Wall Street has always been a rollercoaster — but all the ups and downs have become too much, leaving fashion to enter 2023 with more than a little stock market shock.
Investors are constantly measuring the outlook for everything, taking into account the economy, consumers, new products, strategy and performance and boiling it down to one data point — the all-important stock price.
And while ups and downs are expected as certain companies and sectors advance or as the economy cools down, something more is happening.
A host of investors have fundamentally changed expectations for the consumer sector in 2022 as e-commerce growth has slowed, inflation and interest rates have soared and a recession has loomed. Last year also had its optical challenges and quarterly financial reports often paled in comparison to the launch days of 2021, when the world was first recovering from COVID-19.
The Dow Jones Industrial Average is down 8.8 percent in 2022, but fashion has fallen further and faster.
A WWD study of 104 global apparel, luxury, retail and beauty companies found that only 26 companies in the space beat the Dow last year. (Elf Beauty Inc. led the way with a gain of 66.5 percent, while the stock of Mid-America backup department store Dillard’s Inc. gained 38.7 percent.)
Luxury also held on to its pandemic-induced gains and continued to navigate even through the economic worries, but 2022 was a year defined by the losers.
Among those hardest hit were some of the most sought-after names of years past that were new to Wall Street or pushing newer business models that investors are still trying to figure out.
Companies that shed more than 70 percent of their value last year included resale specialist ThredUp Inc., brand house Aka Brands Holding Corp., tech-savvy sneaker maker Allbirds, social media-focused cosmetics company Olaplex Holdings Inc. and the direct company of consumer eyewear pioneer Warby Parker Inc.
This counts as a rude awakening for the big wave of IPOs in 2021 and leaves doubt in the position of some newcomers.
“Dears fall fast and the first move is stupid,” said Matthew Katz, partner at SSA & Co.
This reflects the flight of investors from a buzzy new idea to a more tried and true business model — and it seems likely that investors will continue to seek certainty.
“We are in a period of uncertainty,” Katz said. “Some would say it has become increasingly certain that we are in trouble.”
Therefore, companies that are still working on their operations could find themselves in a bind.
“Where there is backlog, inefficiencies will increase in a period of slowdown,” Katz said.
Resale platforms, for example, quickly captured the imagination of investors, but now have to prove themselves as more brands enter the game and the sector evolves.
Poshmark Inc., which is valued at more than $7.4 billion after it goes public in January 2021, was bought for $1.2 billion by Naver in October, and shares of The RealReal Inc. and ThredUpa are struggling.
Jessica Ramírez, senior research analyst at Jane Hali & Associates, said: “When we plan for the resale … we were also very surprised at how quickly Wall Street adapted to it, which we almost thought was a no-brainer. It is usually necessary [Wall Street] longer to warm to some of these ideas.”
It turns out that investors quickly fell in love with 2021 and quickly moved on.
Many companies that were built in private hands did not live up to the high expectations of the public market.
Allbrids was another.
Ramírez said the brand “has a glass ceiling for the excitement it can create and the commotion it can create.”
The brand is in step, even a leader in the sustainability movement, but it is still finding its footing.
“There’s a good reason for it, but the shoe is not attractive,” Ramírez said. “You have to have a good product that’s attractive and have a good story behind it.”
Stable companies and proven models are winning on Wall Street today, such as offpricers Ross Stores Inc. and The TJX Cos. Inc., who have been enjoying excess inventory in the industry following all of the COVID-19 supply chain backups.
“Ross and TJX really took advantage of what’s out there to buy and they killed it with their purchases,” Ramírez said.
Dick’s Sporting Goods Inc. he also proved his mettle.
“The product has really taken off there — the private label and the relationships they’re building with all their vendors have really picked up,” Ramírez said, noting the retailer is also taking advantage of the continued increase in outdoor activity. “They are very aligned and run a pretty good business.”
Dick’s, TJX and Ross not only beat the market, but posted modest stock gains last year — a time when small gains counted as big gains.
Much of the trouble over the past year has stemmed from changes in the consumer market that have been bigger than any one brand.
Lower-class shoppers began to have to choose between fashion and food as prices rose. More consumers returned to stores, slowing e-commerce growth. And Russian President Vladimir Putin’s invasion of Ukraine upended the geopolitical calculus, threatening Europe and prompting many companies to close shop in the once-promising Russian market.
It may take similar sweeping changes to turn retail sales around this year – but in the second half, when comparisons ease again.
John Kernan, an analyst at Cowen, said deflation in supply chain costs and more normal inventory levels would boost sentiment in the second half.
“We favor cheap stocks relative to the past given several hundred basis points of gross margin contraction due to lower ocean container and airfreight rates, along with normalization of sector inventory levels and second-half drawdowns,” Kernan said. “Balancing supply chain risk, inventory turnover and gross margin is the source of value creation in the sector.”
It’s very much a back to basics, road to success on Wall Street after a very tumultuous year for fashion.