We think the risk-reward currently for Stella is excellent, because of: 1) a turnaround of the clothing and sportswear sector in the US, 2) the company’s specific strengths like its high-end positioning (e.g. producing Jordan series for Nike) and ramp-up of footwear business by luxury brands (acquired 17-18 new clients, like Moncler Lacoste and Kenzo (under LVMH)in the past two years) and 3) undemanding valuation of 8x FY23E P/E and 9% FY23E yield.
Company-wise, we expect Stella’s growth to accelerate and outperform its peers. We are impressed that Stella not only managed to resume positive sales growth of 13% in 4Q23, but also outperformed peers like Feng Tay (- 3%), Eclat (+10%) and Makalot (+9%). Referring to our NDR call recently, management is still confident on accelerated growth in FY24E (low-teen net profit growth, with 0% to MSD volume and flattish ASP growth), even after a beat in FY23E results. In our view, the general picture in FY24E and FY25E is: 1) sportswear companies to shift from de-stocking to re-stocking, 2) luxury brand sales growth to be soft but price hikes shall continue, and 3) high-end fashion and causal names’ growth to slowly pick up but with healthy discounts and inventory levels. And we think Stella can further differentiate itself and deliver an outstanding result, thanks to:
1) Stella’s high-end positioning (it is the maker of Jordan athleisure series, as well as many other limited or cross-over collections) and its strategic partnership with Nike. Therefore, it should be able to recover faster during the Nike’s turnaround (from de-stocking in FY23E to re-stocking in FY24E), and the U-rate of sports segment factory should increase gradually (80%+ in FY24E and 90%+ in FY25E (close to pre-Covid level). During FY19-23, Jordan brand sales growth was always faster than Nike group’s. Moreover, the construction of a new factory (with designed capacity of 10mn pairs of shoes) in Indonesia for Nike (to be opened in early FY26E) is still on track.
2) The popular trend of category expansion by the luxury and high-end fashion brands. Many brands are looking for new growth drivers and category expansion is one of that. In fact, we can tell from the sales mix of the Prada and Gucci brands that their footwear sales were all climbing from FY19 to 9M23. Therefore, as one other best high-end athleisure shoes maker in town, we are confident that Stella can ramp this up further. In the past two years, it has acquired about 17 to 18 clients (e.g. Moncler, Lacoste, Kenzo (under the LVMH group)), and these could provide a boost in orders in FY25E (as the product testing usually last for around 1-2 years for a new client). For example, one of Moncler’s lately strategy is to generate around 10% of sales from its footwear business in the mid-term.