Should You Invest in One of These Apparel Companies?
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fashion is one of the most difficult industries to predict the future of. That means that it is also one of the hardest industries to invest successfully in. What's hip and hot one year almost never is the next, and staying on top of the fashion world is very challenging. That being said, there are still some apparel companies out there that are solid profit-generating businesses; these are the kind that are worth owning.
Two apparel companies for adults, and one for kids
G-III Apparel Group (NASDAQ: GIII) makes its money selling a wide variety of apparel and accessories. Some of its products include outerwear, swimwear, and luggage. As of Jan. 31, 2013, the company operated 218 retail stores.
The company has licenses to produce branded fashion for big name brands like Calvin Klein and Tommy Hilfiger. Both of those brands are owned by Phillips-Van Heusen Corp (NYSE: PVH).
But we would be remiss to only look at apparel companies whose target audience is wealthy adults. Another potential investment in the apparel industry is Abercrombie & Fitch, (NYSE: ANF) a company that primarily sells clothes to young adults.
Bringing back a retro jacket
G-III recently announced that it would be partnering with the MLB to revive the Starter satin jacket franchise. Additionally, the company has an agreement with the NFL that expires on Mar. 31, 2017. It also has agreements with the NBA and NCAA.
An investment in G-III is not without its risks, however. The company is becoming increasingly dependent on its largest customers. Its largest 10 customers accounted for 63.7% of its 2013 revenues, up from 62.7% in 2011. Sales to its largest customer, Macy's, accounted for over one-fifth of 2013 sales.
How is the balance sheet?
G-III is a $1 billion dollar company with current assets that exceed its total liabilities by $218.6 million. The company's financial position is fairly strong for the time being, though management has stated that future growth will be dependent on the company's ability to extend and increase its line of credit. Debt isn't a problem now, but could become one in the future.
Phillips-Van Heusen does not have as strong of a balance sheet as G-III. The company does have $4.11 billion worth of shareholder's equity, but contributing to that equity is $4.18 billion dollars worth of intangible assets. Without those assets, the company has negative equity.
Abercrombie & Fitch also has current assets that outnumber total liabilities, although by a number that is relatively insignificant to its market cap. The company has bought back a decent amount of shares in the past 12 months. Said buybacks may have made sense last October, when the stock tanked. The company continues to buy back its own stock when it is fairly valued at best; that is not a good use of shareholder capital.
Is the apparel selling?
In G-III's case it sure is. Sales have grown at a four year compound annual growth rate of 18.4%. Net income was negative $14 million in 2009, but G-III has generated $48.7 million in average annual net income in the four years since. For the past two years, that figure was $53.2 million and in 2013 the figure grew to $56.6 million. Suffice it to say that G-III has been growing its net income at a satisfactory rate.
Growth at Phillips-Van Heusen has also been stellar. Between 2010 and 2013 revenues and net income grew at compound annual rates of 36.1% and 39% respectively.
The company did record a net loss in the first quarter of this year, although first quarter is typically a weak one for apparel companies. Another potentially alarming sign, however, is the fact that its selling, general and administrative expenses growing faster than revenues. This means that employees may be lining their pockets with the shareholders' money.
At Abercrombie & Fitch, sales haven't been so hot. The company's first quarter revenue in 2013 was 9% lower than in 2012. Its sales increased at an acceptable rate between 2008 and 2013, but net income declined. This company's net income peaked at $475 million in 2007, and in 2013 it generated just a hair under half of that amount.
Foolish final thoughts
Of these three apparel makers, it seems as if Abercrombie & Fitch would make for the worst investment. Net income that has been on the decline for years. It has rebounded somewhat since an absolutely awful 2010, but $3.9 billion still seems like too much to pay for this company that appears to be past its prime.
Phillips-Van Heusen has registered impressive gains in both sales and net income in the past few years. The company has a huge amount of intangible assets on its balance sheet, however. Intangible assets in the billions of dollars make me uncomfortable, but the company does control some truly amazing brands. If it continues to grow its net income, even if it grows at a lower rate, then the company appears to be a decent investment.
As for G-III... I'm happy that the company is bringing back the Starter satin jackets, those coats are cool. A highly concentrated customer base concern me somewhat, but a healthy balance sheet coupled with robust profit growth leads me to believe that G-III is the best investment of the bunch.
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Fool blogger Ryan Palmer has no position in any of the stocks mentioned. The Motley Fool does not recommend any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!