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The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. — Ed.
Contrary to concerns, apparel sales continue upward through July-August
Investors appear to be losing their interest in the apparel sector amid continuing macro uncertainties and waning reopening effects. Consumption-oriented stocks as a whole have been drifting without clear direction on concerns over 2H22 earnings, in light of the decline in buying power from higher interest rates and the impact of inflation.
Over the past couple of months, market concerns have been rising that the recent upturn in domestic apparel inventories could signal a slowdown in consumer spending on apparel products as in the US. However, contrary to market concerns, apparel companies performed far better than feared in July-August. Both online and offline apparel sales posted double-digit gains in July, continuing sharply upwards as in May-June.
We believe growth remained strong during the typical slow months of July and August thanks to the low YoY base of 2021. Sales growth even exceeded May-June levels in July, with retail sales growth at department stores reaching up to 38.4% YoY for women’s formal wear, 41.3% YoY for women’s casual wear, 38.0% YoY for men’s apparel and children’s clothing, and 48.5% YoY for sportswear. Sales of luxury goods have continued steadily upward, expanding at a CAGR of 30% over the past two years.
Brand companies trading excessively low given short-term momentum
Similar to the growth in apparel sales as a whole, YoY sales growth at domestic apparel companies likely exceeded 30% levels in July. All eyes will now be on the data for August, the month that typically sees the lowest monthly sales/margins and could have been hit by an even steeper downturn in seasonal demand this year due to frequent heavy rains.
Casual brand companies seeing strong growth, such as F&F, The Nature Holdings, SJ Group and Gamsung Corp, remain upbeat on their earnings in July-August as in May-June. However, some brand companies with a relatively larger presence in China have seen their shares sold off by investors disappointed with the weaker-than-anticipated upturn in consumer spending in the country.
While still too early to expect a visible upturn in Chinese consumption, we believe the recent stabilization of apparel retail sales around previous year levels, compared with the declines seen in March-May, indicate that a bottom is near. Moreover, as F&F and newly-entering The Nature Holdings have been operating in China for less than three years, the companies are likely to see an increase in order placements for new season apparel in the near term.
F&F and Shinsegae International remain sector top picks
F&F shares appear excessively corrected, considering its strong growth in the domestic market and expectations for solid order inflows from China in September. Shinsegae International should emerge relatively less affected from slowing consumption, with demand for luxury goods showing resilience to economic cycles. We also expect improving market conditions for cosmetics to lead to a re-rating of share valuations.
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