How to Value: Clothing Stores

Industry Description

The clothing stores industry retails new clothing for all genders and age groups (NAICS 4481).  Retailed clothing includes men (448110), women (448120), children and infants (448130), family (448140), accessories (448150) and many other categories and segments (448190).  The industry also includes basic alterations services, such as hemming, adding or removing seams, and lengthening or shortening sleeves.  Industry considerations are similar across segments, and these segments will be considered together for purposes of these valuation guides.

The following are some basic characteristics of the clothing stores industry:

  • Clothing stores industry has a combined revenue of $200.8 billion, with a decline rate of 8.4% in 2017-2022
  • There are approximately 171,000 businesses as of 2022
  • The clothing stores industry employs approximately 855,000

Industry Trends

The clothing stores industry has low levels of market share concentration, with the top four industry players comprising approximately 24% of the industry revenue in 2022.  Small players are independently operated and owned in one or more states, while the biggest players have multiple locations across the US.  Some key external forces influencing the industry are (i) e-commerce, (ii) sustainability, (iii) ethical products and (iv) the COVID-19 pandemic.  Each of these is described in further detail below.

E-commerce has become crucial to the industry in recent years with online industry purchases increased by 15.2% in 2019 compared to the previous year. Its expansion can be ascribed to how easy it is for people to buy clothing online and how comfortable it is to do so.  Consumers find internet retailers more appealing since they frequently provide discounts and promotions unavailable in traditional stores.  This availability of deals and discounts online compared to traditional stores is another reason online shopping is becoming the preferred shopping method of the industry.  To remain competitive, industry players need to pay more attention to online sales.

The industry has come to value sustainability highly and demand for more environmentally friendly products is rising.  This is due to consumers becoming more conscious of the effects the industry has on the environment. Despite costing more than traditional industry clothing consumers are willing to pay more for environmentally friendly clothing. The industry is one of the most polluting in the world, producing 10% of global carbon emissions. Industry players need to provide these environmentally friendly options to meet the rising demand.

The use of unethical practices such as sweatshop labor is on the decline in the industry because a growing number of industry players have made commitments to sell products sourced ethically and manufactured under fair labor standards.  This is due to consumers becoming more aware of the unethical practices involved in the manufacturing of industry products.  This is a positive development since it ensures clothing manufacturers do not violate the rights of employees and employees are treated with respect and dignity.  The industry has made progress moving away from unethical practices such as sweatshop labor and other acts of unfair labor treatment.  This trend is likely to continue as more industry players see the value of ethically produced products.

The COVID-19 pandemic has fundamentally altered how consumers shop for apparel and are now more likely to shop online than visit physical stores.  Post-pandemic it is predicted that online retail sales of clothing and accessories would climb higher than pandemic levels.  As a result, many clothing stores have had to adapt to the new environment and adopt digital marketing techniques to stay competitive. These techniques include interacting virtually with clients, providing online styling assistance, and developing extensive websites with thorough product information.  By implementing these techniques, clothing shops reach more consumers successfully and succeed in the industry.

Several factors influenced the industry like e-commerce, sustainability, ethical products, and the COVID-19 pandemic. E-commerce is a growing trend and is becoming the preferred shopping method of consumers. Sustainable products are rising in demand because consumers prefer environmentally friendly products over non-environmentally friendly ones due to them becoming more environment conscious. Ethical products are becoming an industry norm as consumers become aware of the unethical practices done to have the product. The COVID-19 pandemic has changed how consumers shop and new techniques need to be adopted to meet these changes. Industry players must be aware of these factors and adjust accordingly to remain and maintain their competitiveness.

Key Performance Metrics

In evaluating clothing stores, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions:

  • Sales per square foot
  • Average transaction value
  • Order fulfillment time
  • Time to markdowns
  • Conversion rate
  • Inventory turnover rate
  • Foot and digital traffic
  • Client satisfaction and retention

Industry Organizations & Publications

The following organizations publish useful information:

  • United States Fashion Industry Association
  • American Apparel and Footwear Association
  • Fashion Group International
  • Retail Industry Leaders Association
  • American Marketing Association
  • National Retail Federation

Guideline Information: Private Purchase Transactions

Most clothing stores are privately owned. While there are publicly traded companies, data regarding the sale of 100% of closely held clothing stores is generally the best source of information to appraise a subject company.

The following are typical appraisal multiples from sale of clothing stores:

  • Revenue multiple between 0.18 and 1.08 times
  • Gross profit multiples between 0.35 and 1.92 times
  • EBITDA multiples between 1.9 and 5.7 times

In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered.

Guideline Information: Publicly Traded Companies

Most clothing stores are privately owned; however, there are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company. 

The largest publicly traded US clothing stores are:

  • NIKE, Inc. (NKE) – $193.1 billion market capitalization
  • The TJX Companies, Inc. (TJX) – $96.8 billion market capitalization
  • Ross Stores, Inc. (ROST) – $36.4 billion market capitalization
  • Burlington Stores, Inc. (BURL) – $12.3 billion market capitalization

The Price-to-Earnings (P/E) ratios of these four companies range between 24.3 times to 36.6 times.

Appraisal Rules of Thumb

Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.

Clothing stores are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.