Giant landfills that look like cities, animal killings, factories that pollute the air and water – the fashion industry takes an honorable second place in terms of damage that it causes to the environment. The fashion for responsible consumption, and in parallel with it, the refusal to wear natural fur is not news, but in 2021 they talked about it so much and so desperately that it became clear: further – only more. People began to think that even buying a regular T-shirt in the mass market is not only a matter of ethics (working in Asian factories that produce clothes can be simply dangerous), but also of the future of the planet.
Fashion industry harmful footprint
In 2012, the journal Natural Science published a report that dyeing and finishing fabrics (fabrics in general, not just textiles for clothing) is the second source of freshwater pollution after agriculture. In the retelling of journalists, it has become “a fashion industry – the second in the world in terms of destructive impact on the environment.” In 2018, The New York Times called this phrase “the most important fake news from the world of fashion.”
However, the production of clothing, footwear and accessories is still noticeably harmful to nature. These are pesticides and chemicals that get into the water when growing cotton and dyeing fabrics, and the release of harmful gases during the production of synthetics and transportation of finished products. So, in 2015, this industry sector emitted 1.2 billion tons of greenhouse gases into the atmosphere. The fashion industry also accounts for a fifth of all freshwater pollution.
Fashion houses are finally awakened by a wake-up call
Now both local brands and large international companies are concerned with the issues of sustainable development. The Kering concern, which owns Gucci, Balenciaga and several other brands, recently released a new sustainability plan and developed animal welfare standards for its suppliers. Its main competitor, the LVMH conglomerate, has signed a cooperation agreement with UNESCO to support biodiversity and is about to switch to sustainable packaging alternatives. Chanel has ditched exotic leather and invested in eco-startups, Prada is set to launch recycled nylon bags and move to a more sustainable alternative to nylon by 2022, and Burberry has stopped destroying unsold products and using real fur. Sports brands are also actively pursuing environmental initiatives, with Adidas pledging to use only recycled plastics by 2024, and Nike launching a website that guides brands and consumers on sustainability.
The mass market is not lagging behind either. While fast fashion has proven to be a major environmental threat, big brands are trying to fix the damage. H&M, Zara and Mango have lines that use recycled materials. Despite the fact that the profit of such brands directly depends on the sale of more and more new things, they launch entire campaigns dedicated to conscious consumption and responsible attitude to things: they collect clothes for recycling, use environmentally friendly materials and encourage people to come to the store with their reusable bag. H&M also decided to list suppliers on all of its products to help the audience make a more informed purchasing decision.
It is still difficult to judge the results of the “work on the mistakes” of fashion houses. Not many companies are willing to talk openly about their performance, with the exception of a few. Among them are Gucci. The brand recently reported on what it has achieved towards sustainable development over the past three years: it uses 1.5 times more “green energy” and reduces carbon dioxide emissions, and has also been able to recycle 11 tons of leather waste and overall reduce its impact on the environment by 16%.
The main result so far is that the problem has become widely discussed, and the environmental agenda has become relevant not only for small eco-brands, but also for companies such as LVMH and Kering.
Most of the companies that own legendary luxury brands such as Louis Vuitton, Gucci, Hermès and Tiffany & Co. are listed on global exchanges. And their value has increased several times over two decades, turning the owner of LVMH, the Frenchman Bernard Arnault, and his fellow countryman, the shareholder of the Kering company Francois-Henri Pinault, into one of the richest people in the world. And theoretically anyone can join this all.
Why not buy a stock instead of a t-shirt?
Why do companies list shares on the stock exchange? First, because they need to attract investment for development. Secondly, their owners may be ready to part with part of the business, as they need money for personal expenses and / or other projects. Usually, when you go public, you can get a premium compared to a private placement, when the shares are distributed by private subscription to a limited number of investors. In addition, shares in a public company can be used to take over a competitor or as collateral for financing. For example, the merger of the Italian manufacturer and distributor of fashion eyewear Luxottica and the French lens manufacturer Essilor takes place on a no-cash basis – through a share swap, while LVMH recently used its Hermès shares to consolidate Dior assets. In turn, investors who bought shares of a public company can earn on the growth of their quotes (if, of course, the company’s business grows), as well as receive income in the form of dividends and / or participation in the share buyback program.
Luxury concerns have not stayed away from the general trend: most of them are public. The market valuation of the top 15 companies in terms of capitalization exceeds $ 470 billion. The most popular stock exchanges among luxury companies are located in the world capitals of fashion – Paris, Milan, New York and London; manufacturers of expensive watches prefer Switzerland. The most valuable companies in the sector are LVMH, Kering, Hermès, Richemont and Swatch, their shares are the most liquid.
However, listing on the exchange also has its drawbacks – in particular, the need to disclose owners and prepare quarterly financial statements. In addition, a public company may be threatened by an unfriendly takeover (the same LVMH received shares in Hermès, buying them on the market to gain control over the company, but then these plans had to be abandoned). Therefore, some fashion manufacturers choose to remain private, such as Chanel and Dolce & Gabbana. The owners of the latter – designers Domenico Dolce and Stefano Gabbana – previously explained that the non-publicity of the company allows them to focus on creativity and not depend on market sentiments.
- What they do: produce sneakers, invest in technology.
- Financial performance. Over the past year, revenue rose 7% to $ 40.8 billion and profits rose 112% to $ 4.6 billion. Recently, they were generous with an increase in dividends by as much as 11%: now they will pay $ 0.245 quarterly. For the year, only 1% dividend yield will accrue.
- Promising undertakings. Nike is developing an app that offers a subscription with free shipping and the ability to try and return items. The company also works with the National Basketball Association to advertise Nike at league events.
- All these movements are for the sake of increasing sneaker sales. Sales are growing, the company’s income is growing, and investors are in positive territory.
- Investors will also receive more dividends on profits because the company spends less on storage and shipping: Nike has invested in data analysis and sneaker technology for the same reason.
- What could go wrong. Capitalization grows faster than profits: that is, investors’ expectations are too high in relation to Nike’s future earnings. If the company does not meet these expectations, a sell-off in shares could begin.
- Another pitfall lies in China – the fastest growing region of Nike in terms of sales of sneakers. And China has a trade war with the United States: they take turns imposing trade duties on each other, which increases the costs of the company. This could affect earnings for both Nike and investors.
- What they do: sell jewelry.
- Financial performance. They regularly pay quarterly dividends of $ 0.58 per share. Over the year, the dividend yield will accumulate in 1.5-1.7%.
- Promising undertakings. The company plans to buy LVMH, which holds the brands Christian Dior, Louis Vuitton, Givenchy and others. After checking Tiffany’s accounts, the deal is expected to close in mid-2020 at $ 135 per share. If all goes well, the current shareholders will be forced to buy back shares at a price higher than the market price.
- What could go wrong. If the economy is shaky, the demand for luxury goods falls first. It hurts the company’s sales and earnings, and with it, investors rip their hair out.
- Tiffany is also directly affected by the value of real estate and the rise in rental payments in large countries like the United States and China. The company focuses on opening physical stores: if real estate prices rise, costs rise, which means that investors will get less money.
- What they do: own Christian Dior, Louis Vuitton, Givenchy, Guerlain and other brands.
- Financial performance. Over the past 12 months, revenue grew by 7% to $ 56.76 billion, net income – $ 7.5 billion. In 2019, they paid dividends in the amount of $ 6.9 per share: the yield is about 1.5% per annum.
- Promising undertakings. The company has so much money that it is ready to buy Tiffany for $ 16.2 billion. The deal will help LVMH increase its jewelry revenue and presence in the US market, so revenue should rise.
- What could go wrong. Investors see the success of LVMH and all divisions of the holding, so they value the company dearly in relation to its financial performance. If revenues and profits stop growing rapidly, capitalization may fall, and then the owners of the shares will remain at a loss.
- What they do: own the brands Michael Kors, Versace and Jimmy Choo.
- Financial performance. Over the past 12 months, net income has dropped by half to $ 0.3 billion. At the same time, revenue increased by 10% to $ 5.6 billion.
- Promising undertakings. The CEO of the company spent the whole of 2019 buying up the shares of Capri Holdings. This should convince large investors that the company has a great future and encourage them to buy up shares. If that works, the stock will go up.
- Capri Holdings recently acquired the Versace and Jimmy Choo brands. Management believes that business costs can be reduced through savings in material procurement and consolidation of the manufacturing processes of all three brands. Expenses will decrease, which means that there will be more income for dividends, which, alas, the company does not pay so far.
- Capri Holdings plans to open new Versace stores: this means that there will be less free money for dividends and share buybacks, but the company’s revenue will increase in the long term.
- What could go wrong. In China, where the Versace flagship store is located, an embarrassment happened: a series of T-shirts was released, on which some of its administrative regions were listed as independent countries. The local star canceled the contract with the Versace brand, and the batch was disposed of. Excessive expenses that reduce the company’s profits are of no use to investors.
- What they do: own the Bath & Body Works and Victoria’s Secret brands.
- Financial performance. Revenue in the past 12 months fell 1% to $ 13.1 billion. Profits are also not going smoothly: they fell by half to $ 0.36 billion. They pay $ 0.3 of dividends per share on a quarterly basis, with a dividend yield of 5.2%.
- Promising undertakings. Revenue for the Bath & Body Works cosmetics brand is growing from quarter to quarter, with a growth rate of over 10%. The Victoria’s Secret division abandoned the annual fashion show: it had almost no effect on sales growth, but it required substantial costs. On this, L Brands will save a lot of money that can be used to invest in a business in order to earn even more profit for investors.
- L Brands can also separate Bath & Body Works into a separate company: so its capitalization can be higher than within the holding. This plays into the hands of investors: it will be easier for them to assess the company and its prospects.
- What could go wrong. The company has a debt of $ 9.1 billion: interest payments on loans gobble up a third of sales revenue, which leaves less money for dividends.
- Victoria’s Secret sales accounted for about 55% of L Brands’ revenues, but the division’s sales were down the previous two quarters compared to the same period last year. If this continues, the company’s revenues will fall, followed by a fall in dividends.
- What they do: sell cosmetics and perfumes.
- Financial performance. Revenue for the year increased by 9% to $ 15.2 billion, profit – to $ 1.9 billion. Paying dividends consistently: $ 0.48 every quarter. This brings investors 1% additional return.
- Promising undertakings. The company is opening stores in emerging markets where middle class growth is expected, as residents of those countries are expected to be able to spend more and increase the company’s revenue.
- The purchasing power of women is growing, which means that incomes for sellers of cosmetics can grow, and then for investors.
- What could go wrong. Many media personalities launch their own cosmetics brands and are not going to participate in Estee Lauder’s marketing campaigns. Management and employees will have to spend energy on attracting customers, and these are unnecessary costs that could be avoided.
- What they do: own brands Gucci, Yves Saint Laurent and others.
- Financial performance. They pay dividends on a stable basis: over the past year they paid $ 1.17 in dividends per share, with a yield of 1.5-2%. Revenue for the year grew by 16% to $ 16.8 billion, with profit not so rosy: it almost doubled to $ 2.2 billion.
- Promising undertakings. The company has a pretty strong presence on social networks compared to the same LVMH and Hermes. And where there are social networks, there is a young audience: if it buys more, the investor’s income grows.
- What could go wrong. More than 60% of the company’s revenue and approximately 80% of the company’s profits come from Gucci. Should anything happen to the brand, Kering’s financial performance will suffer, and so will investors’.
Bright prospects for investing in fashion
Nevertheless, investors should keep an eye on the strategies of specific companies: if earlier explosive growth in emerging markets helped all players, now the strongest wins. According to the results of the last two years, companies have clearly divided into leaders – LVMH, Kering, Moncler (who rebuilt their strategies for the Internet and millennials in time) and laggards (Prada, Salvatore Ferragamo and Tod’s). Whether the second group will be able to close the gap is the main intrigue next year, Deutsche Bank said. In addition, the sector should increase the number of M&A (mergers and acquisitions) – after all, large companies often find it easier to survive in a competitive market. Citi analysts believe Tiffany & Co. is an attractive object for purchase. So, when choosing a diamond ring, think about whether to invest in the shares of its creators at the same time.
Consumer Consciousness. Begin with yourself
At the same time, returning to the topic of caring for the environment in the fashion industry, it is the buyers who can and will become the main driving force of change. At the end of 2018, financial services company HSBC surveyed more than 8,500 different companies and brands (including fashion) and learned that almost a third of them have launched sustainable development initiatives: they did it under the influence of the audience, because such steps increase loyalty (84% of those who decided to make a change noted its positive impact on profit and brand development). In the current market economy, the development of any industry depends on what we “vote with the dollar” for.
Simply put, we can buy less often, but better: better and longer-lasting things, items of responsible manufacturers, choose vintage rather than new things, be attentive to the composition and hand over obsolete products for recycling. And to begin with – to realize that even such a small step can become part of large changes.