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Textile sector - How to invest in clothing companies? [Guide]
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Textile sector - How to invest in clothing companies? [Guide]

created Forex ClubSEPTEMBER 15, 2021

The origins of the modern textile industry date back to the industrial revolution in the 1820th century. At that time, Europe dominated the global clothing market. It was in European cities that large factories were built, the production of which flooded world markets. Many cities owe their development to a thriving textile sector. An example is Łódź, which for decades was the heart of the Łódź Industrial District. The beginnings of the development of Łódź date back to XNUMX, when, by virtue of the decree of Józef Zajączek, the settlement was chosen as the center of the weaving and cloth industry. In less than 100 years, the number of inhabitants increased from 800 to 500 (000). Lodz clothing products were sold, among others, to the Russian and Chinese markets.

Another example is Manchester, which was one of the centers of development of the textile industry during the industrial revolution in England. During this period, the city became the largest cotton goods market in the world. For this reason it got the nicknames "Cottonpolis" and "Warehouse City". In the former British colonies (South Africa, Australia and New Zealand), the term manchester is still used for household linen.

00 Manchester 1900

Manchester 1900 source: writinglives.org

01 Triangle Factory

Triangle Shirtwaist Factory source: history.com

Working conditions in factories in the XNUMXth and XNUMXth centuries in Europe and the United States were not the best. There was often a tragedy. Jone of the most famous was the 1911 fire of the Triangle Shirtwaist Factory in New York. 146 people were killed there. The youngest victim was 14 (Kate Leone). The tragedies were one of the catalysts for change in the "Western" garment industry. Over the next decades, working conditions in Europe and the USA improved.

Currently, the times of domination of the European and American clothing industries are over. Globalization has won. It is the "factories of the world" located in Asia that supply clothing to most of the developed markets. For many years, working conditions in such factories were very bad. They were often located in places that were not properly prepared for it. These places are called "sweatshop". In such conditions, workers worked several hours a day, at starvation rates and in scandalous conditions (e.g. a crowded, unventilated room). The construction disaster in Shabhara (Bangladesh), which took place on April 24, 2013, was widely echoed.. An 8-story building collapsed then, killing 1127 people. The building housed clothing factories, bank branches and shops. The majority of the victims were women who worked as seamstresses. The catastrophe also sparked protests in Europe, with Primark as one of the "targets" of the protesters. The tragedy also affected the image of the Polish clothing company LPP. The reason was the tags of brands such as Reserved, Cropp, House and Mohito found at the scene of the tragedy.

02 Wound Plaza

Rana Plaza disaster source: dw.com

As already mentioned, Asian production currently dominates. However, ordinary outsourcing prevails there, with "Western" brand owners sending orders for the production of clothing and footwear to Asian manufacturers. This is due to lower labor costs. Savings on "labor" more than cover the higher costs of transport. For this reason, cheap clothing travels in containers for thousands of kilometers to find a buyer in stores located in New York, London, Warsaw or Sydney. The textile industry is dominated by countries such as China, Bangladesh, Vietnam and India.

Textile sector in China

This country produces the most clothing. The beginning of China's inclusion in the global supply chain dates back to the end of the seventies, with the advent of economic reforms in the Middle Kingdom. In the beginning, the main competitive advantage was very low employee prices. However, as a result of the development of the textile industry, competition for workers has arisen. This led to an increase in wages. At the same time, the Chinese government developed the transport infrastructure and supported the development of machine parks. Thanks to this, despite the loss of wage competitiveness China has developed a productivity advantage and more efficient supply chain management. In the beginning, industry was concentrated in the coastal regions. With time, along with the development of infrastructure, some factories moved to China. One of the largest clothing manufacturers in China is Esquel Groupwhich produces over 100 million T-shirts annually. The company employs over 50 people.

03 Esquel-Group

One of Esquel's production facilities, source: asiabusinescouncil.org

Textile sector in Bangladesh

It is the second largest clothing manufacturer in Asia. Over 80% of the country's exports are products for the clothing industry (including clothes). Bangladesh is also the second largest clothing producer for "Western" clothing brands. Interestingly, only 5% of factories in this country are owned by foreign investors. The garment sector in Bangladesh has not had a good reputation for many years. The main competitive advantage of Bangladeshi factories was low labor costs. Conditions in many factories were very bad. The result was numerous fires. The fires in the factories were the loudest of nothing "That's It Sportswear Ltd", Tazreen, and the Rana Plaza construction disaster. Most of the workers at garment factories in Bangladesh are women. In 2014, over 29% of women could not write. For such women, working in a factory for several dozen dollars a month is the only chance for a permanent job.

The textile sector in India

Traditionally, it is one of the most important sectors in the economy. The textile market accounts for around 7% of India's industrial production and around 15% of India's exports. The largest centers of the garment industry in India are Gurgaon, Tirupur and Bangalore. About 60% of Indian exports come from these regions. The main direction of Indian clothing exports is Western Europe and the United States.


Be sure to read: How to invest in cotton? [Guide]


Supplies management

The “spring” and “autumn” seasons are the most important in the Polish clothing industry. A new fall-winter collection is launched in August. However, in February, the spring-summer collection is launched. In the case of the American market, the spring-summer season lasts from January to June, and the fall-winter season from June to December.

Due to the remote locations of clothing production, sellers prepare for the season much earlier. Brand owners design new collections. New patterns are created on the basis of the identification of customer needs and trends of a given season. After designing a new collection, production is usually outsourced. As a rule, production goes to Asian countries (including China, Bangladesh, India, Vietnam). Most often, production principals control producers in terms of the materials used, patterns, colors and the quality of finished products. After the products are manufactured, they are transported to warehouses located close to the place of final sale. Further distribution depends on the sales model (including wholesale, retail).

The production cycle is long, therefore companies must properly manage working capital. The brand owner has to finance the inventory, bear the cost of storing the inventory, and collect customer receivables. The demand can be seen after the cash conversion cycle (CCC). In simple terms, the lower the CCC ratio, the faster the cash returns to the company. Below is the cash conversion cycle in selected clothing companies:

cash conversion cycle 2018 2019 2020
Ralph Lauren 114,8 100,5 136,0
V.F. Corporation 126,3 107,7 113,5
PVH 90,5 90,2 91,2

source: own study

Inventory management is important because producing a failed collection causes capital to be frozen and difficult to recover. In order not to be left with warehouses full of unsold goods, large discounts are often carried out. However, such action causes customers to get used to the "discount season", which "spoils" the perception of the brand. For this reason, many luxury brands prefer to destroy unsold collections rather than lowering prices.

The impact of Covid-19 on the apparel industry

The clothing industry has been hit hard by the coronavirus pandemic. Many governments have announced the closure of large-area stores. This had an impact on the sale of stationary clothing. Many companies were not prepared to close this channel. As a result, many companies had an "accelerated e-commerce course". Enterprises started opening online stores or selling on e-commerce platforms. For example, luxury brands have started selling their clothes through platforms such as Farfetch or Net-a-Porter. Nevertheless, online sales did not allow the hole caused by closed brick-and-mortar stores to be "filled". Another blow to the fashion industry was the stoppage of tourist traffic, which prevented the Chinese from purchasing luxury or medium-high-end clothing (the so-called affordable luxury). For example, PVH's revenues in Q2020 and Q43 of the fiscal year 33 decreased by 9% y / y and 11% y / y. Operating margins also fell. In "normal" quarters, the operating margin was 18,2-1,3%. In the first quarter, it fell to -XNUMX%. In the next quarter, the margin was XNUMX%. In the following quarters, PHV rebuilt its margin.

Selected companies from the clothing industry

A lot of companies from the clothing industry are listed on the stock exchange. These are both companies operating in the “fast fashion” segment and owners of luxury brands. Examples of companies from the clothing industry will be briefly described below.

PVH

The company was founded in 1881. It is one of the largest clothing companies in the world. The "pearls in the crown" are two brands, Tommy Hilfiger and Calvin Klein, which generate the bulk of the revenue. It also has brands included in the Heritage Brand (Olga, True, Warners). PVH mainly sells clothes, shoes and accessories (glasses, belts). It is also worth mentioning that the brands owned by the company may be licensed to other companies (e.g. Calvin Klein perfumes). The company sells its products through its own sales network (stationary and online) and through intermediaries (the so-called wholesale). Intermediaries include, among others, department stores and supermarkets. The company employs over 26 people.

PVH 2017 2018 2019 2020
revenues $ 8 million $ 9 million $ 9 million $ 7 million
Operational profit $ 727 million $ 911 million $ 812 million -$ 37 million
Operating margin 8,15% 9,43% 9,01% -0,51%
Net profit $ 538 million $ 746 million $ 417 million $ -1 136 million

source: own study

04 PVH textile sector

PVH stock chart, interval W1. Source: xNUMX XTB.

H&M

It is one of the largest clothing companies in the world. It was established in 1947 and the company's seat is in Stockholm. The company is best known for the brands H&M, Monki, Weekday and Sellpy. H&M offers its customers the opportunity to buy clothes, shoes, accessories and cosmetics. The company sells its products through a network of stationary stores (5000 stores in 74 countries). Hennes & Mauritz also sells its products through its online stores that operate in 51 countries. The company's capitalization exceeds SEK 270 billion.

H&M 2017 2018 2019 2020
revenues SEK 200 billion SEK 210 billion SEK 233 billion SEK 187 billion
Operational profit SEK 20,6 billion SEK 15,5 billion SEK 17,3 billion SEK 3,10 billion
Operating margin 10,30% 7,38% 7,42% 1,65%
Net profit SEK 16,2 billion SEK 12,7 billion SEK 13,4 billion SEK 1,2 billion

source: own study

05 H&M clothing companies

H&M stock chart, interval W1. Source: xNUMX XTB.

Inditex

The company was founded in 1963 as a family business. The founder of the company was Amancio Ortega, who is currently one of the richest people in the world, with a net worth of more than $ 71 billion.  Industria de Diseno Textile it is the largest clothing retailer in the world in terms of revenues (in the Fat Fashion segment). This Spanish company owns brands such as Zara, Pull & Bear, Massimo Dutti, Bereshka, Stradivarius and Oysho. The company sells its products on 216 markets via a stationary chain of stores (less than 7000) and online sales. The most important brand in terms of generated sales is Zara. Together with Zara Home, it generates less than 70% of the company's sales (data for 2019). In the covid 2020, Zara generated 69% of Textil's revenues. The next brand with the highest sales was Bereshka (8,4% of revenues). It is worth mentioning that the company generates over 61% of revenues in Europe.

Textile 2017 2018 2019 2020
revenues € 25 million € 26 million € 28 million € 20 million
Operational profit € 4 million € 4 million € 4 million € 1 million
Operating margin 17,03% 16,64% 16,86% 7,39%
Net profit € 3 million € 3 million € 3 million € 1 million

source: own study

06 Inditex

Inditex stock chart, interval W1. Source: xNUMX XTB.

Ralph Lauren

The company was founded in 1967. The RL offer applies to clothes, footwear, accessories, watches, jewelry and home products. The most famous brands of the company are Ralph Lauren and Pink Pony. Ralph Lauren sells its products through its own chain of stores (548), licensed stores (650) and through intermediaries. The company is also trying to increase online sales, but this channel does not play too much of a role in selling products. The company's current capitalization exceeds $ 8 billion.

Ralph Lauren 2017 2018 2019 2020
revenues $ 6 million $ 6 million $ 6 million $ 4 million
Operational profit $ 664 million $ 707 million $ 602 million $ 199 million
Operating margin 10,74% 11,20% 9,77% 4,52%
Net profit $ 163 million $ 431 million $ 384 million -$ 121 million

source: own study

07 RL textile sector

Ralph Lauren stock chart, interval W1. Source: xNUMX XTB.

V.F. Corp.

The company was founded in 1899. It deals with the design, production, marketing and sale of clothes, shoes and accessories. VF Corporation owns the rights to brands such as North Face, Timberland, Smartwool, Altra, Vans, Supreme, Dickies and Kipling. The company's products are sold both through a network of its own stores (1400), intermediaries and its own websites. VF sells its products to over 170 countries around the world. The company employs over 40 people. The company's capitalization is approximately $ 000 billion.

V.F. Corp. 2017 2018 2019 2020
revenues $ 11 million $ 10 million $ 10 million $ 9 million
Operational profit $ 1 million $ 1 million $ 1 million $ 711 million
Operating margin 11,99% 12,16% 12,28% 7,70%
Net profit $ 637 million $ 870 million $ 629 million $ 355 million

source: own study

08 V.F. Corp

VF Corp stock chart, interval W1. Source: xNUMX XTB.

LVMH

LVMH Moët Hennessy Louis Vuitton, is the largest component of the CAC 40 index. It is an international corporation that specializes in the production and sale of luxury goods. The company's seat is in Paris. The company was established in 1987 as a result of the merger of Louis Vuitton (established in 1854) and Moët Hennessy (resulting from the merger of the Moët & Chandon champagne producer and the Hennessy cognac producer). LVMH has many interesting brands in its portfolio. These are i.a. Louis Vuitton, Christian Dior, Bulgari, Tiffany, Zenith or Emillio Pucci. The company is controlled by Bernard Jean Étienne Arnault, who is one of the richest people in the world. The company's current capitalization exceeds € 317bn.

LVMH 2017 2018 2019 2020
revenues € 42 million € 46 million € 53 million € 44 million
Operational profit € 8 million € 9 million € 11 million € 8 million
Operating margin 19,46% 21,32% 21,19% 18,61%
Net profit € 5 million € 6 million € 7 million € 4 million

source: own study

09 LVMH clothing companies

Chart of LVMH shares, interval W1. Source: xNUMX XTB.

Textile sector - where to invest in stocks

An increasing number of forex brokers have quite a rich offer of stocks, ETFs and CFDs for these instruments.

For example on XTB Today, we can find over 3500 equity instruments and 400 ETFs, a Saxo Bank over 19 companies and 000 ETF funds.

Broker xtb 2 saxo bank logo small plus 500 logos
End Poland Denmark Cyprus *
Number of exchanges on offer 16 exchanges 37 exchanges 24 exchanges
Number of shares in the offer approx. 3500 - shares
circa 2000 - CFDs on shares
19 - shares
8 - CFDs on shares
approx. 3 - CFD on shares
The amount of ETF on offer approx. 400 - ETF
approx. 170 - CFD on ETF
3000 - ETF
675 - CFD on ETF
approx. 100 - CFD on ETF
Commission 0% commission up to EUR 100 turnover / month according to the price list Spread depends on the instrument
Min. Deposit PLN 0
(recommended min. PLN 2000 or USD 500, EUR)
0 PLN / 0 EUR / 0 USD PLN 500
Platform xStation SaxoTrader Pro
Saxo Trader Go
Plus500 platform
 

* PLUS500 CY offer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. From 72% to 89% of retail investor accounts record monetary losses as a result of trading CFDs. Think about whether you understand how CFDs work and whether you can afford the high risk of losing your money.

Summation

The clothing industry has a lot of representatives on the stock exchanges. Companies with well-known brands can achieve quite high margins and provide their clients with a very high return on investment. The industry is not homogeneous, some companies focus on mass products, which are often overestimated. Others focus on providing high-quality products and care for their brand by preventing "margin erosion". Some companies specialize in specific segments, such as manufacturers of sports clothes and clothing (Nike, Adidas). All clothing companies are facing a change in sales channels. The online channel will be more and more important. Some companies believe that the omnichannel has the future, offering customers online and offline shopping experiences (e.g. the New Retail campaign created by Alibaba). When analyzing companies operating in this industry, particular attention should be paid to the rate of revenue growth, the quality of working capital management and the amount of return on invested capital (ROIC).

This article is for information only. It is not a recommendation and is not intended to encourage anyone to undertake any investment activities. Remember that every investment is risky. Do not invest money you cannot afford to lose.
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