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Altering Fashion’s Model

Fashion is a fickle beast. It can only take a season for the hottest trend to rotate from window to bargain bin. Yet amidst this dynamic is an industry that has historically been quite stable.

You see, the traditional retail model involved leasing a space, filling it with product, and encouraging customers to walk in from the street to buy the wares. If sales were poor in one season, the retailer could discount the excess stock to make way for the next trend. Get enough seasons right, and the retailer could replicate this story by rolling out stores.

Retailers that chose this expansion method provided a relatively stable growth profile. The company could identify the number of areas that aligned with their core demographic, and then grow in accordance to their access to capital. This made it relatively simple for investors to value.

Yet it seems that the traditional retail model is becoming as fickle as the garments that are stocked. These days, a well-dressed mannequin in the window isn’t enough to generate sales, and an expansive store footprint is becoming less economical in a rising cost environment. As such, a store rollout profile is becoming a less predictive means of estimating a company’s intrinsic value.

So how is the retail model changing, and how should investors model a retailer’s prospects?

Customers are increasingly demanding garments that are high quality, on-trend, and affordable, which can be difficult to respond to with a large store footprint. Instead of providing a standardised product on a large scale, many retailers are now spending considerable energy and resources on their flagship stores to provide a fashion experience.

What is a flagship store you may ask? It is a nautical term that refers to the vessel used by the commanding officer. Flagship stores are a retailer’s highest profile outlets, typically characterised by more detailed fittings and an extensive product range. The aim is to engage customers on multiple levels so that when they walk in for a shirt, they leave with an entire outfit.

Investors should assess the retailer’s ability to increase same-store-sales, rather than its ability to increase store numbers. A simple way to do this is to visit the flagship store and experience the model for yourself. If you walk past a retailer and aren’t drawn in, chances are that many other customers aren’t enticed either.  

Another threat to a pure store rollout strategy is the rise of online retailing. This is a theme I’m sure you’ve heard, but it’s important to realise that a company cannot simply develop a website and expect sales to improve. This is because an online presence requires a completely different model than a physical presence; customers need to be engaged in a different way, third parties can play a larger role in distribution, and domestic retailers must compete globally.

An online strategy relies on building a strong brand. In order to engage customers on the other side of the world through third party distributors, the brand must be clearly defined, distinct and enduring. A good indicator of a brand’s value is the size of a company’s loyalty program. With loyal customers, a company becomes less reliant on a specific delivery method, which is a disadvantage of the store rollout strategy.

It is important to note that a store rollout strategy can still provide growth opportunities for many retailers. But companies that have a view to grow solely via store numbers, while ignoring the opportunities (and threats) of the changing fashion industry, are at risk of becoming an investment fad.

Roger Montgomery
Roger Montgomery

Roger shares his stock market insights at his Insights blog, Investors can also follow Roger on Facebook and watch media interviews at his YouTube channel. Grab your Second Edition copy of and learn how Roger Montgomery values the best stocks and buys them for less than they're worth. Grab the book now at special price!