UBS and Moody’s both see innovation as the key to future growth. Here are key takeaways from new reports.
UBS
Shares of footwear firms On Holding, Birkenstock, Deckers and Wolverine Worldwide are rated a “Buy” by UBS analyst Jay Sole, and they’re likely to continue to be favorites as use of AI is expected to positively impact the sales and margins of softline firms.
In a research note this week, Sole wrote: “We believe AI will accelerate GDP growth fueling increased apparel and footwear spending. Furthermore, and more importantly, we see AI helping softline companies boost sales and margins more than the market is anticipating.”
You May Also Like
Related Stories
Sole acknowledged that conversations with investors suggested that many still doubt softline firms are generating “meaningful ROI” (return on investment) from their AI investments. But the UBS analyst said the transformative power of AI come companies applying across all of their organizations’ different functions, rather than from one “a-ha” moment captured in a single case study. He noted that one global brand studies has 650 business processes clustered in 16 value chains across its organization. And AI deployment is happening across every step of this firm’s value chain. While no one step alone would likely cause a meaningful change in EPS (earnings per share), the application of AI to each separate step will “collectively create massive transformative power,” he concluded.
Sole said that AI deployment across the softlines industry is just getting started, and the firms most aggressively pursuing AI implementation probably hasn’t even accomplished 10 percent of what they believe is possible. “We see a shift to AI happening over a 3-5 year period,” he said.
Right now, fashion and footwear firms need to figure out who their best AI implementation partners will be. Moreover, the companies also will need time to migrate their IT budgets to AI spending because legacy partner contracts can last for 3-4 years. “Companies are generally only willing to allocate IT budget to AI as dollars free up from other commitments,” the analyst noted.
He said use of AI-driven personalization and customer analytics can boost their lifetime value and marketing ROI. The technology can also be used to optimize the growing secondhand market with an AI-optimized resale platform. And for fashion and footwear, where some lead times are 12 to 18 months from design to store, AI-assisted design programs combined with trend-forecasting algorithms and generative design tools can shorten the lengthy design process and cut the physical prototyping expenses. AI can also be used in inventory planning to ensure shoe brands have the right products in the right quantities for the right markets, which in turn can decrease overproduction of styles that fail to sell and then require heavy discounts that hurt margins.
“AI isn’t a panacea. AI alone can’t turn companies with weak brand images, poor products, or sloppy distribution into leaders,” Sole said. “Softline companies making use of AI still have to execute their business fundamentals at a high-level in order to outperform their peers.”
Moody’s
A retail and apparel report from credit ratings firm Moody’s said that the sector’s ability to innovate will be a key driver for its future profit growth. Moody’s includes footwear in its retail and apparel sector report.
A report led by credit analyst Christina Boni notes that companies in the sector that struggle to deliver profit growth have a compelling reason to “accelerate the pace of innovation and adoption of AI.” The largest retailers have integrated AI tools into their business operations relatively easily, in turn increasing customer loyalty and enhancing the value and convenience of their offerings. However, smaller and more highly levered retailers with limited capital and technological expertise are more vulnerable to losing market share.
And with high prices straining affordability for most consumers, the credit team at Moody’s noted: “Retail and apparel investment in innovation will become even more urgent as businesses continue to adapt to evolving trade, fiscal, monetary and immigration policies, slowing wage growth and elevated prices.”
The report also noted that new AI-related applications are fueling innovation that is critical for sales and profit growth. It cited to Amazon and Walmart as two that are working to personalize the online shopping experience, while others are using predictive tools to speed up deliveries, offer customers greater convenience and lower costs.
“Customer agentic AI marks the next technological frontier for U.S. retail and apparel, which will face a greater need to invest in technology and to keep buyers identifying with their brands rather than AI assistants,” the Moody’s report said. It also noted that the gap will widen between thriving, surviving and at-risk retail and apparel companies as technological change continues to disrupt business models. Dick’s Sporting Goods is among the firms considered a “thriver” due to its “unique business” model that includes its House of Sport concept. Moody’s also noted that the “most levered retailers are at a disadvantage as technology adoption becomes a greater factor in these companies’ fortunes.”
Moody’s also noted that turnarounds are common in the apparel and footwear segment, noting that these firms contend with “significant volatility” as brands periodically gain and lose favor among consumers.
The credit ratings firm said it expects Nike‘s strategic transformation to be helped by its global brand strength, digital capabilities and solid balance sheet. In contrast, Under Armour is still working on elevating its brand positioning and refining its product, while its good liquidity gives it the flexibility to execute its plans.