Vietnam’s Factory Shutdowns Tug at Apparel Industry’s Seams

A broad basket of attire firms—together with

Nike,

Hole,

City Outfitters,

Steve Madden and PVH, the mum or dad of Calvin Klein and Tommy Hilfiger—have seen their shares lose roughly 8% on common since July 9, when Vietnam’s Ho Chi Minh Metropolis entered its second large-scale shut down after a surge in Covid-19 instances. Within the affected areas in Vietnam, most factories are nonetheless shut down, in keeping with a spokeswoman with the American Attire & Footwear Affiliation, which is anticipating at the least one other one to 2 weeks earlier than reopening begins.

At first look, the latest correction in attire firms’ share costs may appear to be an overreaction, given their robust efficiency for the 12 months so far. However there may be good purpose for buyers’ warning.

Attire manufacturers rely closely on Vietnam for manufacturing; the nation has taken on extra significance for U.S. firms specifically as they’ve shifted sourcing out of China to keep away from rising manufacturing prices and tariffs. Vietnam accounts for nearly a 3rd of U.S. footwear manufacturing and a fifth of U.S. attire manufacturing by greenback worth, in keeping with the American Attire & Footwear Affiliation.

Greater than half of Nike’s footwear manufacturing happens in Vietnam, for instance, whereas Hole and

Lululemon

every depend on the nation for roughly a 3rd of their manufacturing. A bunch of greater than 80 shoe and attire firms, together with Nike and Hole, despatched a letter to President Biden in mid-August urging him to hurry up U.S. vaccine donations to Vietnam. The well being of the U.S. attire trade is “instantly depending on the well being of Vietnam’s trade,” the group stated within the letter.

The manufacturing facility shutdowns come on the time of 12 months attire sellers usually begin stocking up for the vacation promoting season, in keeping with Janine Stichter, an analyst at Jefferies. Whereas provide chain points have been build up all 12 months, the lockdown in Vietnam is the worst such snag the attire trade has encountered up to now, Ms. Stichter stated. Even when factories in Vietnam do open again up, delayed orders will probably “pile [up] and doubtlessly flood worldwide freight and provide chains without delay,” in keeping with a report from Cowen.

That’s more likely to make vacation merchandising a little bit of a chance for clothes retailers, which usually purchase half of their stock prematurely after which “chase” gross sales later relying on which objects promote higher. On an earnings name in August, Victoria’s Secret stated it’ll “commit a bit of tougher” than the same old 50% to 55% of merchandise that tends to be booked at the beginning of a season. And City Outfitters stated it might usher in stock sooner than regular, including that it’s making an attempt to convey most attire merchandise by air to offset port congestion. Manufacturers that misinterpret developments may miss out massive this season.

In the meantime, a scarcity of vacation stock for U.S.-based manufacturers may spell a possibility for people who rely much less closely on Asia for provide. European fast-fashion retailer

Inditex,

which owns Zara, sources primarily from Spain, Portugal, Turkey and Morocco. Canada Goose, vendor of down-filled winter put on, manufactures its merchandise in Canada. Secondhand sellers comparable to thredUP and the RealReal, which have to deal solely with home transport, additionally may gain advantage from an industrywide scarcity if clients can’t discover what they need in common shops.

How properly retailers handle additionally will depend upon what sort of attire they promote. Footwear firms appear to have been spared the worst in terms of this vacation season. They have an inclination to position orders six months out in contrast with the three-month lead time that clothes sellers comply with, in keeping with Ms. Stichter. That may assist clarify why, regardless of heavy manufacturing publicity to Vietnam, share costs of each Nike and Crocs have each elevated since early July. Foot Locker Chief Govt

Richard Johnson

stated in an earnings name final month that the majority of its merchandise for the back-to-school and early vacation season are already “on the water and can be obtainable.” Crocs stated in its July earnings name that the corporate feels “actually snug” on stock even with the uncertainties ensuing from manufacturing facility closures.

Corporations’ skill to navigate provide chain challenges additionally will depend upon their scale. Bigger firms with larger order sizes are more likely to take priority over suppliers coping with restricted capability. Hole, which sells roughly $15 billion value of attire a 12 months, raised its full-year outlook throughout its earnings name in late August regardless of the availability chain points. CEO

Sonia Syngal

stated the corporate’s “massive, billion-dollar relationships” with producers give it the flexibility to navigate the availability disruptions in Vietnam.

What is obvious is that the added provide crunch received’t be pleasant to shoppers’ wallets. Already, retailers have been commanding full costs for merchandise as stock ranges have remained low. Of their most up-to-date quarters, each

Abercrombie & Fitch

and Hole noticed their finest gross margins in at the least a decade. A few of that increase in profitability may need to be sacrificed through the holidays, although. Airfreight, which firms will depend on much more to bypass provide chain delays, is about 12 instances as costly as ocean transport in contrast with the a number of of round 5 instances that was typical in recent times, The Wall Avenue Journal reported.

A real return to regular continues to be a stretch for the attire trade.

Write to Jinjoo Lee at jinjoo.lee@wsj.com