Sector financial performance:

This company, who primarily markets, manufactures, and distributes innerwear and activewear apparel products, has been grouped into innerwear and activewear sector in clothing industry.

We see the decrease in sales of innerwear of companies in this sector in 2016/2017 mainly because of the slowing down traffic in their clients’ stores, especially for their department stores clients. The sales of activewear products are following the same way as innerwear products. However, it seems companies in this sector had been less impacted under the  unfavourable industry climate than other apparel categories ( as indicated by only 1-3% decrease).

After entering the second half of 2017, the demand growth turned to be positive again as indicated by increase in both volume and price for most of companies in this sector since then.

Smaller companies apparently have been experiencing larger impacts and this is probably the reason why we are seeing increasing M&A activities recently in this sector. Therefore, while sales went down moderately the acquiring companies’ margin still benefit from saved costs as a result of improved production efficiency and synergies and as well gradual increase in price.  While recently increasing raw materials costs, companies can still generate gross margin of around 33% and operating margin of 13%.

According our analysis, companies’ enterprise price/EBI is around 24 with interest/EBI ratio of 26%.

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Company performance:

Data indicated that the organic sales of this company’s innerwear and activewear products decreased in 2016/2017. However, it seems the rebounding sales volume and price have been helping reverse the decline trend of 2016/2017 and presented a positive growth in sales in second half of 2017.

First six months of fiscal 2018 compared with 2017

The net sales of this company increased 2.2% (6.8% for 2Q), primarily attributable to increase in sales volumes and price in activewear category.

Fiscal 2017 compared with 2016

The organic net sales (excluding acquisition impacts) of this company increased 1.3%, primarily attributable to increase in sales volumes and price.

The organic net sales (excluding acquisition impacts) of this company decreased 1.2% in the first 9 months of fiscal 2017 compared with the same period of 2016, primarily attributable to decrease in sales volumes of innerwear and printwear basics.

The organic net sales (excluding 15 months calendar year impacts) of this company decreased about 4% in fiscal 2016 compared with 2015, primarily attributable to decrease in sales volumes and selling price of innerwear and printwear basics and exit of one retailer client.

The organic net sales (excluding 15 months calendar year impacts) of this company increased in fiscal 2015 compared with 2014.

This company’ gross margin is about 29% in 2017 up compared with 2014 primarily reflecting fluctuation in selling price of its printwear products and saving in production costs. Due to increase of about 1% in SG&A as a result of acquisitions, this company’s operating margin as percentage of sales has no changes and still around 16% in 2017. However, increased raw materials costs since then hurt margin of this company while price rise as well.(currently 28%  gross margin and 15% operating margin).

Stock price

This stock currently has a stock price/cash flow ratio of 26 ($29). We think that its stock is being relatively undervalued considering that while organic sales of its core products have climbed again and while it still is a question whether its improvement in gross margin is sustainable we think compared with the performance in its peers its stock’s price has been over-corrected.