Sector financial performance:

This company, who primarily designs, manufactures,  markets, and distributes third-party brands ( licensed) apparels for men and women mainly through wholesale and as well their own retail/ecommerce sites, has been grouped into lifestyle apparel –licensed brand sector in clothing industry.

Demand from retail customers of companies in this sector seems different among different brands probably as a result of difference in retail performance of brands. However, with the nature as a licensed brand business, companies in this sector have, to some extent, flexibility to choose brand at the cost of paying royalty fees.

Benefited from increased demand for some of brand apparels from retail sector ( probably from some of certain region such as Europe or China), companies in this sector gained increase from wholesales of those branded that they licensed while experienced loss from other licensed brands that did not perform well. Therefore, we see an average 6-7% organic increase in wholesales of those companies for years before 2017. However, it seems the growth in wholesale of some typical companies has been accelerating since 2017 presenting double digits growth in 2017 and 2018 so far.

There is also a sign for those companies’ retail sales to regain traffic in 2018, which generate a 3% growth in comps.

A typical gross margin is 36% in this sector (license expenses included and depreciation, distribution, and stores rental costs excluded) with an average SG&A as percentage of sale of 29%. And this makes an average operating margin of 7%.

According our analysis, companies’ enterprise price/EBI ratios is about 19 with interest/EBI ratios of 17%.

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Company performance:

The demand for apparels of this company’s core brands (licensed) from its retail customers in has been strong as indicated by its general organic growth of about 7% (compounded) in its wholesales in the past three years and it seems the growth continued to be strong in 2018 benefited from new acquired brands. Its own retail sales as indicated by comparable store sales in those markets presented a downward trend before 2017, which have decreased by more than 7% annually in 2016/17 but rebounded back in 2018 due to increasing transactions.

The first six months of fiscal 2019 compared same period of 2018

The organic sales of wholesales increased about 16% primarily attributable to increase in new launched and licensed brands products.  Comparable stores sales increased by about 3%.

The fiscal 2018 compared 2017

The organic sales of wholesales increased about 11% primarily attributable to increase in licensed brands products.  Comparable stores sales decreased by about 8%.

The first six months of fiscal 2018 compared with the same period of 2017

The organic sales of wholesales increased about 14% primarily attributable to increase in licensed brands products.  Comparable stores sales decreased by about 6-7%.

Fiscal 2017 compared with 2016

The organic sales (exclude acquisition and new licensed brands) of wholesales decreased about 3% primarily attributable to decrease in licensed brands products.  Comparable stores sales decreased by about 7-14% among different products categories due to mainly slowing down traffic and decreased in sales of cold weather products caused by warm weather.

Fiscal 2016compared with 2015

The organic sales (exclude acquisition and new licensed brands) of wholesales increased about 10% primarily attributable to increase in licensed brands products.  Comparable stores sales changes between -8% and 12% among different products categories.

The acquisition of brand and retail chain of this company helps improve its whole gross margin but dragged down its SG&A as percentage of sales. This company’ gross margin is currently about 36% (license expenses included and depreciation, distribution, and stores rental costs excluded) presenting no changes compared with 2014 primarily as a combined result of discount and promotion, higher margin of acquired business, and increased licensing income. The decrease of 350 basis points in SG&A as percentage of sales, which is primarily due to increased expenses related to new acquired business, dragged down its operating margin to below 4% in 2017. When SG&A% bounced back in 2018 after the acquisition, its operating margin also went up back to 7%.

Stock price

This stock currently has an enterprise price/EBI ratio of 19($44). We think that its stock is being relatively undervalued considering that, while its relatively high operating margin as a licensed brand apparel company as compared with branding companies is hard to be justified by the nature of business, the continuingly strong demand from retailers, the rebounding retail sales, and backing to normal of SG&A as percentage of sales are all positive factors.