Investment Research PresentationMonth Day, 20XX

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Sector Presentation – Fast Fashion

Finance and Investment ClubConsumer SectorSenior Analyst: Justin BartenbachJAs: Emil Kilman, Sid Vardhamanan, Sijia Zhang, Sajal Karki, Dora Xu

 

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aIndustry Overview

Why Fast Fashion?

Trends

Risk Factors

Valuation – Comparable Companies

Summary

 

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Industry Definition Industry: Fashion Designers in the U.S. Companies in this industry provide professional design services for products and segments such as fashion,

clothing, shoes, textile, fur, and jewelry. – These services occasionally represent the design branch of a large retail chain. – Retailers with expedited processes between the fashion design segment and the clothing retail segment is

coined a fast fashion retailer.

NYSE: GPSMkt Cap: 10.15 B

NASDAQ: URBNMkt Cap: 4.69 B

STO: HM-B Mkt Cap: 357.31 B

(SEK)

NYSE: AEOMkt Cap: 3.48 B

BME: ITXMkt Cap: 20.9 B

(EUR)

NYSE: EXPR Mkt Cap: 1.10 B

NYSE: GESMkt Cap: 1.33 B

Sources: IBISWorld, Bloomberg

 

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Why “Fast Fashion?”

Fast fashion is described as low cost clothing collections that mimic current fashion trends.

These trends change incredibly fast, often causing new styles and trends to become obsolete in a matter of weeks.

The number of garments produced annually has doubled since 2000 and exceeded 100 billion for the first time in 2014: nearly 14 items of clothing for every person on earth.

Year Revenue (million)Revenue Growth %

2017 $2,677.60 8.92018 $2,879.80 7.62019 $3,042.50 5.62020 $3,213.60 5.62021 $3,403.10 5.92022 $3,635.50 6.8 2017 2018 2019 2020 2021 2022

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$3,000.00

$3,500.00

Fast Fashion Revenue

Revenue (million)

6.31% CAGR

Low clothing manufacturing

costs

Decrease in price of clothing

More clothing

purchased per person

Increased revenue for

fashion retailers

Brazil

China

Germany

India

South Africa

United Kingdom

United States

-75 -50 -25 0 25 50 75 100 125 150 175 200 225 250 275 300

247

53

33

272

187

49

55

133

38

10

156

33

-53

-3

Change in Consumer Prices (2000-2014), %

Clothing All goods

Sources: IBISWorld, Mckinsey & Company

 

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Revenue Generation

Cotton

Other materials (i.e. synthetic)

Clothing Material Manufacturing

Clothing Designers

Consumers

Large Retailers

Small, medium sized retailers

Goal: to expedite the process between the clothing designers and the large retailers so that consumers can get the newest clothes faster

How to increase efficiency?

Sources: IBISWorld

 

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Technological Advances Efficiency

e-Commerce Presence

High Designer Collaboration

 

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Efficiency Increase to Supply Chain Due to Technological Advances Unique trait of fast fashion = quick

distribution from runway retail store With ever-changing seasons and constant

shipments of inventory, fast fashion retailers must reduce their costs of inventory management and labor

Reduction of lead time (the time between the initiation and completion of a production process) Increased efficiency in shipping processes

retailer clients have boosted sales between 2% and 30% after installing tracking devices

Zara– Decreased labor hours and costs

40 employees in 5 hours to 9 employees in 2 hours

– Increased inventory tracking and asset control

Radiofrequency identification (RFID) - uses electromagnetic fields to automatically identify and track tags attached to objects. The tags contain electronically stored information.• retailers can identify approximately 12,000

articles per hour – that’s 20 times faster than using a normal barcoding system.

Vision picking - (using smart glasses to scan boxes in warehouses instead of paper and a handheld scanners) has allowed for time efficiency and error reduction.• Fully automatic tracking of lots and serial

numbers

RFID has potential of

increasing turnover 3-10%

Vision picking = more than 25%

performance increase from

handheld

Sources: DHL, Images: ibtimes.com,, WSJ, IBISWorld

Traditional retailers Retailers with RFID0%

10%20%30%40%50%60%70%80%90%

100%

60%

95%

Percentage of Inventory TrackedFF Inventory

turnover average = 6.05 vs. regular retailers = 2.61

 

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Technological Advances Efficiency

e-Commerce Presence

High Designer Collaboration

 

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Surge in US Retail e-Commerce As the transition from Brick and Mortar stores to

online presence increases, fast fashion retailers are focusing greatly on their e-Commerce presence.

Goal of fast fashion: to expedite the process between the fashion designer segment and the retail segment so consumers can receive the styles that they want faster– By utilizing e-Commerce, consumers can

browse clothing options even faster, without having to leave their homes

– Firms can also cut out the transportation from warehouse B&M portion of supply chain less SG&A expense

In order to achieve this goal:– Firm must be incredibly agile– Many local manufacturers– Rapid marketing– Responsive supply chain

Beneficial for fast fashion in particular because consumers are more comfortable purchasing cheaper clothes without trying them on

2012 2013 2014 2015 2016 2017 20180

50

100

150

200

250

183.8 191.1 196.6 201.7 206.2 210.8 215.1

149.4157.1 163.2 169.1 174.8 180.4 185.5

US Digital Shoppers and Buyers, 2012-2018

Digital Shoppers Digital Buyers

Num

ber o

f Sho

pper

s (m

illio

ns)

Sources: IBISWorld, eMarketing, Yieldify

While digital shopping does not always directly lead to purchase, retail execs. claim that it

does translate into an influence throughout the path to purchasing the clothes

Webrooming- bought in store after

browsing digitally- 78% made purchase

Showrooming- Bought digitally after

browsing in store- 72% made purchase

 

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Technological Advances Efficiency

e-Commerce Presence

High Designer Collaboration

 

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Collaborations consisting of high-end retailers with lower-price companies surge demand for marked-down luxury items

Lilly at Target = Lilly Pulitzer clothes sold at immense discounts through partnership with Target (Sold in April 2015)

Very popular with consumers – clothes sold out within minutes online and in stores

Collaboration collections are expected to become periodic over the next 5 years (i.e. Balmain at H&M)

High Collaboration Brings Consumers High-end Names at Low Prices

Income for low-price

retailers

Key takeaways:- Collaborations of high-end designers and low-

price retailers appeal to young and low-income consumers

- Collaborations expected to yield periodic lines that will increase consumer retention

Sources: IBISWorld, Target 2015 10-Q, Business of Fashion, Oxford Industries 10-Q

Allow consumers to spend $200 when they feel like they are getting

something that is worth $20,000

Retailers like H&M have paid $1 mill. in direct cash injections to designers

in the past

Q1 2014 Q1 2015$0.00

$2,500.00

$5,000.00

$7,500.00

$10,000.00

$12,500.00

$15,000.00

$17,500.00

$20,000.00

$14,800.00 $17,742.00

Lilly Pulitzer (Oxford Industries NYSE: OXM) Net Earnings (Thousands)

19.9% Growth

Q1 2014 Q1 2015$0.00

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

$700.00

$418.00

$635.00

Target (NYSE: TGT) Net Earnings (Millions)

52% Growth

Recognition of high-

end designers

 

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Risk Factors

• Higher production in low income countries (outsourcing)• Sacrifice safety of employees for lower costs• Underpay of employees and factory mishaps

Need to maintain low prices

• Constant addition of new designs to product line and removal of “old products” from shelves

• Increases waste of clothing• Negative effects on the environment

Need to keep clothing line constantly

changing

• Due to this low quality, the color fades after few washes• Nonylphenol –chemical in clothing dye that is exposed to the

body• Nonylphenol is linked to allergic reactions and cancer

Low quality products

Many firms have noticed these risks and have taken measures to mitigate them:- Urban Outfitters’ Urban Renewal Program making clothes from recycled materials- The Better Cotton Initiative involving over 50 retailers- H&M partnered with I:CO to recycle clothing and footwear- Established higher labor and environmental standards for suppliers and made supply

chains more transparent.Sources: IBISWorld, McKinsey&Company

 

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Comparable Valuation

Ticker Name Price 52 Week Low

52 Week High

Market Cap. EV

Adj. EPS Est.

Current Yr.

Adj. EPS Est. Next

Yr.P/E Inventory

TurnoverPrice

to Sales

EV/EBITDA SG&A/Revenue

GPS GAP 25.61 17.00 30.74 10183.00 10427.00 2.43 2.02 12.28 5.36 0.66 5.07 25.70%

URBN Urban Outfitters 37.51 20.06 40.80 4397.17 4118.82 1.78 2.06 18.80 6.52 0.89 7.98 24.55%

EXPR Express 13.64 11.28 21.57 1070.00 1069.42 1.45 1.05 9.80 6.26 0.48 3.55 24.97%

AEO American Eagle Outfitters 18.08 12.78 19.55 3286.28 3038.35 1.09 1.31 14.82 7.60 0.94 5.99 23.7%

GES Guess? 15.61 13.19 22.84 1320.00 942.92 0.96 0.65 26.04 4.49 1.28 6.33 30.17%

*in millions of USD, expect per share data

High 2.43 2.06 26.04 7.60 1.28 7.98 30.17%

Mean 1.54 1.42 16.35 6.05 0.85 5.78 25.82%

Median 1.45 1.31 14.82 6.26 0.89 5.99 24.97%

Low 0.96 0.65 9.80 4.49 0.48 3.55 23.7%

Sources: Bloomberg, MarketWatch, Google Finance, Morning Star

Margins 5-Year CAGR

Ticker Gross Net Income EBITDA Revenue EBITDA

GPS 36.21% 5.82% 13.39% 1.50% (3.51%)

URBN 34.89% 6.52% 14.41% 8.66% (0.75%)

EXPR 33.3% 4.96% 11.6% 4.28% 1.05%

AEO 36.99% 6.19% 13.31% 7.28% 0.25%

GES 35.72% 3.71% 8.71% (2.39%) (16.47%) Average Inv. Turnover of non fast-fashion clothing retailers = 2.61

 

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Industry Recommendation

High collaboration

Slow change in prices

Technological advances to

increase turnover

Increasing e-Commerce

Industry Rating: Positive

Highly lucrative industry• 6.31% Revenue CAGR for next 6 years • Strong demand for quick and cheap

clothing

Expectations for higher efficiency in future• e-Commerce instead of B&M

• Lower SG&A expenses• Technological advances

• Strong rates for inventory turnover• Higher average than regular retailers

• Strong gross margins efficiency

Companies to look at for next semester:

NASDAQ: URBNMkt Cap: 4.69B

NYSE: EXPR Mkt Cap: 1.10B

 

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THANK YOU

 

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Appendix Industry Definition Why “Fast Fashion?” Revenue Generation Trend 1 – Technological Advances Trend 2 – e-Commerce Trend 3 – Collaboration Risk Factors CompCo Industry Recommendation