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 between 2015and 2017 while ecommerce and its direct-to—customer retail sales has kept growing and to large extent offset the decrease in sales from wholesales. However, it seems that when growth continues in retail in 2018 its wholesales bounces back largely.

The first six months of fiscal 2018 compared with 2017

The organic sales (excluding M&A and currency) of this company increased about 9% (10% for 2Q) primarily attributable to increase in retail sales (account for about 30% of total sales) including both comparable stores sales and ecommerce and increase in wholesales.

The fiscal 2017 compared with 2016

The organic sales (excluding M&A and currency) of this company increased 4.5% primarily attributable to increase in retail sales ( account for about 30% of total sales) including both comparable stores sales and ecommerce and increase in wholesales.

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 retail sales ( account for about 28% of total sales) including both comparable stores sales and ecommerce offset by decrease in wholesales.

The organic sales (excluding currency) of this company increased 0.7% in fiscal 2016 compared with 2015, primarily attributable to increase in retail sales (account for about 28% of total sales) including both new store opening and ecommerce and offset by decrease in wholesales.

The organic sales (excluding currency) of this company increased 6% in fiscal 2015 compared with 2014, primarily attributable to increase from new stores opening and ecommerce.

This company’ gross margin is currently about 51% (distribution and rental costs excluded) up since 2015 primarily due to pricing and products mix shifting to higher margin. The improvement in gross margin has been offset by faster increase in SG&A spending on retail channel and thus resulted in decrease in operating margins, which have gone down from 15.5% to current 12.5%.

Stock price

This stock currently has an enterprise price/EBI ratio of 38 ($91). We think that its stock is being relatively slightly overvalued compared with its peers which have better growth potentials in both sales and cash flow.