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Point of View

From Runway to Revenue – Sanlam’s take on some fashionable investments

By Matthew Brittain, Investment Analyst 

The London fashion week is a fascinating expression of a complex and competitive industry where companies start each season with the potential to get their product offering “on point,” hitting the ball out the park, or get it all wrong.

With customer tastes evolving and competitors bringing out innovative products its tough to keep up with the trends year after year and building a sustainable franchise takes great skill. Most companies in the industry ride a wave or two of success, experiencing phenomenal growth before struggling for relevance. However, there are a few special businesses that have managed to get things right pretty consistently and we take a look at some of their differentiators.

They keep on top of trends

The 3rd richest man in the world is Amancio Ortega, founder and largest shareholder of Inditex, the company that owns Zara, Massimo Dutti and a range of other successful franchises. You don’t get into the same sentence as Bill Gates in wealth terms without developing a bullet proof business and Ortega has built his on the ability to adapt to trends. His companies carefully test the waters with customer trends and react with lightening speed to customer feedback, taking as little as five days to produce a prototype and 15 days to get from design to shelf.

Have a strong brand

Other fashion companies like Hermes, Burberry and Louis Vuitton have been exceptional at managing their brands, primarily by offering a limited quantity of a high quality product at a high price. This has kept these brands exclusive and desirable. While this strategy continues to work well in older generations they have struggled a little with the younger millennial generation whose tastes are subtly different. On average they spend a higher proportion of their incomes on travelling and eating out at restaurants, as opposed to expensive things, than other demographics.

Develop technically exceptional products

Lastly, another pillar that has allowed some companies to endure where others have floundered is in technical capability. A company like Nike is a great example of a business where the technology in the product is highly regarded and provides customers with comfort that their purchase would make it down the catwalk.

All three of these characteristics - the ability to respond to changing trends, owning desirable brands and technical capacity - provide these businesses with an enormous defence against the array of competitors out there. So while for a season or two they could easily lose share to another company that gets it right for a time, these quality businesses should be able to use their rock solid foundations to bounce back.

Once such company that has recently been under siege is L Brands, owners of the Victoria’s Secret brand. They were slow to react to the change in trend towards the bralette and lost out to upstart companies such as Aerie (American Eagle). Since they were on the back foot already and there is a lot less technology in a bralette they were also not able to sell at the same prices, reducing their profitability. It looks like management managed to score a couple of other own goals as well, so with all the negative news flow out there the share price has really taken a battering and when this happens to a good business we get ready to do more than just window shop.  

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Before we take out the cheque book for the shares however we would want more assurance that the business was not broken and that management have a proper handle on the challenges. We know it’s cheap and can be highly profitable when firing on all cylinders. We also know they have great brands that have been carefully cultivated over many years, they have renowned technological expertise that customers trust and, with the exception of the recent season or two, they have managed to react well to evolving customer trends. So it ticks a lot of the boxes we look for in an investment. Perhaps it could be next season’s flavour of the month?

Disclaimer: Neither the author, nor the author’s company, has a position in or acts in a professional capacity for any of the companies mentioned. 

This article is for information purposes and should not be treated as advice to buy or sell any security or to adopt any trading strategy. Past performance is not a reliable indicator of future results.

Sanlam is a trading name of Sanlam Private Investments (UK) Ltd (registered in England and Wales 2041819; Registered Office: 16 South Park, Sevenoaks, Kent, TN13 1AN), Sanlam Wealth Planning UK Ltd, registered in England and Wales 3879955, and English Mutual Limited, registered in England and Wales 6685913 (Registered Offices: St Bartholomew’s House, Lewins Mead, Bristol, BS1 2NH), all of which are authorised and regulated by the Financial Conduct Authority.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.