Under the weak consumption, why is clothing an exception?

There is a saying in A shares to describe the current market of consumer stocks, "Kill a big white horse every day." Consumption white horses frequently collapsed. In July this year alone, Tomson By-Health (300146) and Juewei Food (603517) both experienced limit-downs. The leading beer Tsingtao Brewery also experienced a single-day stock price drop of more than 7%.

The consumption white horses are like this, so the performance of consumer stocks is naturally a bit bleak. Since the beginning of this year, consumer ETFs have fallen by more than 10%. But in the entire consumer sector, clothing is undoubtedly an exception. From June to now, the service retail fee sector has risen by nearly 20%.

The excellent stock price performance of the clothing retail sector is due to the strong performance of clothing consumption. In the eyes of investors, clothing, as optional consumption, is the most vulnerable category to the economic downturn. But since the beginning of this year, clothing has unexpectedly led the consumption market. According to the National Bureau of Statistics, the retail sales of clothing in the first half of the year increased by 12.8% year-on-year, far exceeding the growth rate of the commodity retail market by 6.8%.

What is the logic behind this? How long can the trend of clothing contrarian growth last?

This article holds the following views:

1. Clothing is the category with the greatest consumption elasticity. Clothing has the strongest optional attribute among consumer products, and users often choose clothing first when they shrink their spending. In addition, during the epidemic, users stayed at home for a long time, which further suppressed the consumption of clothing products. After the epidemic was released, the recovery of offline social scenes stimulated the demand for clothing consumption, and the rebound in clothing consumption naturally became more rapid.

2. Domestic garment enterprises are ushering in the node of performance release. The destocking cycle of the clothing industry is basically completed, which is conducive to channels and consumers to get goods. Inventory optimization also reduces the promotion and injection behavior of enterprises, which is conducive to reducing costs and increasing profits. Judging from the clothing brands that have released their financial reports, most of their performance exceeded expectations.

3. Whether the performance of clothing consumption can continue depends on the face of the economic cycle. Apparel is the sector most affected by the economic downturn. In Japan's "lost 30 years", clothing has fallen by about 50% from 1992 to 2022, and it is the worst performing optional consumer product category. The subsequent domestic economic trend will determine the fate of the clothing sector.

/ 01 /

Consumption down, clothing up

Consumer stocks have performed poorly this year, but clothing is an exception.

Since the beginning of the year, the consumption ETF has fallen by more than 10%, but the stock price of the clothing consumption sector in the same period is basically the same as that of the beginning of the year. After entering June, the clothing sector has even risen. Since June, the clothing retail sector has risen nearly 20%, while the consumption ETF has only increased by 2% during the same period.

Apparel companies rose sharply after entering June, largely benefiting from the catalysis of performance. As of now, a total of 20 apparel companies in the A-share market have released performance forecasts for 2023. Through the performance forecast, we have drawn the following points of view:

First, clothing companies have reversed the decline in performance. In 2022, 33 of the 45 A-share apparel companies have negative profit growth, and less than a quarter of the companies have achieved positive year-on-year growth. In the first half of this year, of the 20 companies that released performance forecasts, a total of 15 companies achieved positive year-on-year net profit growth, and more than three-quarters of the companies achieved positive year-on-year growth.

From the perspective of the types of enterprises that have achieved positive year-on-year growth in net profit, the performance recovery of clothing enterprises is all-round. Among them, SAINT ANGELO (002154), which focuses on men’s clothing, is expected to increase its net profit by 40%-55% year-on-year, and casual wear Semir Apparel (002563) is expected to increase its net profit by 331%-427% year-on-year. Good growth has been achieved. Ellassay (603808) expects net profit to increase by 100%-120% year-on-year.

Second, the performance of clothing companies has exceeded the expectations of securities companies. Guosheng Securities predicted the performance of key apparel companies in the first half of 2023. Judging from the companies that have released notices so far, the actual performance of the companies has exceeded the expectations of securities companies. For example, SAINT ANGELO's net profit increased by 40%-55% year-on-year, exceeding the 20%-30% expected by brokers. The lower limit of net profit growth of Ellassay is 100% year-on-year, which exceeds the lower limit of 93% net profit growth of securities companies.

Third, the profitability of garment enterprises is improving. Ellassay expects revenue to increase by 17% year-on-year in the first half of the year, and net profit to increase by 100%-120% year-on-year. Although there are fewer companies that disclose both revenue and profit expectations in the performance forecast. However, according to the forecast of Guosheng Securities, among the 10 clothing companies it focuses on, 8 of them have a year-on-year growth rate of net profit higher than their revenue growth rate.

Why have apparel companies achieved good performance growth this year?

/ 02 /

The strongest rebound in consumption, the release of certain profits

Judging from the consumption data in the first half of this year, clothing is one of the best-performing categories in consumption. According to the National Bureau of Statistics, in the first half of the year, clothing retail sales increased by 12.8% year-on-year, second only to the growth rate of gold, silver and jewelry (17.5%), far exceeding the growth rate of commodity retail market (6.8%).

Clothing sales rebounded far more than the broader market because it has the strongest optional attributes among consumer goods. Compared with food and beverages, clothes are not just needed, and compared with cosmetics, clothes will not be used up like cosmetics. Therefore, when users shrink their spending, they often choose clothing first. In addition, during the epidemic, users stay at home for a long time, which further suppresses the consumption of clothing products. In 2022, retail sales of clothing categories will drop by 6.5% year-on-year, not only far behind the performance of the broader market (+0.5%), but even underperformed retail sales of cosmetics (-4.5%).

But by 2023, after the epidemic is fully released, residents' consumption expectations will improve, and the suppressed clothing consumption demand will be more likely to recover. In addition, the recovery of offline social scenes will stimulate clothing consumption demand, and there will be clothing retail sales in the first half of the year. The situation leading the consumption market.

Referring to Japan, clothing is also the category with the most elastic consumption before and after the epidemic. As shown in the figure below, before April 2021, the monthly sales growth rate of clothing consumption is the worst-performing category. But after April 2021, the monthly growth rate of clothing consumption began to lead the rise of consumer goods.

In addition to the improvement in consumption performance, domestic clothing companies are also at the node of performance release.

In the past few years, the biggest problem that plagued the clothing industry was inventory. Adidas' frequent discounts in live broadcast rooms to clear inventory are the best proof. In 2021, the inventory scale of A-share clothing companies will increase by 8% year-on-year. In 2022, enterprises will consciously clean up their inventory, and the year-on-year growth rate of inventory scale will drop to 2%. The inventory of some leading companies has also begun to decline. For example, the inventory scale of Peacebird (603877) will drop from 2.5 billion in 2021 to 2.1 billion in 2022, and Semir's inventory will drop from 4 billion to 3.8 billion.

Entering 2023, the industry inventory will improve. Both Huatai Securities (601688) and Guosheng Securities pointed out that the peak inventory of the industry has passed, and channel inventory will gradually return to normal in the first half of 2023.

The business performance of foreign clothing companies in China, which were the first to release financial reports, also supports the views of securities companies. Nike mentioned, "The improvement of revenue and inventory in Greater China exceeded expectations. At the same time, based on management's optimism about its current inventory level and revenue guidance for the new fiscal year, the certainty of supplier order recovery has increased."

In addition, Uniqlo's inventory turnover days from March to May decreased by 16 days to 104 days compared with the same period last year. Lululemon also said in June that it expects to increase the matching of revenue and inventory growth in the second half of the year.

At the same time, channel inventory has also improved significantly. The inventory of Topbo, the largest distributor of Nike and Adidas in China, will drop from 6.68 billion in 2021 to 6.25 billion in 2022.

The improvement of industry inventory is beneficial to channels and consumers to get goods, and at the same time, it will also make brands no longer rely on discounts to destock, which is conducive to profit improvement. Huatai Securities mentioned that benefiting from the improvement of the inventory structure, it is expected that in the second half of the year, clothing companies are expected to continue to benefit from the improvement of discounts, and the year-on-year growth rate of revenue and net profit recorded a more obvious rebound.

Although the current growth is not worrying, is the rebound of the apparel industry sustainable in the long run?

/ 03 /

still depends on the face of the economic cycle

From a long-term perspective, clothing is the field with the highest correlation with economic trends, and even one of the fields most affected by the economic downturn. In Japan's "lost 30 years", clothing and furniture both fell by about 50% from 1992 to 2022, making them the worst performing optional consumer goods.

With reference to overseas markets, after the rebound in clothing consumption this time, growth is still strongly tied to the broader economy. Compared with 2019, the scale of each sub-industry in the United States in 2021 will increase by about 10% compared with 2019. The scale of most sub-sectors in Japan will recover to about 80-90% of 2019 in 2021. Clothing consumption in the United States after the epidemic was significantly better than that in Japan, thanks to a stronger economic recovery. In 2021, the GDP of the United States will increase by 5.9% year-on-year, and Japan will increase by 2.1% year-on-year.

By 2022, the year-on-year growth rate of US GDP will drop to 2.1%, and the year-on-year growth rate of clothing will also drop to 2%. From the perspective of sub-categories, the degree of economic impact of each clothing sub-category is quite different.

According to the data of Everbright Securities (601788), in 2022, the year-on-year growth rate of high-end luxury and sports outdoor wear will be faster, reaching 32% and 15% respectively, followed by light luxury and business casual wear, both with a year-on-year growth rate of 7%. Apparel and children's clothing performed the worst, with year-on-year growth rates of -4% and -11%.

The consumption differentiation of clothing categories is still related to fluctuations in the broader economy. The year-on-year growth rate of US GDP will drop from 5.9% in 2021 to 2.1% in 2022. Ordinary users are the most vulnerable to economic fluctuations, and the consumption of mass consumer goods such as mass clothing and children's clothing is also the most vulnerable to impact, becoming the worst-performing sub-category. The high-luxury, light luxury, and business casual customers are mainly aimed at the middle and high-end class groups. After the epidemic returns to normal, the demand will still be released steadily, and the growth rate of high luxury is obviously due to light luxury, business leisure.

As for the strong performance of sports and outdoor consumer goods, it is largely due to the changes in consumption habits brought about by the epidemic. After the epidemic is fully released, as consumers exercise more frequently and pay more attention to their health, the demand for sports and outdoor products has further improved. boost.

Taking your neighbor as a mirror can correct your clothes. The domestic enlightenment from the performance of overseas clothing consumption after the epidemic is that although the backlog of consumer demand after the epidemic is over will temporarily stimulate the growth of clothing consumption, in the long run, clothing is indeed the category most tied to the economic market. Destiny is more controlled by the economic cycle.

Disclaimer: This article (report) is written based on publicly available information or information provided by interviewees, but Read Finance and the author of the article do not guarantee the completeness and accuracy of such information. In no event shall the information or opinions expressed in this article (report) constitute investment advice to any person.

This article was first published on the WeChat public account: Understanding Finance and Economics. The content of the article is the author's personal opinion and does not represent the position of Hexun.com. Investors operate accordingly, at their own risk.