Apparel OEM companies stocks soar as industry recovers

[Courtesy of Youngone]

Youngone Corp., Hansae Co., and other apparel original equipment manufacturers (OEMs) have seen a rise in their stock prices this month, driven by optimism that the industry has hit the bottom in the second quarter and is anticipated to rebound in the latter half of the year. Positive earnings forecasts from their global customers also have added to these positive observations.

According to the Korea Exchange on Monday, shares of Youngone has gained 30.14 percent this month. Hansae and Hwaseung Enterprise Co. have also climbed 15.71 percent and 10.74 percent, respectively. Their gains far exceed the Kospi’s 0.2 percent return this month. Institutional investors have been driving the upward trend of those OEM companies, buying a net 20 billion won ($1.53 million) in Youngone stocks and a net 7.3 billion won in Hansae stocks this month.

Apparel OEMs have struggled in the stock market for some time as clothing companies have been facing inventory surpluses caused by inflation and weakened consumer demand this year, contrary to an industry-wide boom following the reopening last year. Domestic OEM companies subsequently have experienced lower profitability compared to the index until this month’s upward trend.

It is the recent recovery in the clothing industry that is leading to a rebound in stock prices of OEMs. Analysts note that the industry, which experienced a downturn due to inventory overhang, is expected to improve after reaching its lowest point in the second quarter. With major global clothing companies nearly normalizing their inventories, OEMs are likely to see an increase in orders starting from the third quarter, analysts say.

Indeed, some of the global apparel companies like Gap Inc., Nike Inc. and Lululemon Athletica Inc. have all seen a slow increase or decline in their inventory assets.

In the U.S., the growth rate of retail inventory has decreased to 13 percent at the beginning of this year and further fell to 5 percent in May, after reaching its peak in August last year at 31 percent compared to the previous year.

[Courtesy of Hansae]

“The clothing industry has recently shown signs of recovery after a prolonged period of inventory reduction. The growth rate of U.S. retail inventory has been slowing down each month since reaching its peak last summer, indicating a shift towards inventory accumulation,” said an analyst at EBest Investment & Securities Co.

According to local data tracker FnGuide, Youngone’s estimated operating profit for the second half of the year is expected to increase by 5.2 percent to 382.5 billion won, compared with an estimated 363.6 billion won in the first half of this year. Similarly, Hansae is projected to experience a 15 percent increase in operating profit to 85.2 billion won for the second half, in comparison to 74.2 billion won in the first half.

However, experts note that the extent of performance improvement may vary depending on the specific categories on which OEMs focus. While Youngone has functional clothing brands as its primary customers, like The North Face and Lululemon, Hansae specializes in producing general clothing for customers such as Gap. “Youngone is expected to benefit from the structural growth of the functional clothing market as the largest global supplier,” said Yu Jung-hyun, an analyst at Daishin Securities Co.

The strong performance of global clothing companies is further raising expectations for OEMs. Yoga apparel brand Lululemon announced a surprising first-quarter performance earlier this month, with its operating profit up by 54 percent year-on-year. Market insiders expect that Youngone, the supplier of male clothing for Lululemon, would benefit from this. Lululemon is estimated to account for about 17 percent of Youngone’s customer base, according to EBest Investment & Securities.

Hansae will also benefit from the improved performance of its customer, Gap. Gap announced a 27.5 percent drop in its inventory for the first quarter compared to the previous year. “Gap may turn to positive earnings in the second quarter driven by its focus on profitability through restructuring and store efficiency,” said the EBest Investment & Securities analyst.