Continues to Install New Brands
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. -- Ed.
Sales growth for The Nature Holdings’ travel carrier and NG Kids products should stand out in its 2Q22 results. Despite rising department store commission fees and parcel delivery costs, our earnings outlook remains rosy. While the short-term contribution to overall margins of a recently-acquired stake in Barrel is to be negligible, the addition is to complement the summer season product category and to strengthen global inter-brand synergies.
Continues to install new brands
Due to The Nature Holdings’ delayed entry into China in 2H22, we believe that its number of stores in the country will be reduced from 25 to 3. Accordingly, we slightly cut our 2023 equity-method gains and EPS estimates. Applying a target multiple of 8x (the average of domestic apparel brands), we lower our TP by 5% from W42,000 to W40,000. Given the possibility of a global slowing in apparel consumption in 2H22, the firm looks in need of new mid/long-term growth engines. Earnings expansion should be possible from next year thanks to this year’s acquisition of a stake in Barrel and signing of a licensing deal for Mark Gonzalez. With related earnings yet to be reflected, The Nature Holdings’ shares are currently trading at a 2023F P/E of 5x, based upon a Jul 14 closing price of W29,600. Seeing valuation merit, we adhere to a Buy rating.
Acquisition of stake in Barrel: Earnings improvement to be key
On Jul 15, The Nature Holdings acquired a 47.73% stake in Barrel for W64bn. On Jul 31, it is slated to complete a contract to acquire W10.8bn worth of convertible bonds in Barrel. Moving head, the stake acquisition should: 1) bolster global synergies with NG, especially in China and Hong Kong; 2) lead to the combining of Barrel’s water sports apparel and SALTY CABIN brand (an existing chain of F&B stores being operated by The Nature Holdings); and 3) complement summer season category sales in 2Q~3Q (of note, 4Q has traditionally accounted for around half of The Nature Holdings’ annual sales). Although Barrel having recorded operating losses for nine consecutive quarters (1Q21~1Q22) due to Covid-19 crisis effects, we forecast that the brand will reach BEP in 3Q22, backed by brisk sales of rash guards and swimwear.
2Q22 preview: NG Kids and travel carrier sales carrying hard!
We now expect The Nature Holdings to post 2Q22 consolidated sales of W82.5bn (+38% y-y) and OP of W13.5bn (+43% y-y), with both figures topping our previous projections.
We estimate that 2Q22 sales growth (y-y) by brand divided as: NG +30%, NG Kids +105%, and NFL +52%. With children’s backpacks for the new school semester having propelled sales in 1Q22, we believe that travel carriers (sold via home shopping channels) and NG Kids products led sales growth in 2Q22. As most of NG Kids’ stores are located in department stores, NG’s sales per store likely upped in line with a strengthening in brand power, overcoming the negatives of high department-store commission fees and parcel delivery price hikes. We view this success as evidencing the transition of NG’s brand power over from the adults market to the kids market.