Textile/apparel
The author is an analyst for Shinhan Securities. She can be reached at hpark@shinhan.com -- Ed.
Solid performance reported at home and in China
F&F registered consolidated operating profit of KRW110.1bn (+16% YoY) on sales of KRW405.5bn (+9% YoY) in 2Q23, largely coming in line with market expectations. By brand, Discovery recorded sales growth of -8% YoY, MLB +18% YoY, and MLB Kids +11% YoY. Sales from Chinese and Hong Kong subsidiaries expanded by 31% and 64% YoY, respectively. Sergio Tacchini, acquired in 2H22, made a KRW9.6bn contribution to consolidated sales.
The 2Q sales of the Discovery brand showed limited room for further growth in the domestic market with annual sales nearing the KRW500bn mark. Sales of the MLB brand at home grew 4% YoY, converging to the market average. Compared with our previous projections, F&F reported weaker performance at home and stronger results in China. The number of regular MLB stores in China increased by 88 stores from a quarter earlier, bringing the total store count including pop-up stores to 983. At this pace, the figure is expected to exceed the company’s target of 1,100 stores set at the beginning of the year.
New store openings to accelerate in 2H23
F&F will likely see sluggish growth in the domestic market in 3Q. Meanwhile, Chinese operations are accelerating the pace of new store openings vs. 1Q, led by MLB and MLB Kids. With the approaching fall/winter season, new orders typically rise in the third quarter. China-bound exports of Duvetica and Supra products should contribute to sales in 3Q. Roughly 50 new stores (23 for Duvetica and 25 for Supra) are set to open in China in 2H23. Orders for the 2023 fall/winter season are expected to be booked as sales in 3Q.
The launch of Duvetica and Supra in China is projected to add roughly KRW6- 9bn to sales in 2023 (monthly sales of KRW40mn x 50 stores x 3 months), and make a full-fledged contribution to sales from 2024. At home, the tennis wear brand Sergio Tacchini will concentrate new store openings in 2H23.
Shares grossly undervalued, but still attractive as a growth stock
We slightly lower our earnings forecasts for F&F in view of a possible increase in marketing spend for newly launched brands. However, we find current share valuations excessively cheap considering that strong sales gains are typically reported in the second half of the year. Although our target price has been lowered to KRW180,000 along with the earnings forecast revision, F&F is still a very attractive growth stock in the apparel sector.