Listed apparel groups: tough times

The largest listed apparel firms, Onward, TSI, Sanyo Shokai and Renown should be the main beneficiaries of a resurgent department store sector, but with spending coming mostly from more affluent consumers, it is luxury and big international brands that have gained the most. Middle market brands from the traditional apparel houses haven’t done so well, and tourists haven’t shown any interest either.

Sales & Profits for Top Apparel Groups 2014

At the same time, many regional department stores are now converting to shopping centre style management, with specialty retailers grabbing large chunks of newly leased floor space, again reducing space for wholesaled and concession brands.

All of which means a shrinking market for apparel groups dependent on this channel.

As if these were not problems enough, the rising cost of imports due to the cheap Yen has hit profitability hard. With consumption tax possibly rising to 10% in April 2017, there are worries about what will happen to the middle market on which most of these firms depend.

All of the big four are at varying stages of restructuring. Renown has been consolidating for more than 15 years, but still isn’t done. TSI Holdings continues to slash brands and stores following the merger of Sanei International and Tokyo Style, with 900 stores and 19 brands cut since 2012. It still barely scraped a profit in FY2014, with operating profit at just ¥900 million, the first since the merger. Its latest medium term report calls for an increase in operating profits of just 5% through FY2017, and this year alone it will close down another nine brands and as many as 300 stores, after closing six brands and 225 stores last year.

Sanyo Shokai, perhaps a little late, is working on cultivating a new generation of brands to replace Burberry, which took away its license last month. Over the next four months it will convert more than 260 Burberry concessions and stores into Mackintosh London stores – Mackintosh is a license – and hopes the brand will generate sales of ¥20 billion through 2018.

Common strategies among all firms are M&A to buy in growth, e-commerce, and expansion beyond the apparel market into high growth markets like home fashion – and almost all agree their share of the department store market will continue to decline. They are all also shifting production away from China to reduce production costs and offset the weak Yen.

There is some good news. Last year TSI Holdings posted its first operating profit, and even Renown, after selling off assets to pare down debt, returned a rare surplus of just ¥324 million. And while Onward saw a 44% drop in operating profit last year, it expects to bounce back this year thanks to pulling out of various businesses such as Donna Karan Japan and kimonos – it also closed 130 stores in 1H2015, reducing losses by ¥1 billion.

In the year ahead, there will be some reshaping of the sector. Sanyo Shokai expects a rather conservative 13.5% fall in sales due to the loss of Burberry for the second half of the year – a bigger decline can be expected in FY2016 if its hoped for replacement brand Mackintosh London doesn’t take off.

The biggest change will be further efforts to diversify away from department stores. Given the thin margins on department store brands this should help profitability too. Instead investment is going into specialty chains, select shops, and e-commerce. In addition, Onward is working with partners on new brands for overseas markets (see Page 11) and TSI even plans investments in restaurants, hotels and home fashion, and has allocated ¥20 billion to make this happen.

Unlike in previous decades, ROE is a real strategic consideration these days too; Sanyo Shokai posted an ROE of 10.3% last year and Onward hopes to increase its ROE from 2.4% last year to 5% within three years and TSI to 7%.