Negative reports by analysts have been constantly published in a year in which not even Inditex has managed to avoid the penalisation of the market. The reduction of margins, online growth and the sector’s transformation are all to blame: the stock market has turned its back on fashion’s listed titans.
Fashion turns its back on the titans listed on the stock exchange. The transformation of the sector’s top-dogs has put investors on guard. Now, they are in disbelieve of a business whose future is more sensitive to external factors by the day and whose profitability follows a downward trend.
Investors have always been more fearful of fashion players than of other sectors due to the so-called “fashion effect”: a screw store will continue to sell screws unless something completely radical takes place in the sector; in fashion, however, companies are forced to reinvent themselves at least every six months, and success in former campaigns does not guarantee success in future ones.
Notwithstanding, the professionalisation of the sector, its capacity to generate money and its opportunity to escalate have all influenced the entrance of capital in fashion, especially in the stock market, and mostly after the end of the nineties.
But, this last year, investors have started to see their trust in fashion disappear again. The transformation the sector is going through, the uncertainty of knowing which will be the future of retail, its exposition to exogenous matters like the weather or currencies, the fall of margins registered by its main players and the advancement of pure ones with values inspired by Silicon Valley, have all motivated that analysts from the sector recommend investors to stay cautious and consider a selling position.
One of the most damaged companies by this wave of recommendations is H&M: From 2015 to 2017, the Swedish giant’s shares dropped by 50% partly due to the challenge of reaching its rival’s figures, Inditex. Already in 2017, the critical evaluations of the group multiplied. In November, H&M accumulated fifteen sales advices, a record level, and its shareholding reached minimums from 2011. The main risk was, according to analysts, the advancement of the online channel.
The Nordic bank Handelsbanken, one of the analysts that advised to get rid of shares from the group, even qualified as a “painful journey” H&M’s challenge in base to digitalisation, stating the “whopping” difference between the company’s online offer and that of its main competitors.
SEB also alluded to a growing market share of native online companies such as Zalando, Boohoo and Asos to justify its advice of selling H&M’s shares, as well as the impact of climatology and the slow down of sales in the German market, the most important one for the group in base to its revenue. Throughout 2018, the positions stood in a similar concept with reports that underlined the high stock levels of H&M and its difficulty to compete against pure players.
From 2015 to 2017, the shares of H&M dropped by 50%
The slow down that the group registered during the last months of 2017 and the first of 2018 made it organise, for the first time in its history, a day dedicated to capital markets. The initiative took place during February, but it did not manage to get the expected back up from investors who continued to doubt on the group’s strategy to revert the weakness of its main brand.
In the first quarter, the company presented a decrease of sales once more, its second quarter of losses on a row, and its profit dropped by 44%, which ended up sinking its price in the market. The 6th of April, the group’s shares reached minimums ever since 2008, scoring 126.26 Swedish kroners per share, ahead of the 360 kroners it managed to reach in 2015.
The downturn of H&M also influenced Inditex, which was rewarded by investors in March when the presentation of its annual results and the announcement of its strategy for the network of stores and its expansion of online sales coincided. In the second quarter, sales stayed up, but profit decreased.
The first moment of relief for H&M by part of the stock came in the third quarter, when the company’s reorganising plan started to show its first fruits. That, together with the acquisition of a share parcel by Interogo Holding, the investing vehicle of Ikea, maintained up its fall in the stock exchange. Analysts stated that the right choice for the company was to focus on its main channel and to reorient it, as well as to lower its prices, but they also mentioned its high stock levels and its challenging online adaptation.
In the fourth quarter of 2018, H&M took a break from the pressure by growing more than what was predicted
“We think H&M has done the right thing in lowering entry point prices and investing in its offer for the long term, but expect this to lead to margin pressure in the short term,” said RBC Capital Markets. The stock exchange was encouraged by an article published in the Daily Mail which pointed out that Stefan Persson, the group’s president, had started to talk to banks to pact a refinancing of the debt and was contemplating a mega-operation to exclude the company from the stock exchange. In the fourth quarter of 2018, H&M took a break from the pressure by growing more than what was predicted both in those three months as in the whole year, but still, the group did not manage to end the day with positive numbers in the stock market.
Not even the leader is immune
The distrust of the fashion sector’s markets also impacted the business’ top-gun: Inditex. The company is a traditionally cared for value by analysts and in barely 17 years it has managed to become one of the leading firms in stock value of the Ibex-35.
Notwithstanding, 2018 has been unusually characterised by red figures. In February, the company dropped to minimums from three years ago in the stock market right before it anticipated to analysts a fall in comparable sales and in its margin during the last quarter of fiscal 2017. The press release of such statement caused a wave of sales of the Spanish group’s assets, which ended the day with a fall of 7,06%.
The second biggest blow, except for the effects of H&M’s contagion, did not come until August, when a devastating report by Morgan Stanley was published. In it, the bank from the United States claimed that Inditex would have an “unavoidable reduction” in the long term. The company “is more sensitive to currencies day by day, has registered falls of margins and faces the same pressures as most of the rest of retailer groups”, stated the document.
In September, Morgan Stanley attacked once again lowering the group’s value by 20%, which was added to a wave of reductions by part of analysts such as Goldman Sachs, Credit Suisse, JP Morgan or Citigroup, who made the group experience five consecutive days of shareholding decreases, including the biggest one ever since the Brexit referendum.
On the other hand, Gap, fashion’s number three, has also followed a downward trend in the stock market during the year, and in mid-December, it accumulated a fall of 26% of its value. The company reached rock bottom with brick after a report by an analyst, this time JP Morgan, who reduced the group’s value due to the company’s high degree of exposure in the United States and China’s trade war.
And pure players?
Although the threat of the online channel and the strong growth rates of pure players drag down retailers in the stock market, when pure players lag, brick titans are also the first to feel the effect.
That’s what happened, for instance, the 17th of December, when an Asos profit warning dragged down Inditex and H&M. The British group’s warning that sales in November were not up to their expectations due to economic uncertainty in several of its main markets and the fall of trust of consumers costed them a drop of 35.7% in the London Stock Exchange. The domino effect did not take too long. Zara’s parent company dropped by 3.87%, H&M stepped back by 8.5%, and even AB Foods, owner of Primark, reduced its share by 3.15%.
In September 2018, Morgan Standley reduced the value of Inditex by 20%
The decrease of the British group affected Zalando too. The other European pure player, specialised in fashion, reduced by 11.6% to the point of reaching 22.56 euros per share. The company was carrying a bearish trend ever since its own profit warning in August and September, which costed it a correction of 30% in barely three months.
Globally, the balance of online players turned out to be quite negative in 2018. Asos accumulated a fall of 66.7% the 21st of December; Zalando, 44.5%, and SHowroomprive, specialised in online sales of stocks, had dropped by 88.4% its price. The other huge online fashion player that lists in the stock exchange, Yoox Net-a-Porter, abandoned the brick in June when the Swiss group Richemont acquired 100% of the company’s capital.
The evolution of the International Selection of Stock by Modaes.es (in its Spanish initials, SIMB35), which checks the evolution of the 35 most representative listed companies from the sector all around the world, has also shown this loss of trust in the sector’s market. After a sprint during the first half of the year embraced by the rise of US values which made it score peaks in June, the SIMB35 stumbled in June and in September, although in October it bounced back to obtain a figure of 19,000 points for the first time in its history. In the final stage of the year, however, the selection started to step back again to the point of going below the bar of 18,000 points only one month before finishing the fiscal year, with Michael Kors, Tod’s and Coty at the back of the list.
In the final stage of 2018, the SIMB35 stepped back again going below the figure of 18,000 points
Another fashion ‘unicorn’ in the stock exchange
It all balances out. Barely a few months after Richemont excluded Yoox Net-a-Porter from the brick through its acquisition of 100% of the shares, one of the phenomena of luxury sales, Farfetch, debuted in the New York Stock Exchange.
The company, promoted by the Portuguese entrepreneur José Neves and with headquarters in London, is specialised in the sale of physical stocks through wholesale stores on the web. Before listing in the stock market, Farfetch had already raised up to 701.5 million euros in seven financing rounds, through which it attracted the attention of investors such as Index Ventures, Condé Nast or Eurazeo. In June 2017, the company closed another macro-operation, selling 13.94% of its capital to the Chinese e-commerce giant JD.com.
Little more than a year later, in September 2018, the company listed in the stock exchange with twenty dollars per share, above the estimated figure of between 17 dollars and 19 dollars. The company scored 885 million dollars, well above its objective of 446.5 million. And all of that, without even being in the black.
Nevertheless, Farfetch was not the only group linked to the fashion business that started to be listed in 2018. Another company backed up by a Chinese group, SMCP (property of Shandong Ruyi since 2016) started to be listed in October with a price of 1.7 billion euros, 21.8 euros per share, slightly below the calculated objective.
In Latin America, the main players to be listed in the stock exchange were department stores. Mallplaza, property of the Chilean titan of department stores Falabella led the main role in one of the biggest entrances to the Chilean Stock Exchange and raised 520 million dollars in its debut. During its first day listing in the stock market, its shares multiplied by seven. After the operation, Chile stood as the Latin American country with a greater number of companies related to fashion listed on the stock exchange: Falabella, Cencosud, Ripley, La Polar, Parque Arauco, Forus and Tricot.
Ahead of 2019, one more will be added, as Cencosud will list its department stores division. The Chilean retailer, owner of facilities such as Alto Las Condes, Unicenter or Plaza Lima Sur, will put in the stock market between 20% and 30% of its facility society.
Among the IPOs programmed for fiscal 2019 there is the Italian company Liu JO and more importantly, Levi Strauss. The denim giant, which had been already listed in the stock exchange during the seventies, estimates to raise between 600 million dollars and 800 million dollars, which would make the company’s price stand at 5 billion.