Welcome to the Sustainable Money Mail 👋 We think investing should be about trying to beat the market while providing capital to companies that make the world a better place. This week, we’re looking at the small cap French fashion conglomerate SMCP Group.
Headlines:
Starbucks Expands To 3,500 Green Stores across the globe [ESG News]
Air France KLM gains $2 billion in loans for ESG targets [Reuters]
Apple targets 100% recycled cobalt batteries [ESG Today]
Mass ESG Fund Ratings downgrades hits Europe [Bloomberg]
Colombia looks to issue green government bonds this year [Reuters]
G7 countries urge mandatory climate disclosure [ESG Today]
We can’t tackle climate change in the Middle East without ESG investing [Middle East Institute ]
Amprion commits €22 billion to grid expansion [ESG News]
World Bank grants $200 million to repair energy infrastructure in Ukraine [World Bank ]
Hong Kong Stock Exchange plans to make climate disclosures mandatory [Bloomberg]
Iberdrola builds Spain’s first hydro-solar plant [Energy Global]
New ESG trends in Food & Beverage [Yahoo Finance]
Barclays expands Impact Program to 450 companies tackling ESG issues [ESG News]
Stock Pick: SMCP Group (€SMCP)
Shares in the French luxury fashion holding firm SMCP (Sandro, Maje, Claudie Pierlot) are up 28% this year, as French luxury goods have seen an explosion of demand thanks for the Chinese economic recovery. This overlooked small-cap firm has a rapidly-growing business and still enjoys an attractive valuation. Here’s the rundown:
Stock overview
SMCP stocks are listed on the EPA (Euronext Paris Eurolist) in France. Currently trading at €8.40 per share, they’re up 23% YTD, 28% in the past year, and up 38% in the last 6 months.
SMCP was formed in 2010 through the merger of Sandro, Maje, and Claudie Pierlot. SMCP operates over 1,600 points of sale, including boutiques, flagships, and within high-end department stores, in 43 countries.
It specializes in ready-to-wear ‘Parisian chic' clothing with the vision to become the “global leader in accessible luxury”.
They sell: longevity in designs, beyond isolated trends.
ESG
We love companies with genuine commitments to ESG: especially in the luxury market, when brand value and keeping up with the demands of younger buyers is crucial. All 5 of SMCP’s brands have banned animal fur since 2020 and are banning feathers and down this year. Since then, they’ve also adopted 3 key sustainability strategies:
SMCProduct: reduce excess production, optimize residual stock, refine supply chains, introduce eco-friendly and recycled collections. Launched second-hand resale and renting platform to promote the circular economy.
SMCPlanet: reduced carbon footprint by 8% between 2019 and 2021- aims for 20% by 2030, reduced aviation usage to 49% from 63%- aims for 38% by 2027. Eco-responsible stores set up with low emission air-conditioning, recyclable shopping materials. Received Gold Leadership in Energy and Environmental Design (LEED) rating in 2020 for stores.
SMCPeople: favouring internal mobility and talent recognition with ⅓ of all headquarter and managerial positions from internal hires. Invested in the MyLearning training platform for skills in Strategy, Marketing, Management, Languages etc accessible to all employees. 81% of employees are women.
Private equity history
SMCP has a solid foundation with longstanding control from established private equity firms in the last 2 decades.
They benefited under the ownership of LVMH’s private equity arm L Capital from 2010-2013. This gave SMCP global access to L Capital and LVMH's assets, long standing relationships and leading expertise in the textile industry.
In 2013, private equity giant KKR tripled SMCP’s revenues in 3 years after acquiring a 65% stake.
SMCP was sold to Chinese textile conglomerate Shangdong Ruyi for €1.3 billion in 2016. This generated an explosive revenue growth in Greater China of 51% and global growth of 19% in Q2 2016 alone.
SMCP Group went public in October 2017 with IPO at €22 euros per share, giving the company a market capitalization of around 1.7 billion euros.
In June 2019, SMCP acquired Fursac, a French luxury menswear brand known for its expertise in tailoring.
Current performance
1Y Shareholders Returns are +30.3% significantly above the French Specialty Retail market’s of -18.9%.
SMCP’s net profit doubled in the past year and reached €51m in Q1 2023.
2022 revenues exceeded analysts’ expectations at €1.2 billion.
Earnings grew by an impressive 117% over the past year, forecasted to grow 17% which is above the average French market of 13%.
Current price/earnings ratio is 12.3x which is below the French market’s 15.1 x and Specialty Retail market’s 17.8x.
Free Cash Flow (FCF) was €34 million in 2022, €69 million in 2021 and €8 million in 2020.
Strong deleveraging of net debt/EBITDA ratios now at 1.9x (one year ahead of expectations), down from 2.5x in 2021 and 7.1x in 2020.
Total Net Debt was €293 million in Q4 2022, down from €318 million in 2021.
Debt/FCF: 8.6x.
Net debt/ equity: 0.25x (25%)
Working capital requirements increased from €134m in 2021 to €178m in 2022, due to an increase in inventories to accompany the growth of sales expected in 2023, combined to a restocking in China due to health constraints and to the impact of inflation. Working capital weight on total sales is 15% in 2022, compared with 13% in 2021 and 18% in 2020.
Growth opportunities
China’s post-lockdown reopening and tourism is expected to drive a surge in sales. The new flagship stores in Wuhan Airport and Chengdu are set to harness the growing young middle class demographic which SMCP’s brands appeal to. Maje and Sandro are particularly popular with Chinese consumers with many promotional videos going viral on Chinese social media.
Strong, steady double-digit revenue growth in France, North America and Europe despite the uncertain economic environment demonstrates resilience.
Australia and New Zealand expansion has begun with the opening of two flagship stores.
New brand strengthening strategies including tailored marketing, collaborations with renowned designers and expansion into the sports & leisure market can drive 2023 growth. Recent products worn by high profile influencers such as Queen Letizia of Spain and Paris Hilton have caught mass media attention, pushing global sales.
Further expansion of the successful campaign to integrate Digital sales with Brick & Mortar clientele is to continue.
Elina Kousourna was appointed New CEO of flagship brand Maje in April 2023. Elina was instrumental in SMCP’s growth for the past 6 years. She was Head of Fursac for 3 years during its brand renewal. She successfully accelerated Fursac’s growth in France and Europe by following an “ambitious strategy and a clear roadmap, around collections that celebrate its tailoring know-how while opening up to more casual styles”. She was also involved in SMCP’s IPO in 2017. SMCP’s CEO Isabelle Guichot is confident that Elina’s leadership will help the brand assert its identity and strengthen its global presence.
Note:
All opinions are the author’s own. This is not investment advice. Please consult your financial advisor before making investment decisions.
Disclosure:
The author has a position in SMCP. The SMM and its writers may buy, increase or sell a position at any time.
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