Europe’s Fashion Industry Faces Nightmare

“People do not buy a new outfit to stay at home.” Sales at stores that have reopened languish while ecommerce is booming. McKinsey: up to a third of global fashion retailers will not survive the crisis.

By Nick Corbishley, for WOLF STREET:

Most European brick-and-mortar clothing stores have been open for three or four weeks, yet sales continue to languish. In April, when all but the essential brick-and-mortar stores were shut, sales of clothing and accessories slumped by 50% in the UK and 67.4% in France, the home of fashion. In Spain, revenues in the sector plunged by 80.5%, according to data published by the trade association Acotex.

But even in May, when stores in most Spanish cities reopened, revenues in the sector fell 72% year over year and are down 45% year to date. Those figures include booming online sales.

“The textile and accessories trade is in a very delicate spot, requiring urgent and specific measures for the sector,” warned Acotex. In other words, government help and money. Otherwise, the trade association said, there will soon be a wave of bankruptcies and closings.

The problem is not just that people have been unable to visit their favorite clothing stores in recent months, it’s that they’re less likely to add to their wardrobe at a time of much reduced socializing, and in many cases reduced income. As Simon Wolfson, CEO of UK fashion retailer NEXT, said, “People do not buy a new outfit to stay at home.” And much of what they do buy, they now buy online.

On Wednesday, Inditex, one of the world’s largest fashion retailers with with eight brands, including Zara, and nearly 7,500 stores in 96 countries (at the end of 2019), reported a 44% plunge in revenues in its first quarter, February through April, to €3.3 billion from nearly €6 billion a year ago, and a net loss of €409 million, its first quarterly loss since going public in 2001. The company’s shares fell 9% on the week and are down 23% year to date.

But online sales have surged 95% in April and 50% in the first quarter. Inditex says it expects online sales to represent more than 25% of total sales by 2022, up from 14% at the end of 2019.

At the end of April, only 965 of Inditex’s stores were open in 27 countries, about 13% of total capacity. But in May, despite seeing “a progressive recovery in sales in the markets that have reopened stores,” total sales in local currencies (including booming online sales) were still down by 51% compared to the same month last year.

“The Covid-19 pandemic has had a material impact on our operations as lockdowns and restrictions have been in place in most markets,” said Inditex CEO Pablo Isla during the earnings call.

That’s bad news for landlords, which have already seen a growing rash of store closures since the lockdown, as well as an unprecedented spike in non-payment of rents. Inditex is one of the biggest retail tenants on the planet. A few days ago, it unveiled plans to close as many as 1,200 “mainly smaller” stores around the world — the equivalent of 16% of its global store portfolio. Around three hundred of the store closures will take place in the company’s native Spain.

Despite its recent struggles, Inditex has one big advantage over many of its rivals: its huge reserves of cash, which has enabled it to continue paying its staff throughout the crisis without having to put them on short-term leave. Many of its rivals have had to tap government bailout programs to keep paying their workers, meaning no more dividend payments for their shareholders, at least until the support ends.

Budget fashion chain Primark has drawn on government bailouts across Europe to pay its 68,000-strong workforce, “without which we would have been forced to make most redundant,” chief executive George Weston admitted in a statement. Inditex’s biggest rival, Sweden’s H&M Group has also had tens of thousands of employees on short-term leave throughout the world.

The Nordic giant has been struggling for a number of years. Its shares are down almost 60% from a 2015 peak. Its last quarterly report was pre-lockdowns, covering the period from December through February. But it already reported a 57% year-on-year slump in sales in March and April.

H&M has another big problem: its burgeoning inventory of unsold goods, a problem that has dogged the company for years but has worsened since the lockdowns began. By the end of April, its unsold inventory had jumped to $4.2 billion, from $3.9 billion at the end of February. For Inditex this is a somewhat lesser issue, thanks to its eclectic mix of local production, heavy rotation of products, and its successful embrace of ecommerce.

But nobody in the fashion business is ready for what is coming. Nearly 40% of businesses in the sector are expecting the impact to be “much worse” than that of the 2008 financial crisis, according to a Euromonitor International survey. McKinsey estimates that up to a third of global fashion retailers will not survive the crisis.

The fashion industry’s tightly woven $2.5 trillion supply chain is already beginning to unravel, leaving some suppliers feeling the pinch, as big clients such as the UK’s Arcadia Group cancel orders and extend payment terms. Many of these suppliers are in low-cost labor countries like Vietnam and Bangladesh, where furlough programs, emergency business loans, and central bank corporate bond buying programs are virtually unheard of.

For cash-strapped consumers in Europe, there may be bargains to be had this summer as retailers try to entice buyers back into the stores. But these discounts could cripple the already challenged finances of many retailers. How many consumers will actually take advantage of the discounts remains to be seen — with many consumers now having switched to online buying. For the legions of already struggling fashion retailers, the hit to profit margins could well the last straw. By Nick Corbishley, for WOLF STREET.