EUROPEAN APPAREL PRICING: Our September pricing work shows that entry level apparel pricing for Autumn/Winter (A/W) in the UK and Euro zone has started to increase. This is not being reflected in premium prices which continue to fall, so range architecture continues to narrow. However coupled with better weather, soft comps and the prospect of cheaper US$ buying, there is some better news for apparel retailers, which is in part reflected in our double upgrade of H&M last week. We remain structurally cautious of apparel but see some tactical opportunities: Inditex (UP, TP EUR25.00), H&M (OP, TP SKR240.00) and ABF's (OP, TP CBp3600.00).
FULL NOTE
FULL NOTE
■ Inditex (UP TP EUR25) – Zara A/W prices are largely flat Y/Y, but regional premiums continue to decline. Having been very price aggressive for the past two years Inditex's Euro-centric supply chain is now looking quite disadvantageous, geographic mix is negative and we do not believe that current valuations (29x 12m FWD PER) are sustainable give the likelihood of further margin declines. Please see our recent report 'Inditex – More pressure on margins'.
■ H&M (OP TP SKr240) – Last week's double upgrade (see our report 'H&M: End of the downgrade cycle') was based on a 175bp recovery in 2018 gross margins as markdown normalises and US$ sourcing costs feed through. Inventory clearance comments in the 3Q IMS were encouraging. Entry price points look much firmer for AW 17 across the range.
■ ABF's (OP TP 3,600p) Primark should be a key beneficiary of the return of entry level pricing power, particularly given the recent strength of demand in the UK (2H LFL c6%), Spain and Ireland.