Fashion Companies: Bucking the Trend of Declining Retail-Store Operations

Online shopping has unquestionably posed a serious challenge to traditional retailers, most noticeably those selling apparel and accessories, from J.C. Penney and Sears to Target and Macy's. Mass-marketing clothing in department stores may eventually become an outdated retail operation, since their indistinguishable merchandise may not require in-person checkup by customers or on-site body fitting and can be bought more conveniently online.

On the other hand, fashion companies can use brick-and-mortar stores as showrooms to display their collections of designer clothing and branded accessories. Fashion identity and the uniqueness of designer brands draws customers into physical stores. Simply viewing online images alone may not satisfy consumers' need to personally explore the richer quality of designer goods.

Rising fashion retailing
While other retailers are reducing the number of locations they operate, fashion companies such as Michael Kors (NYSE: KORS  ) and Kate Spade  (NYSE: KATE  )  are continually increasing their store counts. Fashion companies' success is not built solely on the higher quality of their designer offerings, but also a brand's ability to suggest to consumers a fashionable lifestyle. (Similarly, traditional department store retailers helped shape the middle-class lifestyle in the past via stores that attracted consumers to suburban malls.)

Today,  as more people shop for designer goods, part of the consumer culture may shift from visiting traditional mall stores to frequenting trendy fashion outlets. This bodes well for fashion companies and their retail operations. If attending runway shows says something about one's desire for fashion and style, shopping at a designer store may also indicate that same inclination. The power of any product's image can never be underestimated when it comes to attracting customers and retaining their loyalty.

Close customer relationships
Unlike department stores, fashion companies that have their own retail locations are their own suppliers of the apparel they sell. Besides operating their namesake retail stores, they also distribute their designer clothing to some department stores, even though that segment makes up only a small percentage of their total sales. Strategically, a company such as Michael Kors can't afford to delegate to other retailers its entire marketing and sales operations, as integrated fashion making and marketing helps strengthen a fashion company's image.

Building a more intimate relationship with their fashion-seeking customers is what distinguishes a fashion company from other apparel retailers. Having their own clothing labels allows fashion companies to connect with their customers on a deeper emotional level, something unlikely for distribution-only retail store operators. Customer bonds based on strong brand identity are where fashion companies can eventually derive their value, giving them an opportunity to become a trendsetter and then a business and market leader.

Luxury customer base
Having a strong customer following is not just a contest for brand superiority; it has important business implications for fashion companies and their investors. Even though for investment-analysis purposes companies such as Michael Kors and Kate Spade, as well as the fashion industry's analog Ralph Lauren (NYSE: RL  ) , often are grouped within the consumer-cyclical sector, investors may be surprised to see how recession-proof these fashion companies can be.

Fashion clothing and pricey accessories, including handbags and designer shoes, are not targeted at the average consumer. Many designer fashion items represent certain levels of luxury, and customers with the economic means may show continued demand for them, irrespective of economic developments. While designer items are more discretionary goods to many consumers, they are also a special kind of staple for those with the purchasing power. One bit of evidence for this is that fashion companies, including Michael Kors, an upstart in the fashion industry, have shown continued fast sales growth over the years.

Unique fashion identity
While fashion companies often sell namesake designer goods, the companies themselves are first named after their founders. Designers such as Michael Kors, Kate Spade, and Ralph Lauren, the king of fashion longevity, all started their namesake companies. As founders, they either have led or continue to direct their respective company's brand creativity efforts, being personally responsible for selling his or her vision for a fashionable lifestyle.

When researching fashion companies as potential investments, investors may have to first assess the company's founder. A fashion company thrives or fails on the identity envisioned by its chief creative officer. The success of Ralph Lauren the person is the success of Ralph Lauren the company. In the case of Kate Spade, the funky and vibrant style she established has guided the company all the way and may also foreshadow its future endurance, even now with her no longer with the company. At the end of the day, a strong consumer following and a financially well of customer base are the kind of staples fashion companies can rely on for continued growth.

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