts, flip flops and whatever free t-shirt I got during a company visit), won’t cut it in Mongolia. Last winter, I survived on my only two sweaters. This year, I decided to go shopping for proper attire—as a value investor, I headed to the outlet mall on Riverhead, Long Island.

I won’t go through the details of my shopping. Let’s just say that I buy new clothes about once a decade and despise the experience. My sense of fashion is abysmal, but fortunately, every store has the exact same thing—so it’s hard to mess up too horribly. After a few stores, I became intrigued by just how similar they all were. The more stores I went into, the more perplexed by this I became.

Out of roughly two hundred stores, there were at least a dozen that specialized in jeans. I found this humorous because jeans are all pretty similar. To summarize a half century of jean evolution, we’ve gone from bell-bottoms, to ass tight, to ripped, to baggy to what I’ll currently call the “designer phase,” because jeans shouldn’t cost $250 a pair.

As a speedy shopper, I didn’t even have to bother with the specialty jean stores; every single other store has its own brand of jeans that look just like the designer ones—blue. They even have the same fake stains in the same places. The dress shirts were the same, the sweaters were the same. Quite honestly, everything looked the same.

There were a few dozen designers that I hadn’t heard of. I poked my head in for a refresher on pop culture—why bother? These stores had the same stuff as well. With a few broad exceptions, they all looked the same—but why shouldn’t they?

Any retailer with common sense has an army of experts who micro-analyze what fashionable celebrities were wearing last week, because it’s likely selling well at the mall this week—naturally, they analyze the mall sales as well. If it sells well for one retailer, all the competitors buy some, Fed-Ex it to China and mass produce it the week later. With the current information and shipping revolutions, anyone can copy anyone else’s style in days. If it works for one retailer, by the end of the week, it works for everyone. In a world without the ability to differentiate, what’s the value of a retail brand? Probably not much.

I’ve always thought that retailing was an awful business and clothing retailers were even worse. Let’s face it; it’s a business with very high fixed costs. The whole profitability rests on the ability to push through high sales per foot. Even mark-downs don’t matter; the margins are just that large to begin with. Sales are everything. In the past, you could differentiate yourself if you could guess right about the fashion trends. You would either do well, or flop horribly. Those who got it correct more often than not, made lots of money for their shareholders. If there’s four seasons a year, in any multi-year period, almost every retailer would have a horrible quarter eventually—it’s inevitable that they would guess wrong at least once. As an investor, it was quick money to buy the bad quarters if I had any confidence that the company could survive long enough for their fashion sense to return. Now, I’m not sure if anyone can win at this. It all looks the same.

What if the era of high margin retail apparel is over? In the past decade, information technology and the internet have eroded the profits of industry after industry. Why should clothing retailers be immune? Luxury brands are losing the war against knock-offs, which increasingly look like the original. Now the copying game is going down market.

There are a few true brands out there, particularly in the luxury space. But tell me, what’s the difference between The Gap, Express, Aeropostale, Eddie Bauer, American Eagle, The Limited, Ann Taylor, Perry Ellis, etc? In the more niche category, Pacific Sunwear and Quicksilver are practically the same. What’s the difference between the five sneaker stores at the outlet store? I can go on and on. Sure, there are subtle differences, but not enough for someone like me to discern. Why should any of these businesses have profitability that’s substantially beyond their costs of rent?

The amount to be spent on clothing is static in any given year. If someone gains share, someone else loses. In the past, you gained market share by outmaneuvering your rivals on the grounds of fashion. No longer is it a game of guessing the right style, where some guys can guess better. What if the battle for market share increasingly involves price wars since it all looks the same? I’m clearly no expert on anything to do with fashion, but I’ve never understood the huge margins that companies like The Gap can earn on rather non-unique blue shirts. Maybe the days of 40% margins is over because every other retailer has the same damn shirt too.

Categories: General
Positions Mentioned: none

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