For Apparel Sector, "X" Marks a Threat This Holiday Season

New iPhone model could steal $30 billion of discretionary spending

Author: Andria Cheng

November 1, 2017

Department stores, specialty clothing and other brick-and-mortar apparel retailers have been battling increased online competition and consumers’ spending shift toward gadgets and experiences. But a confluence of factors, in particular the launch of the iPhone X, suggests the fight is going to get even tougher this holiday season.

Same-store sales for apparel and other so-called softline retailers could dip 0.4% in the Q4 holiday-selling season this year, the first drop since the 2008 recession, according to a Morgan Stanley forecast. Except for gains at some off-price retailers such as Burlington Stores and TJ Maxx’s TJX, Morgan Stanley expects holiday sales to decline across specialty retail, department stores and footwear retailers. (The pressure on the sector was clearly evident earlier this week, when Under Armour cut its sales outlook for the year.)

Online retailers are one threat to the apparel sector. Amazon, which Morgan Stanley estimates is driving up to 50% of overall US retail sales growth, will see its Q4 share of US online sales rising to 35% this year, up from 30% during the same time last year. Amazon's  US mobile app downloads in the first nine months of this year rose 10% to 21.8 million, 2.4 times those of its nearest rival by that metric, Walmart, according to Morgan Stanley, citing its research and Sensor Tower data.

And that parallels data from the National Retail Federation that found that, for the first time, online topped all brick-and-mortar destinations as the channel where most consumers said they plan to buy holiday items.

While retailers including Macy’s have said consumers’ increased shift to buying the latest smartphone and other gadgets have eaten into their fashion budget, the introduction of Apple’s iPhone X alone could “absorb $30 billion of discretionary spending" in Q4, Morgan Stanley said in a report published Wednesday. The percentage of iPhones that are two or more generations old is at peak levels, the firm said.

“We see this upgrade supercycle coupled with the very high $999 iPhone X average selling price as a significant headwind to specialty retailers and department stores in the fourth quarter,” the firm said in the report. “Consumers likely pull back on other discretionary purchases for a short period after such a big ticket item purchase."

The report also said that the "upgrade supercycle" could continue to be felt into Q1 2018.

Meanwhile, gasoline prices could also crimp spending on apparel this year, Morgan Stanley said, citing an estimated 19% increase in Q4 pump prices.

As if pressure on sales weren't enough, apparel retailers will also face margin squeeze, Morgan Stanley said. On average, Morgan Stanley estimates it costs $4.19 for an apparel retailer to process and ship an online order. That cost is likely going to head higher thanks to peak period surcharges planned by shipping giant UPS. As retailers fight to stay competitive with shipping offers from Amazon and Walmart, they will likely have to eat those higher delivery costs if they want to meet consumer demand for free shipping.