California Apparel News

Managing gross margins is a never-ending challenge for apparel manufacturers and retailers. This year, because of the World Trade Organization’s elimination of textile and apparel quotas, manufacturers can take advantage of increased foreign production to improve gross margins. Yet, in the fickle juniors market, which emphasizes quick turnaround and low prices and experienced a lackluster Back-to-School season, some companies are trying other strategies.

Richard Clareman, president of juniors company Self Esteem, is guaranteeing his margins stay robust by turning down business.

“I’m eliminating some of the orders that contributed to crappy margins,” Clareman said. “I’m sacrificing volume for margins.”

If Clareman were willing to accept lower margins, he said he could rake in $40 million in first-quarter revenue. Instead, he projects revenue of more than $30 million in the first quarter, up 50 percent from $20 million a year ago. The trade-off is that gross margins, which equal net sales less the cost of goods sold, are “up significantly.”

Some juniors companies have not been successful. Retailer Limited Brands Inc. disclosed in financial filings that gross margins were “down significantly” for both its Express and Limited brands in the third fiscal quarter ended Oct. 30, 2004, from a year ago. The Columbus, Ohio–based company declined to comment.

San Diego’s Charlotte Russe Holding Inc. said gross profit decreased to 22.6 percent in the fiscal first quarter ended Dec. 25, 2004, from 26.2 percent a year ago. Selling clothes under its namesake and Rampage labels, the retail company blamed higher occupancy expenses and bigger markdowns for the decline. Consequently, it said it will cut back the maximum number of stores it had planned to open in fiscal 2005 to 50 from 60. It will increase direct imports in an effort to buoy margins.

Keeping up margins in surf

Adam Sharp also believes that global sourcing can boost margins by providing economies of scale. The vice president of sales and marketing at Rip Curl said the Carlsbad, Calif.–based surfwear company is also forecasting better and working closely with vendors in an increasingly competitive and costly business market. Margins for apparel are healthy compared with those for surfboards, he added. Nonetheless, he said, “At the end of the day, there is only so far you can push it.”

Dick Baker, president of Warnaco Inc.’s Ocean Pacific division in Irvine, Calif., said he thinks profit margins will hold in the surfwear industry. “The brand of a product has a significant impact on pricing,” he said. He declined to state Op’s margins.

Christy Lowe, who follows the apparel industry for USBX Advisory Services Inc. in Santa Monica, Calif., said that, on average, gross margins for manufacturers hover between the high 30s and low 40s. Gross margins amount to approximately 45 percent for Huntington Beach, Calif.–based active sportswear manufacturer Quiksilver Inc.; approximately 38 percent for Warrendale, Pa.–based retailer American Eagle Outfitters Inc.; approximately 44 percent for New Albany, Ohio–based retailer Abercrombie & Fitch Co.; and approximately 35 percent for Anaheim, Calif.–based retailer Pacific Sunwear of California Inc., which attributes 40 percent of its business to private-label sales. Lowe also noted that because many companies are already manufacturing overseas, foreign production is “not exactly a competitive advantage.”

Following Forever 21’s model

For Forever 21 Inc., keeping a lot of production in Los Angeles helps ensure quick turnaround and daily deliveries of fresh goods. The Los Angeles company is often cited as the one to beat in the juniors sector. According to Forever 21 Chief Financial Officer Larry Meyer, the privately held company posted revenue of $408.3 million in fiscal 2002 and $500 million in fiscal 2003. He said he expects revenue of more than $625 million in fiscal 2004, which will end in March 2005. Meyer declined to quote gross margins but said profits have grown along with sales. With some 200 stores nationwide, Forever 21 plans to open between 30 and 40 new stores this year, he said.

For better or worse, Forever 21’s success might goad some juniors companies to take a bite out of their margins in order to compete. Jiny Kim, a designer at Los Angeles’ Just in Time, said many juniors manufacturers vie for limited space in stores.

Self Esteem’s Clareman countered that “taking on Forever 21 is foolish.” He explained: “I don’t think that is a smart business strategy. I think that if you have the right product, you can get more money for your product.”

He said he hired additional people in his sourcing department and plans to open an office in Shanghai by April. His imports tripled to 75 percent from 25 percent a year ago.