ndustry Overview

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The US clothing stores industry includes about 100,000 stores with combined annual revenue of
about $150 billion. Large companies include TJX Companies (TJ Maxx, Marshalls); Gap;
Limited Brands; Ross; and Abercrombie & Fitch. The industry is concentrated: the 50 largest
companies account for about 65 percent of industry revenue.

The industry includes stores that sell clothing accessories. Shoe stores and jewelry stores are
covered in separate industry profiles.

COMPETITIVE LANDSCAPE

Personal income and fashion trends drive demand for clothing. The profitability of individual
companies depends heavily on effective merchandising and marketing. Large companies can offer
wide selections of clothing and have advantages in purchasing, distribution, and marketing. Small
stores can compete by offering unique merchandise, targeting a specific demographic, providing
superior customer service, or serving a local market. The industry is labor-intensive: annual
revenue per worker is about $145,000.

Competition for the clothing store industry includes department stores, discount stores, and
Internet and catalog retailers.

PRODUCTS, OPERATIONS & TECHNOLOGY

The clothing retail industry includes stores specializing in women's clothing (50 percent); or
men's clothing (20 percent). Stores may also specialize in children's clothing (nearly 10 percent
of sales) or accessories. Children's clothing stores include infant wear. Accessory stores may
specialize in hats or caps, costume jewelry, gloves, handbags, ties, wigs, or belts. Within their
specialty, stores typically sell a full range of items including clothing, outerwear, and underwear.
Many clothing stores also sell shoes, accessories, makeup, and perfumes.

The industry includes national and regional chains and independent retailers. Store sizes vary
greatly. Boutique stores may be smaller than 2,000 square feet; a typical mall-based store is about
6,000; large off-price retailers are about 30,000. Major companies may have large flagship stores
in well-known shopping areas. Most clothing stores are located in retail centers, such as shopping
or strip malls, and benefit from customer traffic drawn by larger anchor retailers. Large
companies may have outlet stores in more remote locations. Companies measure how effectively
they use space by monitoring annual sales per square foot.

Most companies have a staff of buyers who make merchandising (product selection) decisions.
Products are introduced by brand representatives or at seasonal meetings with major vendors.
Trade shows and fashion weeks, where designers showcase upcoming collections, are an
important source of information about new fashions. Apparel buyers need thorough knowledge of
consumer and fashion trends to make good buying decisions.

Clothing stores buy from independent manufacturers, although a few chains have a manufacturing
arm to produce their own brands. Depending on the depth of merchandise selection, companies
can deal with hundreds (some, even thousands) of vendors. Large companies may use buying
agents to manage vendor relationships. Some chains, such as Gap, may have significant private-
label sales. To produce private-label merchandise, companies design their own clothes and
outsource production. Because a large percentage of the apparel sold in the US is imported, the
supply chain can be long and complicated. Reacting quickly to fashion trends is challenging,
particularly for small retailers with limited influence over their supply chain.

The two major clothes selling seasons are spring and fall. Retailers place orders with
manufacturers well ahead of time, build inventory in anticipation of these seasons, and replenish
inventory as product is sold. Chains usually receive merchandise at a central distribution facility
and deliver goods to individual retail stores with their own fleet of trucks or outside carriers.

Clothing market segments include various styles (casual, contemporary, professional, formal);
occasions (resort, special occasion, athletic); and price tiers that target a specific type of buyer.
Major apparel brand names, such as Calvin Klein, Ralph Lauren, or DKNY, represent a certain
lifestyle and appeal to a distinct customer. Designers often have multiple lines, each representing
a particular style within a price tier to appeal to different customer types. Clothing stores select
the designer line that best represents their target demographic. Companies must also buy the
appropriate mix of sizes and colors to satisfy demand.

An effective store layout positions merchandise to maximize sales. Companies may have flexible
floor plans that allow them to reposition products as needed. Clothing stores often display
merchandise as coordinated outfits to help customers visualize combinations and drive
complementary sales. Many clothing stores aim to deliver a distinct shopping experience or
image, through unique decor, merchandise displays, a particular type of background music, or
customer service.

Most stores use bar-coded tags on clothing and point-of-sale (POS) registers to track sales.
Companies that sell expensive apparel typically use electronic merchandise tags to deter theft.
Inventory management programs help companies identify slow- and fast-moving items and can
sometimes automatically replenish inventory when levels are low. Real-time access to inventory
information is especially important when larger companies need to balance merchandise across
multiple stores and warehouses. Many companies use electronic data interchange (EDI) to
facilitate purchasing with vendors.

SALES & MARKETING

Customer demographics vary according to an individual company's strategy; for example, Gap
sells men's, women's, and children's clothing. Gap also operates Old Navy (targeting value-
oriented consumers) and Banana Republic (targeting sophisticated consumers). Companies also
consider customer lifestyle (casual, working professional, etc.) when developing marketing plans.

Marketing and promotional vehicles include TV, print, and newspaper advertising; direct mail;
catalogs; social media; and in-store events. Large chains may run extensive national TV and print
campaigns. In-store events include fashion and trunk shows. Locally, clothing stores often use
window displays to attract store traffic. Companies may use a signature decor to define store
image. For example, Abercrombie stores feature an entertaining but comfortable environment to
appeal to college students: TJ Maxx and Marshall's discount stores purposely have a bare-bones
look to appeal to value-oriented shoppers. Companies offer loyalty programs, which offer
special discounts for frequent or large purchases. Loyalty programs may be linked to proprietary
credit cards.

Price markdowns or discounts are a common marketing strategy and often warrant direct mail or
advertising campaigns. Clearance sales help drive store traffic and sell excess merchandise. Large
companies may perform sophisticated pricing analysis to determine the timing and amount of
discounting needed to maximize profitability.

Customer service is especially important in high-end or designer clothing stores, where garments
can cost thousands. High-end companies may have an established clientèle and rely heavily on
repeat business. Sales associates often have personal relationships with loyal customers and
contact them when new merchandise arrives. Even mid-price chains may offer personal shopper
services to help busy customers and promote related item sales.

Many chains sell merchandise through catalogs and Internet sites. While still a small percentage
of total retail clothing sales, apparel is one of the top-selling online categories, according to
Forrester Research. Clothing retailers may offer colors, styles, or sizes not available in stores
through websites or catalogs. Some companies advertise in-store promotions on Internet sites or
run exclusive web-only sales. Emails to website customers are a quick, inexpensive way to
communicate promotions.

US consumers buy an average of 64 items of clothing and seven pairs of shoes annually,
according to the American Apparel and Footwear Association (AAFA). Designer brand apparel is
typically the most expensive. Bridge wear features designer or brand names at moderate prices.
Off-price clothing stores typically offer a wide assortment of brands and styles at 20 to 60 percent
below standard retail prices.

FINANCE & REGULATION

Cash flow is seasonal: peaks generally occur during the fourth quarter, which includes the back-
to-school and winter holiday shopping periods. Companies may monitor the inventory to sales
ratio to identify potential cash flow or inventory issues. Measuring comparable store sales from
year to year helps clothing retailers gauge growth. Inventory typically fluctuates throughout the
year and is highest in early spring and fall, when vendors introduce lines. Inventory may turn over
four to five times a year.

Receivables are generally low because most customers pay with cash or third-party credit card. A
company may have liability for receivables for proprietary credit cards, depending on issuing
arrangements. Opening new stores or financing store remodeling can require significant capital
investment. Gross margins range from 40 to 50 percent of sales.

Many companies lease store locations. Lease payments usually consist of a fixed annual rent and
a "percentage rent" based on annual store sales above a certain level. Stores usually have to pay
for real estate taxes, utilities, and common shopping center marketing costs.

Federal, state, and local government laws regarding truth-in-advertising and consumer protection
regulate clothing retailers. For example, regulations discourage companies from advertising an
item that isn't stocked in reasonable quantities. Various state and federal labor laws, including the
Fair Labor Standards Act, can affect employment practices.

REGIONAL & INTERNATIONAL ISSUES

Regional climate and demographics can affect demand for certain types of apparel. For example,
swimwear has a longer selling season in warm weather states, such as Florida, while demand for
cold weather apparel is limited. Demand for the most current fashions is strongest in urban areas
with large populations of young adults.

Imports, primarily from China, are a critical source of supply for the US apparel market. Mexico,
Vietnam, Indonesia, and Bangladesh are also key sources of imported apparel. Transactions with
foreign manufacturers are often in US dollars. The US has periodically imposed quotas on
categories of apparel and textiles from China.

Working conditions of workers in foreign clothing factories have become controversial. Most
apparel importing countries pay low wages and the "sweatshop" working environments in certain
foreign clothing factories have resulted in negative publicity. Many retailers who buy from abroad
certify that the factories they buy from adhere to certain standards, such as humane working
conditions and a ban on child labor.

HUMAN RESOURCES

Most jobs in clothing stores require few skills. Average hourly industry wages are significantly
lower than the national average. Annual personnel turnover in retail is high, about 50 percent,
requiring constant hiring and training of new employees. Because of uneven demand during the
day, week, and year, many companies use part-time employees. The industry's injury rate is about
25 percent lower than the US average.

Industry Employment Growth

Bureau of Labor Statistics
Average Hourly Earnings & Annual Wage Increase
Bureau of Labor Statistics

Recent Developments

INDUSTRY INDICATORS

US consumer spending on nondurable goods, an indicator of retail clothing sales, rose 1.8
percent in July 2010 compared to the same month in 2009.

US personal income, which drives consumer ability to purchase clothing, rose 3 percent in July
2010 compared to the same month in 2009.

US retail sales for clothing and clothing accessories stores, a measure of consumer spending on
clothing, increased 4.6 percent in the first eight months of 2010 compared to the same period in
2009.
US tourism spending on shopping, which impacts clothing store revenues, increased 3.7 percent
in the first quarter of 2010 compared to the same period in 2009.

MONTHLY NEWS

Corporate News: Sears Seeks Trendier 'Vibe' With Forever 21

The Wall Street Journal, 22 September, 2010, 532 words

Sears Holdings Corp., saddled with extra space in its cavernous Sears department stores, is
joining with hot fashion chain Forever 21 to expand the store-within-a-store concept. The move
is among the most aggressive merchandising steps ...
  
Stores Cheer Versatile Designs --- Designers Pin Rebound Hopes on Uncomplicated Looks That
Will Stay Fresh

The Wall Street Journal, 17 September, 2010, 814 words

Retail buyers emerged from New York Fashion Week at Lincoln Center, in an optimistic mood
for spring, as designers offered them looks that were both uncomplicated and versatile. Nearly
two years after the bottom fell out of the luxury ...
  
Time Travels; Express has morphed with its target customer for three decades

Women's Wear Daily, 16 September, 2010, 1000 words

Known to mall rats for its edgy, budget-friendly, trendy apparel and accessories, Express Inc.
has experienced a few growing pains in its 30-year tenure, but they hardly show today. The
Columbus, Ohio-based Express, which operates 577 ...
  

QUARTERLY INDUSTRY UPDATE

Mall Vacancies Worsen - US shopping malls continue to have trouble as the economic recovery
sputters, according to real estate research firm Reis. The vacancy rate at regional malls hit 9
percent in second quarter 2010 compared to 8.4 percent a year ago. Reis predicts that the average
vacancy rate will likely not improve until 2012 and won't likely reach pre-recessionary levels
until 2016. Economic shifts often take longer to reach the retail property market in part due to
longer term leases. Making things worse, the retail sector added more property during the boom
years, causing the vacancy rate jump to be even more dramatic.

Consumer Spending Index Drops - The Deloitte Consumer Spending Index fell in June 2010
for the second consecutive month, as consumers held onto their money in the rocky economic
recovery. The index cited declines in hourly earnings as well as continued problems in the
residential real estate market as key areas contributing to consumer hesitance. The index
measures four components: unemployment claims, real wages, real home prices, and tax burden.

Shorter Turnarounds Straining Apparel Industry - More apparel dealers are asking for faster
turnarounds on smaller orders, resulting in a strain on the industry, according to the Wall Street
Journal. Gun-shy apparel retailers are asking factories to produce smaller orders in order to test
the products in stores and then expect factories to re-fill orders quickly on hot-selling items.
Factories are struggling with the faster turnarounds and are reluctant to ramp up production
capacity too quickly in an uncertain economy.
Business Challenges

CRITICAL ISSUES

Demand Depends on the Economy - Consumers buy more clothing when they have more
disposable income and the economy is healthy. Under recessionary conditions, clothing stores
sales can slow significantly. Economic factors that drive consumer spending, including personal
income, consumer confidence, and credit availability, affect demand. When money is tight,
consumers often cut discretionary purchases, including clothing and accessories.

Competition from Mass Merchants - The rapid expansion of mass merchants like Wal-Mart
and Target has pressured clothing retailers at the lower and middle segments of the market. By
selling stylish clothes and accessories at low prices, mass merchants attract consumers looking
for fashion and value. Many industry experts credit mass merchants for creating the "cheap chic"
clothing category. These stores also offer one-stop shopping by selling other products besides
clothes.

OTHER BUSINESS CHALLENGES

Dependence on Imports - The large majority of clothes sold in US stores is made abroad by
low-cost manufacturers. Tariffs, quotas, foreign exchange risk, and other import restrictions can
affect the supply and cost of clothing. Purchasing typically requires long lead times, limiting a
company's ability to react quickly to fashion trends. In addition, poor working conditions in
factories by some foreign suppliers have generated negative publicity and resulted in limited
protests.

Merchandising Decisions Crucial - Buying decisions are often made many months before
clothing is actually sold in stores. Most clothing retailers must build inventory before key selling
periods, such as the winter holiday, and carry considerable risk that merchandise may not sell.
Companies that buy the wrong mix of merchandise, the wrong sizes, or too much of an item may
end up with large amounts of unsold inventory. Big inventory markdowns can have catastrophic
consequences on profits.

Fashion Trends Drive Demand - Fashion trends and fads greatly influence clothing sales.
Stores that rely on a particular image are vulnerable to changes in consumer tastes; higher-end
stores are particularly likely to suffer. Certain customer segments, such as teens and young
adults, are notoriously fickle and adopt and abandon styles quickly. Companies that compete in
more trend-driven segments may experience wide fluctuations in sales.

Mall Traffic Declining - Many clothing retailers are located in shopping malls and mall traffic is
declining. Consumers are shopping in malls less frequently and spending less time per trip. The
decreasing appeal of department store anchors has resulted in lower traffic and caused some mall
operators to fill anchor locations with nontraditional retailers with more limited appeal. Some
large clothing chains have closed mall locations or consolidated multiple stores into a single
location.

Competition from Catalog, Internet Sales - Catalog and Internet clothing sales represent a
small, but growing, percentage of clothing sales. Even considering potential problems with sizing
and fit, apparel is one of the top selling categories online, according to Forrester Research. Non-
store retailers may offer unique styles or sizes (such as petites or large sizes), which may not
generate enough volume to justify space in physical stores. Improvements in the US package
delivery system have helped non-store retailers deliver merchandise more effectively. Some
traditional clothing retailers, such as J Crew, generate a significant percentage of sales through
catalogs and websites.

Trends & Opportunities

BUSINESS TRENDS

Demographic Changes - Demographic shifts can greatly affect the size of a clothing store's
customer base. From 2010 to 2020, the population of the US is expected to grow 10 percent. The
population of adults between the ages of 25 and 44 is expected to increase by 8 percent, and the
population between 45 and 64 is expected to increase by 4 percent. Meanwhile, the population
age 65 and older is forecast to grow 36 percent.

Lower Clothing Prices - Retail prices for clothing have consistently fallen in the past decade,
encouraging shoppers to buy more. Retail prices for clothing fell 7 percent between 2000 and
2009. Competitive pressure and the advent of inexpensive fashionable clothing ("cheap chic") by
mass merchandisers have contributed to decreasing retail prices. Low wholesale prices, a result
of more clothing manufacture in foreign countries with inexpensive labor, has allowed clothing
stores to limit pricing growth while maintaining or even growing margins.

Department Store Competition Decreases - Fewer shoppers buy at department stores: clothing
store sales increased over 10 percent between 2004 and 2009 while sales at conventional
department stores fell 12 percent. Specialty clothing retailers have stolen sales from department
stores with more unique merchandise and better service. Despite tough competition from a
variety of retailers, including clothing retailers, department stores continue to focus on apparel
and fashion-related merchandise to drive sales.

International Chains Entering US - Attracted by the world's largest consumer market and
leveraging the weak dollar, foreign chains are expanding into the US. Most of the expansion
comes from mid-priced chains, such as Sweden's Hennes & Mauritz AB, Canada's lululemon
athletica, and Spain's Zara and Mango. Favorable lease terms due to high vacancy rates in malls
and contraction by many US clothing chains have also made the US an attractive target market
for foreign chains.

INDUSTRY OPPORTUNITIES

Plus-Size Apparel - Demand for plus-size apparel is growing, driven by the American
consumer's ongoing struggle with weight. The average women's apparel size is 14, the entry
point for plus-sizes. Almost two-thirds of Americans are either overweight or obese, according to
the Centers for Disease Control and Prevention. Many plus-size consumers cite lack of fashion
forward garments and poor customer service as common problems when shopping for clothes.

Frequent Shopper Programs - To improve the loyalty of notoriously fickle shoppers, many
clothing stores reward frequent shoppers, typically through discounts or free merchandise. Some
companies give loyalty program members access to special events, such as exclusive previews of
new merchandise, concerts, or festivals. Frequent shopper programs have the added benefit of
allowing stores to gather information about shoppers that can be used for direct mail or
telemarketing campaigns. Companies may solicit feedback on customer service from loyalty
program members.

Internet Marketing - Some large marketers have been successful with clothing sales over the
Internet, but mainly those with standard items that customers are already familiar with or those
with specialty items that customers aren't likely to find in local stores. While Internet operations
can be expensive for companies with just one or two stores, most companies can use Internet
sites to show merchandise and dispense coupons to draw store traffic. Accessories, such as
costume jewelry and watches, tend to sell better online because size and fit are less of an issue.

Complementary Product Sales - To sell more goods to existing customers, companies may
package clothing and complementary items into distinct "looks" to help customers visualize
complete outfits and promote related items. Strategically placed merchandise and coordinated
outfit displays can help drive sales of complementary products. For example, selling bathing
suits, beach towels, sandals, and sunglasses in a resort-themed display may motivate customers
to buy extra items. By developing and recommending complete outfits, personal shoppers can
also help drive sales of complementary products.

RFID Inventory Control Systems - While costly, radio frequency identification devices (RFID)
can improve inventory management and give clothing retailers greater access to timely supply
chain information. RFID tags can store more product data and are easier to monitor than standard
bar codes. A small, but increasing, number of clothing retailers and suppliers are experimenting
with RFID. Wal-Mart has been a major supporter of the technology.

Executive Insight  what is this?

CHIEF EXECUTIVE OFFICER - CEO

Achieving Growth in Highly Competitive Market

The success of discount merchants has fueled competition for the lower end of the clothing
market. Discount stores are a one-stop destination for many shoppers who buy clothing and
other items and offer fashionable apparel at low prices. Clothing stores try to appeal to
individuals with a particular lifestyle to combat the sameness of big-box stores. Companies can
drive sales by selling unique merchandise, offering a distinctive shopping experience, or
providing superior customer service.
 
Developing Strategy in Trend-Driven Environment
Fashion trends and fads change constantly, driven by consumer desire for the next hot item.
Because demand for various styles and colors of clothing can be volatile, developing a
consistent corporate strategy and image can be a challenge. Some companies maintain a core
segment of "classic" merchandise to preserve identity and supplement stock with trendier items.
Other companies embrace trends and change clothing selections many times annually.
 
CHIEF FINANCIAL OFFICER - CFO

Managing Inventory
Managing inventory is a major financial consideration as clothing that loses appeal must be
liquidated before losing too much value. Inventories fluctuate throughout the year, but are
highest immediately before the busy spring, fall, and winter holiday seasons. Because popular
fashions sell quickly and yield high profitability, stores monitor inventory levels closely, re-
ordering popular fashions and deciding quickly to move unpopular merchandise.
 
Liquidating Unpopular Merchandise
Unwanted merchandise can accumulate due to the end of a fashion season, a style becoming
less popular, or a poor merchandising decision. Stores quickly decide to dispose of unwanted
merchandise while trying to minimize losses. End-of-season sales are a common way to dispose
of unsold merchandise. Items that can’t be sold are written off, sent to outlets, sold to off-price
retailers, or given to charities.
 
CHIEF INFORMATION OFFICER - CIO

Automating Inventory Management

Monitoring inventory levels is critical to effective merchandising. Real-time access to inventory
data allows companies to quickly identify fast- and slow-moving items and redistribute
merchandise among stores to maximize sales. Technology allows suppliers and store buyers to
complete the sale and shipment of merchandise with a minimum of human intervention. Some
companies use electronic data interchange (EDI) or automatic replenishment programs to
streamline the purchasing process.
 
Leveraging the Internet
Internet sales of clothing are a small, but rapidly growing segment of the apparel market.
Despite sizing and fit problems associated with online shopping, clothing is one of the top
Internet retail categories. Large companies typically offer retail websites and may sell additional
items that complement in-store merchandise. Smaller companies may use Internet sites as an
online "window display," featuring key items to attract customers to physical stores. Clothing
stores often promote special discounts or events through websites to drive store traffic.
 
HUMAN RESOURCES - HR

Managing Part-time Staff

Relatively low pay in the industry has resulted in a turnover rate of about 50 percent. Part-time
help can be a significant percentage of the total labor as stores struggle to maintain adequate
staffing, especially during busy retail seasons such as the winter holidays. Stores hire part-time
and seasonal staff to fill low-skilled positions rather than raise wages and benefits for full-time
workers, so training is often ongoing.
 
Assuring Humane Working Standards Abroad
Public interest groups have protested various stores for buying merchandise from overseas
where labor conditions are poor. Clothing imports are substantial and many companies have
become sensitive to working conditions abroad. Many large companies require certification that
factories meet minimum labor standards. Stores are paying special attention to potential use of
child and prison labor.
 
VP SALES/MARKETING - SALES

Developing a Compelling Merchandising Mix

Bad merchandising decisions can result in unsold inventory, heavy discounting, and financial
losses. Buying is complicated because companies must make purchasing decisions months
before selling seasons, and fashion preferences can change quickly. Companies carefully
consider style and consumer trends and historical purchase patterns to avoid bad buys.
Merchandising is so important to the success of individual stores that buying decisions typically
involve senior managers.
 
Retaining Best Customers
Developing customer loyalty can be difficult due to intense competition in the retail clothing
market and sudden changes in fashion style and consumer taste. To help instill customer loyalty
and generate repeat business, stores reward frequent shoppers with discounts, free merchandise,
and notification of sales prior to a public announcement. Frequent contact with select customers
via direct mail and telemarketing campaigns can help companies develop more personal
relationships with key customers.
 
Call Preparation Questions

EXECUTIVE INSIGHT what is this?

CEO: How is the company reacting to increasing competition from alternative retailers?
Clothing stores try to appeal to individuals with a particular lifestyle to combat the sameness of
big-box stores.

CEO: How does the company integrate fashion trends and fads into their strategy?
Some companies maintain a core segment of "classic" merchandise to preserve identity and
supplement stock with trendier items. Other companies embrace trends and change clothing
selections many times annually.

CFO: How successful is the company's inventory management and subsequent profitability?
Popular fashions sell quickly and yield high profitability, so stores monitor inventory levels
closely, re-ordering popular fashions and liquidating unpopular ones.

CFO: How much of the store's merchandise typically gets liquidated in a season?
End-of-season sales are a common way to dispose of unsold merchandise; items that can't be sold
are written off, sent to outlets, sold to off-price retailers, or given to charities.

CIO: How has technology improved the company's inventory management process?
Real-time access to inventory data allows companies to quickly identify fast- and slow-moving
items and redistribute merchandise to maximize sales. Some companies use EDI or automatic
replenishment programs to streamline the purchasing process.

CIO: How successfully has the company sold merchandise online?

Large companies typically offer retail websites and may sell additional items that complement
in-store merchandise. Smaller companies may use Internet sites as an online "window display,"
featuring key items to attract customers to physical stores.

HR: What difficulties does the company have managing part-time staff?
Stores hire part-time and seasonal staff to fill low-skilled positions rather than raise wages and
benefits for full-time workers, so training is often ongoing.

HR: How important to the company are fair working conditions when buying foreign-made
merchandise?
Many large companies have become sensitive to working conditions abroad, requiring
certification that factories meet minimum labor standards.

Sales: How successful are the company's merchandising strategies?

Companies carefully consider style and consumer trends and historical purchase patterns to avoid
bad buys. Merchandising is so important to the success of individual stores that buying decisions
typically involve senior managers.

Sales: What benefits does the company see in offering loyalty or frequent shopper programs?
To build customer loyalty and repeat business, stores reward frequent shoppers with discounts,
free merchandise, and sales notifications.

CONVERSATION STARTERS

How does the company protect itself from drops in consumer spending?
Consumers buy more clothing when they have more disposable income and the economy is
healthy.
How does the company address competition from mass merchants, such as Target and Wal-
Mart?
The rapid expansion of mass merchants like Wal-Mart and Target has pressured clothing retailers
at the lower and middle segments of the market.

How does import dominance in the US clothing market affect the company's operations?
The large majority of clothes sold in US stores is made abroad by low-cost manufacturers.

How has growing demand for plus-size clothing influenced the company's merchandising plans?
Demand for plus-size apparel is growing, driven by the American consumer's ongoing struggle
with weight.

How beneficial is the company's "frequent shopper" or "loyalty" program?

To improve the loyalty of notoriously fickle shoppers, many clothing stores reward frequent
shoppers, typically through discounts or free merchandise.

What percentage of company sales is through the Internet? What improvements is the company
planning for its website?
Some large marketers have been successful with clothing sales over the Internet, but mainly
those with standard items that customers are already familiar with or those with specialty items
that customers aren't likely to find in local stores.

QUARTERLY INDUSTRY UPDATE

What are the company's expansion plans involving shopping malls?

US shopping malls continue to have trouble as the economic recovery sputters, according to real
estate research firm Reis.

OPERATIONS, PRODUCTS, AND FACILITIES

What do the company's buyers consider when evaluating merchandise?

Apparel buyers need thorough knowledge of consumer and fashion trends to make good buying
decisions.

How does the company stay abreast of current fashion trends?

Trade shows and fashion weeks, where designers showcase upcoming collections, are an
important source of information about new fashions.

How does the company manage its relationships with suppliers?

Depending on the depth of merchandise selection, companies can deal with hundreds (some,
even thousands) of vendors. Large companies may use buying agents to manage vendor
relationships.

If the company offers private label goods, how does the company source its private label
merchandise?
To produce private label merchandise, companies design their own clothes and outsource
production.

How long are the company's purchasing lead times?

Retailers place orders with manufacturers well ahead of time, build inventory in anticipation of
major selling seasons, and replenish inventory as product is sold.

How efficient is the company's distribution network?

Chains usually receive merchandise at a central distribution facility and deliver goods to
individual retail stores with their own fleet of trucks or outside carriers.
How would the company define its market segment?
Clothing market segments include various styles (casual, contemporary, professional, formal),
occasions (resort, special occasion, athletic), and price tiers that target a specific type of buyer.

What are the company's best-selling brands?

Major apparel brand names, such as Calvin Klein, Ralph Lauren, or DKNY, represent a certain
lifestyle and appeal to a distinct customer. Designers often have multiple lines, each representing
a particular style within a price tier to appeal to different customer types

How big are the company's stores?

Boutique stores may be smaller than 2,000 square feet; a typical mall-based store is about 6,000;
large off-price retailers are about 30,000. Major companies may have large flagship stores in
well-known shopping areas.

What does the company consider when selecting locations for new stores?
Most clothing stores are located in retail centers, such as shopping malls or strip malls, and
benefit from customer traffic drawn by larger anchor retailers. Large companies may have outlet
stores in more remote locations.

How does store layout affect the company's sales?

Companies may have flexible floor plans that allow them to reposition products as needed.
Clothing stores often display merchandise as coordinated outfits to help customers visualize
combinations and drive complementary sales.

CUSTOMERS, MARKETING, PRICING, COMPETITION

Who is the company's typical customer?

Customer demographics vary according to an individual company's strategy: for example, Gap
sells men's, women's, and children's clothing.

What type of lifestyle does the company try to project?

Companies consider customer lifestyle (casual, working professional, etc) when developing
marketing plans.

What are the company's most effective marketing and promotional vehicles?
Marketing and promotional vehicles include TV, print, and newspaper advertising; direct mail;
catalogs; and in-store events. Large chains may run extensive national TV and print campaigns.

How does the company generate store traffic?

Locally, clothing stores often use window displays to attract store traffic. In-store events include
fashion shows and trunk shows.

How would the company describe its image?

Companies may use a signature decor to define store image. Many clothing stores aim to deliver
a distinct shopping experience or image, through unique decor, merchandise displays, a
particular type of background music, or customer service.

How reliant is the company on discounting and clearance sales?

Price markdowns or discounts are a common marketing strategy. Clearance sales help drive store
traffic and sell excess merchandise.

How does the company determine the timing and amount of discounting for a particular sale?
Large companies may perform sophisticated pricing analysis to determine the timing and amount
of discounting needed to maximize profitability.

How would the company's customers describe the level of service they receive?
Customer service is especially important in high-end or designer clothing stores, where garments
can costs thousands of dollars. Sales associates often have personal relationships with loyal
customers and contact them when new merchandise arrives.

What are the benefits of offering personal shopping services?

Companies may offer personal shopper services to help busy customers and promote related item
sales.

How important are alternative channels, such as catalogs and Internet sites, to the company's
sales?
Many chains sell merchandise through catalogs and Internet sites. Clothing retailers may offer
colors, styles, or sizes not available in stores through websites or catalogs.

How is the company leveraging the Internet?

Some companies advertise in-store promotions on Internet sites or run exclusive web-only sales.
Emails to website customers are a quick, inexpensive way to communicate promotions.

How does the company's pricing compare to its competition?

Designer brand apparel is typically the most expensive. Bridge wear features designer or brand
names at moderate prices. Off-price clothing stores typically offer a wide assortment of brands
and styles at 20 to 60 percent standard retail prices.

REGULATIONS, R&D, IMPORTS AND EXPORTS

What government regulations have the greatest effect on the company's business?
Federal, state, and local government laws regarding truth-in-advertising and consumer protection
regulate clothing retailers. For example, regulations discourage companies from advertising an
item that isn't stocked in reasonable quantities.

How have labor laws affected the company's staffing operations?

Various state and federal labor laws, including the Fair Labor Standards Act, can affect
employment practices.

How much of company product is made abroad? In what countries?

Imports are a critical source of supply for the US apparel market.

How has the company reacted to publicity over controversial working conditions in foreign
clothing factories?
Most apparel importing countries pay low wages and the "sweatshop" working environments in
certain foreign clothing factories have resulted in negative publicity.

How does the company ensure that its products are not produced in sweatshops?
Many retailers who buy from abroad certify that the factories they buy from adhere to certain
standards, such as humane working conditions and a ban on the use of child labor.

ORGANIZATION AND MANAGEMENT

What are the company's biggest obstacles when hiring staff?

Most jobs in clothing stores require few skills and are low paid. Wages are almost 40 percent
lower than the average for all US workers.

How does the company minimize turnover?

Annual personnel turnover in retail is high, about 50 percent, requiring constant hiring and
training of new employees.

How reliant is the company on part-time help?

Because of uneven demand during the day, week, and year, many companies use part-time
employees.

FINANCIAL ANALYSIS

How does seasonality affect cash flow?

Cash flow is seasonal: peaks generally occur during the fourth quarter, which includes the back-
to-school and winter holiday shopping periods.

What measures does the company use to identify cash flow problems?
Companies may monitor the inventory to sales ratio to identify potential cash flow or inventory
issues.

What is the trend in the company's comparable store sales?

Measuring comparable store sales from year to year helps clothing retailers gauge growth.

How effectively is the company using its floor space?

Companies measure how effectively they use space by monitoring annual sales per square foot.

How does the company deal with seasonal inventory fluctuations?

Inventory typically fluctuates throughout the year and is highest in early spring and fall, when
vendors introduce new lines.

How quickly does the company's inventory turn?

Inventory may turn over four to five times a year.

How does the company provide consumer credit?

Receivables are generally low because most customers pay with cash or third party credit card. A
company may have liability for receivables for proprietary credit cards, depending on issuing
arrangements.

How does the company acquire capital for big projects?

Opening new stores or financing store remodeling can require significant capital investment.

What trend is the company seeing in its gross margins?

Gross margins range from 40 to 50 percent of sales.

What are the terms of the company's leases?

Lease payments usually consist of a fixed annual rent and a "percentage rent" based on annual
store sales above a certain level. Stores usually have to pay for real estate taxes, utilities, and
common shopping center marketing costs.

BUSINESS AND TECHNOLOGY STRATEGIES

What types of information technology does the company use for basic store operations?
Most stores use bar-coded tags on clothing and point-of-sale (POS) registers to track sales.

How does the company minimize losses due to theft?

Companies that sell expensive apparel typically use electronic merchandise tags to deter theft.

How have technology standards improved the company's purchasing process?

Many companies use electronic data interchange (EDI) to facilitate purchasing with vendors.

How has increasing use of radio frequency identification devices (RFID) affected the company's
supply chain?
While costly, radio frequency identification devices (RFID) can improve inventory management
and give clothing retailers greater access to timely supply chain information. A small, but
increasing, number of clothing retailers and suppliers are experimenting with RFID.

What demographic trends are having the greatest effect on the company's customer base?
Demographic shifts can greatly affect the size of a clothing store's customer base.

What changes in consumer shopping behavior has the company observed?

Many clothing retailers are located in shopping malls and mall traffic is declining.

How has the company benefited from the decreasing popularity of department stores?
Fewer shoppers buy at department stores.

Financial Information

COMPANY BENCHMARK INFORMATION

Clothing Stores
(NAICS: 4481) - (NAICS: 4481)

12 Month Rolling Data Period Last Update September 2010

Small Company Data Sales < $445,040
Table Data Format Median Values
 
  US Private Company Data
  Aggregate Small Company
Company Count in Analysis 3877 969
 
Income Statement
Net Sales 100% 100%
Gross Profit 43.2% 41.8%
Operating Income 3.6% 4.4%
Net Profit After Tax 1.8% 3.1%
 
Balance Sheet
Cash 8.9% 8.1%
Accounts Receivable 0.1% 0%
Inventory 55.2% 60.7%
Total Current Assets 64.5% 68.8%
Total Fixed Assets 8.7% 6.8%
Other Non-Current Assets 26.8% 24.4%
Total Assets 100.0% 100.0%
 Accounts Payable 8.8% 4.3%
Total Current Liabilities 25.6% 18.5%
Total Long-Term Liabilities 0% 0%
Net Worth 74.4% 81.5%
 
Financial Ratios
(Click on any ratio for comprehensive definitions)
Quick Ratio 0.6 0.66
Current Ratio 2.99 4.02
Current Liabilities to Net Worth 32.5% 15.0%
Current Liabilities to Inventory 50.0% 33.0%
Total Liabilities to Net Worth 42.0% 20.0%
Fixed Assets to Net Worth 13% 7%
Collection Period 0.1 0
Inventory Turnover 4.8 3.3
Assets to Sales 40.0% 55.0%
Sales to Working Capital 4.4 2.7
Accounts Payable to Sales 4.0% 3.0%
Return on Sales 2.0% 4.0%
Return on Assets 5.0% 6.0%
Return on Investment 16.0% 20.0%
Interest Coverage 5.0 2.7
 
Financial industry data provided by Fintel -- offering leading benchmarking with a database of
over 900 industries.  Utilize financial analysis through profitability, liquidity, sustainable
growth rate, business valuation, custom research, and other tools. Visit us on the web at
www.fintel.us/firstresearch to find out how we can help you.

ECONOMIC STATISTICS AND INFORMATION

Retail Annual Sales Growth - Census Bureau

Change in Consumer Prices - Bureau of Labor Statistics

Change in Dollar Value of US Trade - US International Trade Commission

Imports of apparel to the US come primarily from China, Vietnam, Indonesia, Mexico, and Bangladesh. Major export
markets for US apparel include Canada, Mexico, Japan, UK, and Honduras.
 
NAIC 315 APPAREL AND ACCESSORIES
 

VALUATION MULTIPLES

Clothing Stores

Acquisition multiples below are calculated using at least 24 private, middle-market (valued at less than $1 billion)
industry asset transactions completed between 9/1994 and 4/2010. Data updated every six months. Last updated:
September 2010.

Valuation Multiple MVIC/Net Sales MVIC/Gross Profit MVIC/EBIT

Median Value 0.4 0.9 3.9
 MVIC (Market Value of Invested Capital) = Also known as the selling price, the MVIC is the total consideration
paid to the seller and includes any cash, notes and/or securities that were used as a form of payment plus any interest-
bearing liabilities assumed by the buyer.
Net Sales = Annual Gross Sales, net of returns and discounts allowed, if any.
Gross Profit = Net Sales - Cost of Goods Sold
EBIT = Operating Profit
EBITDA = Operating Profit + Noncash Charges

SOURCE: Pratt's Stats™ (Portland, OR: Business Valuation Resources, LLC) To purchase more detailed information,
please either visit www.BVMarketData.com or call 888-287-8258.

Industry Forecast

US personal consumption expenditures on clothing, an indicator for clothing store sales, are
forecast to grow at an annual compounded rate of 6 percent between 2010 and 2015. Data
Published: September 2010

Consumer Spending Growth of Clothing Steadies

First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry
Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro"
approach to modeling the economy captures the links between industries and the aggregate
economy.  Forecast FAQs

First Research Industry Growth Rating

The First Research Industry Growth Rating reflects the expected industry growth relative to other
industries, based on INFORUM's forecasted average annual growth for the combined years of
2010 and 2011. INFORUM forecasts were prepared by the Interindustry Economic Research
Fund, Inc.  Industry Growth Rating FAQ
 Demand: Driven by consumer income and fashion

Need good merchandising and marketing

Risk: Economic health affects consumer ability to buy

non-essential clothing

First Research Industry Drivers

Changes in the economic environment that may positively or negatively affect industry growth.

Consumer Spending: Change in overall level of consumer spending on goods and

services

Web Links & Acronyms

INDUSTRY WEBSITES

Accessories Magazine
Industry news, trends, and statistics on the fashion accessory segment.

American Apparel & Footwear Association

Lobbying association.

Apparel Magazine
Industry news, trends, and statistics.

Canadian Apparel Federation

Information, events, and directories.

Dept. of Commerce - Office of Textiles and Apparel

Trade statistics and policy.

National Retail Federation

Legislative issues.

NPD
Market research on the fashion industry.

Retail Council of Canada

News and periodic statistics.

Women's Wear Daily

Industry news.

GLOSSARY OF ACRONYMS

AAFA - American Apparel and Footwear Association

DPI - disposable personal income

EDI - electronic data interchange

ICSC - International Council of Shopping Centers

ITC - US International Trade Commission

POS - point-of-sale

RFID - radio frequency identification

WTO - World Trade Organization