How Apparel and Footwear Brands Make Money

Introduction

An apparel or footwear brand makes its most important decisions about a product long before anyone can buy it. Designs are locked, factory capacity is booked and quantities are committed many months ahead of the season, on the strength of forecasts and early orders from retailers. The brand then spends the season finding out whether it guessed right. Guess well and most units sell at full price; guess badly and the excess goes out through markdowns and off-price stores, taking the margin with it.

That bet sits on top of an asset-light model: most brands own the design, the brand and the customer relationships, while independent factories in Asia do the manufacturing. For a coverage banker, the business comes down to a few questions: what a unit costs to land, what share of units sells at full price, which channels sell them and whether the brand keeps the consumer's interest from one season to the next. This article works through each, along with sourcing and the race among athletic brands.

A branded apparel company is, at its core, a design, marketing and distribution business. It decides what to make, commissions factories to make it, imports the goods and sells them to retailers or directly to consumers. What it owns is mostly intangible: trademarks, product know-how, athlete and influencer relationships, and contracts with wholesale accounts. Physical assets are limited to distribution centers, offices and, for brands that sell direct, stores and websites.

The model keeps capital needs low and lets a brand switch factories, countries and product categories faster than a manufacturer could. It also means the brand's margin depends on two things outside its walls: factory pricing and the willingness of retailers to keep buying.

Real gross margins span that range. Nike earned 42.9% in its fiscal year to May 2026, Deckers (owner of HOKA and UGG) earned 57.7% in its year to March 2026, and On, the Swiss running brand, earned 62.8% in 2025. The gaps reflect pricing power, how much of each company sells direct and how much product ends up discounted, themes covered in brand equity, pricing power and price elasticity.

Wholesale brands, vertical brands and everything in between

Apparel companies sit along a spectrum defined by who owns the customer. At one end, a wholesale brand sells mainly to department stores, sporting goods chains and specialty boutiques, which set the retail price, choose the assortment and take the markdown risk on what they buy (though brands often contribute to it). At the other end, a vertical brand, often called a specialty retailer, designs its own product and sells it almost entirely in its own stores and website, so it keeps the full retail margin but carries every unsold unit and every store lease.

Most large brands now sit in between, selling through wholesale accounts while running their own stores, websites and apps. The mix changes the financial profile far more than the product does. A wholesale-heavy brand reports lower gross margins, lower operating costs and revenue concentrated in a few large accounts; a direct-heavy brand reports higher gross margins, higher fixed costs and lease obligations that behave like debt. Comparing the two on gross margin alone is misleading, which is why bankers look at operating margin and return on capital as well.

Fashion runs on a product calendar that starts long before the product reaches a shelf. Most brands work on two main seasons (spring and summer, fall and holiday) with smaller deliveries in between, and each season moves through the same stages, with the riskiest commitments made earliest.

The advance orders in step two are the brand's best early signal of demand, and investors watch them closely.

Futures Orders

Orders that wholesale accounts place in advance for delivery in a future season, sometimes called advance orders or the order book. They give a brand early visibility into wholesale revenue, but they can be cancelled or reduced, and they say little about demand in the brand's own stores and websites.

Nike's annual report warns that advance orders may not indicate future revenue, because shipment timing, shorter-lead-time orders, discounts and cancellations all change what is finally sold. That is why bankers pair the order book with sell-through data from retailers before trusting a forecast.

Why full-price sell-through decides the year

The inventory bet is where apparel margins are made or lost. Full-price sell-through, the share of units sold before any discount, is the number that separates a good season from a bad one. A brand that over-orders carries excess stock into the next season, and markdowns are the price of clearing it. Inventory that cannot be sold at cost must be written down, an accounting test explained in inventory write-downs at the lower of cost and net realizable value. The worked example below shows how fast the damage compounds.

Inventory levels also reveal a brand's health between results. Inventory growing faster than sales usually means discounting ahead; inventory that is flat while sales hold, as at Nike, where inventory stayed at about $7.5 billion across fiscal 2026, suggests a cleaner position. The ratios bankers use to judge it are covered in inventory turns, GMROI and retail working capital.

Clearance channels and the cost of protecting the brand

Excess inventory has to go somewhere, and each exit carries a different cost to the brand. Its own outlet stores let it control presentation and keep part of the margin. Off-price retailers buy surplus in bulk at deep discounts and resell it, turning stock into cash quickly. Selling to discounters or liquidators recovers the least. Wholesale accounts also push back on brands whose products do not sell, through markdown allowances (payments to cover discounts the retailer had to take), returns and smaller orders the next season.

The hidden cost is to the brand itself. A label that shows up too often at a discount teaches shoppers to wait for the sale, which erodes full-price selling for future seasons. Strong brands therefore accept some lost revenue, by ordering conservatively, limiting off-price sales or even destroying or recycling surplus, to protect price integrity. When a banker sees a brand's off-price sales rising year after year, it is usually a sign the inventory bet has been going wrong for some time.

Almost every large brand relies on independent contract manufacturers, concentrated in a few Asian countries. Nike's annual report gives a clear picture of what that looks like at scale. In fiscal 2026, 15 contract manufacturers made Nike Brand footwear in 95 factories across 11 countries, with Vietnam producing about 52%, Indonesia 27% and China 16%; four manufacturers each made more than 10% of footwear, about 60% combined. Apparel was more dispersed, with 64 manufacturers running 321 factories in 34 countries, led by Vietnam at about 34%, according to Nike's Form 10-K.

Footwear concentrates because shoes need specialized equipment, molds and skills, and a handful of large manufacturers supply most global brands. That creates supplier concentration: a brand cannot quickly move a performance shoe to a new factory, and a disruption in one country affects many brands at once. Apparel is easier to move between countries, which is why apparel sourcing shifts faster when costs or tariffs change.

Landed cost: what a unit really costs

The factory price is only the start. A brand's real product cost is its landed cost, and every component moves with markets and trade policy.

Landed Cost

The full cost of getting a finished product into a brand's distribution center: the factory price plus ocean or air freight, insurance, import duties, customs brokerage and inland transport. Gross margin is measured against landed cost, not the factory price.

A simple build-up shows why import duties and freight costs matter so much. Take a shoe with a factory price of $20, ocean freight and insurance of $1.50, an import duty of 20% on the factory price ($4.00) and $0.50 of brokerage and handling. Landed cost is $26.00. Sold to a retailer at a wholesale price of $55, the brand's gross margin is about 52.7%. Raise the duty rate by ten points and landed cost becomes $28.00, cutting the margin to about 49.1% unless the brand raises its price. On a product line selling millions of pairs, that difference decides whether the season meets its plan.

Tariffs and country diversification

Trade policy is now one of the largest swing factors in apparel and footwear profits. After years of moving production from China to Vietnam, Indonesia, Cambodia and India, brands faced sharply higher US tariffs on most Asian imports in 2025. Many responded with country diversification, price increases and cost sharing with factories. Tariffs can also reverse: after the US Supreme Court ruled on 20 February 2026 that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) were unauthorized, Nike recorded an expected recovery of about $986 million, which lifted its fourth-quarter gross margin by about nine points, according to Nike's fiscal 2026 results release.

For bankers, the lesson is to separate underlying margin from tariff timing. A quarter flattered by a refund, or depressed by a duty that may later be repaid, says little about the brand's real earning power. The wider trade picture for consumer companies is covered in tariffs, refunds and the consumer supply chain.

Speed versus cost

Not every brand optimizes for the lowest factory price. Speed-to-market models produce closer to the consumer, in Europe, North Africa, Turkey or Central America, and accept higher unit costs in exchange for shorter lead times. A brand that can reorder a hot item in weeks rather than months orders less up front, marks down less and sells more at full price. The trade-off between cost and flexibility is a recurring diligence question: a cheaper supply chain with long lead times carries more inventory risk than its unit costs suggest.

Factory compliance and traceability

Outsourcing production does not outsource responsibility. The 2013 collapse of the Rana Plaza factory building in Bangladesh, which killed more than 1,100 garment workers, led brands to adopt factory audits, safety agreements and supplier codes of conduct that are now standard. Trade law has added supply chain traceability: under the US Uyghur Forced Labor Prevention Act, whose presumption took effect in June 2022, goods made wholly or partly in China's Xinjiang region are presumed to involve forced labor, and importers must prove otherwise with clear and convincing evidence or have shipments held. Cotton is the main exposure for apparel.

For a buyer, these are real diligence items rather than reputational footnotes. Detained shipments mean missed delivery windows and markdowns, and a brand that cannot trace its cotton or synthetic fibers back through spinners and mills carries compliance risk in every season. Bankers ask how many tiers of the supply chain the brand maps, how factories are audited and what share of production sits with suppliers that have had violations.

Athletic footwear and sportswear is one of the most contested profit pools in apparel. Running shoes, basketball sneakers and training gear combine performance claims, cultural status and repeat purchase, and the category rewards brands that keep producing product innovation: new foams, plates and silhouettes that give runners and fashion buyers a reason to upgrade. It also straddles two markets, sport and lifestyle, and a shoe designed for one can become a hit in the other.

Incumbents and challengers

The competitive story of recent years is established incumbents under pressure from fast-growing challenger brands. Nike's fiscal 2026 revenue was $46.4 billion, flat on a reported basis, with footwear at $29.5 billion and its Converse brand down 31%. Over a similar period, the challengers grew quickly.

On's 2025 net sales rose 30.0% on a reported basis and 35.6% at constant currency, according to On's full-year results release. At Deckers, HOKA grew 15.9% to $2.59 billion, close to half of group sales, as FashionUnited reported on the fiscal 2026 results. The challengers started in specialty running stores, won serious runners with a distinct product and then moved into lifestyle wear and wider distribution.

Franchises and product cycles

Athletic brands live on franchise products: a handful of shoe lines that sell for years and carry a large share of revenue. A strong franchise lowers design risk and supports full-price selling, but concentration cuts both ways. When a franchise fades, or a brand floods the market with too many units of it, the brand must replace a large block of revenue at once, and markdowns spread across its wholesale accounts.

Bankers therefore look at franchise concentration (what share of footwear revenue the top lines provide), the age of those lines and the pipeline of new ones. A brand with a deep pipeline and disciplined supply of its icons can sustain premium pricing; a brand relying on one aging franchise is more exposed than its current margins suggest.

Marketing as a cost of staying relevant

Athletic brands spend heavily on demand creation: athlete and team endorsements, sponsorships, advertising and digital content. Unlike a factory cost, this spending builds the brand that justifies the price, so cutting it to protect a year's margin can weaken the next. Endorsement and sponsorship contracts also run for years, which makes part of the budget a fixed commitment rather than a lever. Challengers often spend differently, on running communities, specialty retailers and word of mouth rather than global endorsement deals.

Across apparel and footwear, a short list of margin drivers explains most of the change in profit from year to year:

Channel mix deserves its own analysis because selling direct raises gross margin but adds operating cost, a trade-off worked through in wholesale vs DTC: channel economics in apparel. Where the products are sold, and to whom, is mapped in the consumer channel map.

Currency: buying in dollars, selling in euros

Currency is the driver outsiders most often miss. Most factories in Asia price in US dollars, while a brand selling in Europe, Japan or the UK earns revenue in local currency. When the dollar strengthens, the local-currency landed cost rises even though nothing changed at the factory.

Take the $26 shoe from the landed-cost example, sold to a European retailer at a wholesale price of €55. At an exchange rate of 1.10 dollars per euro, the landed cost is about €23.64 and the gross margin about 57.0%. If the euro falls to parity, the landed cost becomes €26.00 and the margin about 52.7%, a loss of more than four points from currency alone. Brands hedge their product purchases months in advance, which delays the impact by a season or two but does not remove it, so bankers ask what rates are locked in for the next year.

What bankers diligence

In diligence, bankers and buyers concentrate on the evidence behind those drivers: inventory aging by season, the futures order book, the concentration of revenue in the largest wholesale accounts, franchise concentration, factory and country concentration, and the history of markdown and return allowances given to retailers. Some brands also earn royalties by licensing their names into categories they do not make themselves, a model taken to its logical end by the owners covered in brand management companies and IP licensing.

How these drivers translate into valuation, and why the best brands trade at premiums to the rest of retail, is covered in the Valuation guide's retail and consumer valuation primer. For a coverage banker, the core judgment is simpler: whether a brand's margin comes from genuine demand that lets it sell most units at full price, or from a cost or tariff advantage that the next season can take away.