You could have made or lost significant amounts of money in this industry

Clothing is one of life’s essential goods. We all regularly buy clothes and therefore one might assume it is a good place to invest. In reality, it is a highly competitive industry and historically there has been a wide gap between the best and worst performing shares in the sector.

This Christmas season, including the frenzied and fiercely contested Black Friday and Cyber Monday events in late November, could be tough for most clothing sellers.

Apparel purveyors are being clobbered by a combination of frail consumer confidence, political uncertainty, rising costs and the structural spending shift to the web.

As Helen Dickinson, chief executive of the British Retail Consortium, recently cautioned: ‘Retailers embarked on an extraordinary period of discounting this October as they tried to entice shoppers into making purchases. Fashion shops were particularly active, helping non-food return to growth for the first time since July.

‘Unfortunately, the long-term trend remains bleak with the 12 month average sales growth falling to a new low of just 0.1%. With Brexit still unresolved and a December election creating new uncertainties, retailers will be looking nervously at the months ahead.’

In recent months, women’s value retailer Bonmarche and the UK arm of Mothercare (MTC) have gone into administration; shares in quirky fashion brand Ted Baker (TED) tumbled on yet another profit warning; while Nigel Oddy, the boss of privately-owned fashion firm New Look, warned retailers were experiencing a ‘perfect storm’.

All of this suggests that anyone looking to invest in the fashion space needs to have nerves of steel and accept that share prices are likely to move up and down a lot – potentially more of the latter than the former.

RETAILERS RUN RAGGED

According to the BRC Springboard data for October, overall monthly footfall declined by 3.2% year-on-year, marking another month of declining footfall, not helped by colder, wetter weather.

Worryingly, footfall was down in both retail parks and shopping centres, but high streets were hit the hardest with wet and wintery weather putting off many consumers from venturing out to the shops.

All eyes are now focused on the important Black Friday (29 November) spending spree that coincides with workers getting paid at the end of the month. Apparel retailers will also have to contend with a general election less than two weeks before Christmas, which could potentially impact footfall on polling day.

CLOTHING SELLERS ON THE STOCK MARKET

The apparel sector includes a mixture of large and small companies, many of which are household names. Investors should note that a company with a strong brand isn’t necessarily a good investment as they can still experience financial and operational challenges. You need to examine each business one-by-one.

Among the clothing sellers on the stock market is JD Sports Fashion (JD.) which has been one of the best performers in its sector.

The colder weather in October and into November bodes well for sales of warm clothing items including jackets, hoodies and knitwear which is the domain of Superdry (SDRY) and Joules (JOUL:AIM).

Marks & Spencer (MKS) continues to struggle with the clothing part of its business, letting down customers by not stocking enough of the right sizes of clothes in demand. The company’s gross margins remain under pressure in a highly promotional market and online sales growth through M&S.com 

remains frustratingly slow, crawling a meagre 0.2% higher in the six months to 28 September.

Associated British Foods (ABF) owns the budget clothing chain Primark, which celebrates its 50th anniversary this year. Interestingly, the latter isn’t being held back by its lack of an online business. Primark continues to attract customers with its low prices and profit margins are being bolstered by savvy buying and tight stock control.

Next’s online sales grew 9.7% in the third quarter to 26 October. The established trend of online sales growth outweighing stores’ decline continued, which is encouraging given that analysts predict more than half of retail purchases will be made online in the next decade.

Other apparel specialists on the UK stock market include Jacamo-to-JD Williams brands owner N Brown (BWNG). Offering a near-6% prospective dividend yield, the self-styled ‘size inclusive’ online clothing retailer is trying to recover from a difficult 2018.

DIGITAL DELIVERY

Other online pure-plays include ASOS (ASC:AIM), Boohoo (BOO:AIM) and Sosandar (SOS:AIM).

ASOS has coughed up a number of profit warnings over the past 10 months which has seen the shares slump from highs of £76 in the spring of 2018 to £31.22. Trading on 52.6 times forecast earnings, ASOS has a lot to do to justify its rating given a recent history of operational issues and with analysts still downgrading earnings forecasts.

Closest peer Boohoo isn’t cheap either, swapping hands for roughly 50 times forward earnings, but we’re confident the Manchester-based business can continue to make rapid in-roads into the global fashion e-commerce market.

Sosandar is currently spending a lot of money on marketing in an attempt to gain scale. This might drive revenue growth but the business isn’t forecast to make a profit until the financial year ending March 2021 and we have no idea when it will turn cash flow positive.

HOW TO INVEST IN THE SECTOR

Investors have a choice of either investing in individual company shares or funds which have a stake in these companies.

Unfortunately there isn’t a specialist fund solely focused on clothing retailers, neither is there an exchange-traded fund tracking an index of the sector.

The only way you’ll get exposure via funds is to pick a product that will have retailers alongside investments in other sectors. We’ve produced a table showing examples of funds and investment trusts where a retailer is one of their top holdings.


OUR TOP PICKS

Buy Boohoo at 261.2p

Online fast fashion seller Boohoo is a social media-savvy company offering exposure to the global structural spending shift to the web.

While the shares aren’t cheap on a punchy 50 times Liberum Capital’s 5.2p earnings per share estimate for 2020, Boohoo continues to deliver earnings upgrades and its financial performance and momentum is all the more impressive given the apparel market backcloth and the travails of sector peer ASOS.

Generating strong growth across all geographies, Boohoo recently acquired MissPap, Karen Millen and Coast, adding to its successful Boohoo, Pretty Little Thing and Nasty Gal brands.

Annual sales now exceed £1bn and a cash generative model and £207.4m net cash pile at last count mean Boohoo can reinvest back into the business and acquire new brands that can be plugged into its core infrastructure.

Buy Next at £65.88

While clothing colossus Next isn’t a fast growth stock like Boohoo, it is a slow and steady provider of functional clothing which is able to keep growing full price sales. That’s a welcome quality in a sector awash with discounting.

Run by a best-in-class management team led by chief executive Simon Wolfson, online is now the growth driver for Next, helping to offset declines in the physical store estate which forms a key component of its successful click and collect service.

A drop in temperatures boosted Next’s October sales and while management does not believe sales growth for the rest of the year will be as strong as last month’s, we believe it should have a fairly robust Christmas.

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