Sector financial performance:

This company, who primarily designs, markets, manufactures, and distributes outdoor and active lifestyle apparel, footwear, accessories, and equipment mainly as a wholesaler and as well by their own stores or ecommerce sites, has been grouped into outdoor wear &sport apparel sector in clothing industry.

We see the annual decrease of about 2-3% in wholesales or demand from retail customers of US market for outdoor wears and sport apparels in 2016 and early 2017, mainly a reflection of slowing down traffic in retail stores of customers of companies in this sector during the same period of time. However, positively reacting from warming up retail orders after entering 2018, the decline in wholesale of companies in this sector hit the bottom and bounced back. Together with continuing increase in sales from their retail channels (mainly from new opening of stores and e-commerce), which basically offset the decrease in wholesales in the past two years, rebound in wholesale brought those companies a double digits increase in sales in 2018 so far.

While unfavourable climate in retail industry has certainly been putting huge pressure on the wholesale of those apparel companies, so far this impact has not yet significantly impact companies’ merchandise margin because companies have still not see the need to lower price to deal with decline in wholesale. In fact, companies’ gross margins (average 200 basis points increase) have benefited from the sales’ shifting to higher margin products/sales channels. At the same time, have seen fast growth in ecommerce channel, some companies started to increase spending on those sales channel and thus caused pushing up of SG&A as percentage of sales and decline of operating margin, which are about 12% currently.

According our analysis, companies’ enterprise price/EBI is around 32-38 with interest/EBI ratio of 3%.

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Company performance:

Data indicated that the wholesale of this company’s products decreased since 2016 while ecommerce and its direct-to—customer retail sales has kept growing and to large extent offset the decrease in sales from wholesales during this period. However, it seems that when growth continues in retail in 2018 its wholesales bounces back largely.

The first two quarter of fiscal 2018 compared with 2017(ended 20180630)

The organic sales (excluding currency) of this company increased 19% primarily attributable to increase in all areas including US market of 19% growth due to increase in store sales (new stores) and ecommerce and increase wholesales.

The fiscal 2017 compared with 2016

The organic sales (excluding currency) of this company increased 4% primarily attributable to increase in all areas including US market of 1% growth due to increase in store sales (new stores) and ecommerce offset by decrease in wholesales from some of its retail customers.

The organic sales (excluding currency) of this company increased 2% in the first nine months of fiscal 2017 compared with the same period of 2016, primarily attributable to increase in all area other than US market. Sales in US market decreased 2% due to decrease in wholesales offset by increase in its own retail stores and ecommerce.

The organic sales (excluding currency) of this company increased 2% in fiscal 2016 compared with 2015, primarily attributable to increase in its retail stores and ecommerce in US and EMEA market. Its wholesale in those two markets decreased.

The organic sales (excluding currency) of this company increased 15% in fiscal 2015 compared with 2014, primarily attributable to increase in its wholesales in US market and Canada and also to the increase in its retail stores and ecommerce.

This company’ gross margins is currently 48% (distribution and rental costs excluded) up from last year primarily due to products mix shifting to higher margin (retail and ecommerce). With flat SG&A% as a result of large growth in sales, we see improvement in gross margin ( about 12% in 2018).

Stock price

This stock currently has an enterprise price/EBI ratio of 32 ($90). We think that its stock is being relatively slightly undervalued compared with its peers which have not better growth potentials in both sales and cash flow.