Dissecting the clothing sector is an exacting task. Changing consumer dynamics make it difficult to predict, not helped by the fact that high-street vendors themselves are still figuring out how to serve customers. This year, the debate is unlikely to change. Questions still loom over the popularity of online shopping, how much the quality of products matter and how much prices speak to customers.
FTSE 350 companies in this space are coming under increasing pressure from online 'fast-fashion' stars such as Aim-traded Asos (ASC). The group will enter a new chapter this year with a new chief executive, Nick Beighton, who takes the reins from the company's founder and longstanding boss Nick Robertson. But the group left 2015 behind on a positive note, posting an 18 per cent improvement in sales and a small improvement in pre-tax profit for the financial year ended March. A recent trading update put the group's margins under closer inspection from the market, triggering speculation as to the effect on the company's bottom line.
Its closest competitor on the London market - albeit not a FTSE 350 constituent - boohoo.com (BOO), got 2016 off to a good start, too, reporting strong Christmas sales. Margins also suffered at the hands of heavy discounting, but customer numbers are up 33 per cent year on year, proving that the site's popularity is growing.
By contrast, the UK high street has fallen totally out of favour. Quality products tend to fare better, which serves middle-market FTSE 350 retailers such as Ted Baker (TED) and SuperGroup (SGP) better. We're particularly bullish on the latter, as expansion into the US and China seems firmly back on the agenda. Other high-street stalwarts include Next (NXT), which has its work cut out this year. The unusually mild weather in the run-up to Christmas dampened sales of autumn/winter collections, and the company will hope to make up the difference with the launch of spring/summer collections in a matter of weeks.
The luxury end of the market also faces a number of challenges in 2016. Some, such as Burberry (BRBY), are trying to lessen their dependence on Asian territories, which are facing weak consumer demand for high-ticket fashion items. Others, such as market newcomer and shoe king Jimmy Choo (CHOO), appear less able to adapt to the challenge from relying heavily on Asian sales. Since issuing our sell advice on Jimmy Choo in October, the shares have fallen just over 10 per cent.
| Company Name | Share price (p) | Market value (£m) | PE ratio | Dividend yield | 1-year performance (%) | Last IC view |
| Brown (N) | 283 | 803 | 19.4 | 5 | -29.9 | Hold, 337p,14 Oct 2015 |
| Burberry | 1,139 | 5,068 | 14.5 | 3.1 | -31.8 | Buy,1,269p, 19 Nov 2015 |
| JD Sports Fashion | 1,089 | 2,120 | 24.1 | 0.7 | 112.3 | Buy, 898p, 16 Sep 2015 |
| Jimmy Choo | 130 | 507 | 21 | 0 | -22.2 | Sell, 146p, 1 Oct 2015 |
| Next | 6,685 | 10,127 | 15.1 | 2.3 | -3.1 | Hold, 6,835p, 5 Jan 2016 |
| Sports Direct Int'l | 395 | 2,363 | 9.9 | 0 | -46.2 | Buy, 581p,11 Dec 2015 |
| SuperGroup | 1,527 | 1,240 | 22.7 | 0.4 | 65.3 | Buy, 1,667p, 31 Dec 2015 |
| Ted Baker | 2,669 | 1,174 | 30.1 | 1.6 | 11.2 | Hold, 3,200p, 6 Oct 2015 |
Favourites
From the luxury end of the sector, our top pick remains Burberry. The company has reportedly returned to growth in mainland China, and we have faith in Burberry's management to continue diversifying geographically. From the high street, our tops picks remain SuperGroup, Ted Baker and Next. The latter had a sluggish Christmas, but its track record of handing shareholders' cash returns remains encouraging. Bosses at cash-rich high-street chain JD Sports (JD.) say they expect full-year pre-tax profit to be materially ahead of current expectations, by as much as 10 per cent, following strong Christmas trading.
Outsiders
With its Asia challenges, Jimmy Choo is our only clear outsider in this sector. We would stick Sports Direct International (SPD) in with it - the discount retailer's boss, Mike Ashley, is busy negotiating a PR storm over wages and conditions, although we still think it is too cheap at the current share price.
