We added seven new stocks to the Forager International Shares Fund portfolio in 2018. One of them was New Zealand company Hallenstein Glasson Holdings (NZSE:HLG).
Glassons has 32 stores in Australia—less than they have in New Zealand. Australia is a much bigger market, so we think the number of stores could comfortably double. If that happens we should do very well out of the investment.
Watch the full video or read the blog post below to find out more about the stock.
Hallenstein operates fashion retail stores across Australia and New Zealand under the Glassons and Hallenstein Brothers brands.
Glassons stores are smaller than your average Zara or H&M. They target female, mostly millennial, consumers with fast fashion styles and a range of basics. Glassons generates almost 65% of the company’s revenue.
Hallenstein Brothers stores target males in a similar age group. The clothing range is much broader though—men can shop for suits, board shorts and track pants in the same place. There are 42 Hallenstein stores in NZ. The three Australian stores are still in the testing phase, but we expect more stores to be rolled out if this holiday season’s performance meets expectations.
A Peter Lynch investment
I first came across the business about a year ago, when I started shopping at Glassons stores. I noticed that new products were being restocked weekly and stock was selling out fast. Glassons is also very active on Instagram with over 320k followers, and a lot of prominent ‘influencer’ partnerships. All you have to do is walk into a store or have a look on their Instagram profile to realise that young girls are going crazy for the brand. Whenever people are enthusiastic about a brand, it’s something we want to understand from an investment standpoint. So once I found out the company was listed, I took a closer look.
The first thing that caught my attention about Hallenstein was its 2018 interim report. The company reported like-for-like sales growth of 10.8% on the prior year, at a time when many retailers were reporting negative numbers. A lot of the revenue growth was coming from Glassons Australia—a segment that had historically been small and barely profitable. While that wouldn’t be a surprise to anyone who has a millennial daughter or recently visited a store, the stock is too small to elicit much analyst attention (the market cap is roughly NZ$240m, but the founding family still owns 20% of the shares).
There are a number of things to like. The business has been generating high returns on equity for a long period of time, pays large dividends and has no debt. Pair that with significant inside ownership and a conservative management team and you have a reasonably strong base case. Our bull case hinges on underappreciated growth prospects.
We want to see growth
The growth in Glassons Australia to date is evident both in the numbers and inside stores. The company has reformatted stores, recruited a new buying team and embraced the preferences of their target market—largely millennials—by diverting a lot of marketing towards social media and influencers. It is working. There are currently 32 Glassons stores in Australia. We think this number could almost double. At around 10 times earnings, little of this potential growth is priced in.
The other two segments—Glassons New Zealand and Hallenstein Brothers—have been the backbone of the business historically. The profitability has been high, albeit volatile, for a long time. These stores are also part of the reformatting program. While growth in these two concepts isn’t part of our valuation, there is room for pleasant surprises.
The next couple of years are vital for the investment case. We want to see management opening new stores in Australia. And doing so profitably. We want to see the new buying team continuing to get it right. And we want to see margins maintained, rather than off-the-shelf excuses relating to inclement weather or getting online right. If this plays out we should do well from the stock. Hallenstein represents around 2.5% of the International Fund portfolio.
Want to know more about the style of investing we practice at Forager? Check out our page what is value investing
11 thoughts on “Betting on Fast Fashion with Glassons”
So what would you say about the difficulties of other fast fashion retailers in Australia? TopShop – a huge international brand targeting the millennial market has failed. H&M is struggling. And Uniqlo and Zara haven’t been consistently profitable. To me, Uniqlo seems like a very well run business with the ability to invest long term in Australia with flagship stores and big marketing campaigns?
Why is Glassons different from these businesses?
Hi Paul – good question.
For me it comes down to size and pricing. Glassons has a much smaller store base than say Zara or H&M. The company is conscious of utilising its online business as efficiently as possible and ensuring they don’t end up with a number of stores in low footfall locations. The size also means that growth in one category (for example, Glassons Australia) could have a huge impact on the business as a whole. At less than 10x earnings, the market is not expecting significant growth. So even if the growth we’re hoping for doesn’t materialise, we have not paid a crazy price for the stock.
With no debt and an 11% yield, I think it has an asymmetric payoff profile.
Bricks and mortar retail?
I am not really sure where Forager are heading to be honest and am starting to be a bit concerned.
Well… What do you expect? Forager’s motto is ‘Finding Opportunity in Unlikely Places’. Based on the analysis above, it sounds like this is an opportunity that has opened up in as unlikely a place as one could look. Even so, fast fashion icons like Zara have demonstrated that specific bricks and mortar retailers have the potential to be profitable with the right business model behind them.
Interesting investment but only seems like one for the mid term, watched very closely rather than a long term bottom drawer growth story.
Why will this fashion retailer be different?
I agree, you are getting paid a decent yield/not paying much for an under-penetrated, on-trend retailer with good growth prospects and online expertise.
Interested in your views on the following issues:
As you say, retail is an unusual investment for Forager, yet you buying a retailer as there are growing signs consumer sentiment is at risk. Is your view HLG is less exposed to consumer sentiment than other retailers, and if so why?
Are you concerned about gross margins given depreciating AUD and NZD against the USD? What gross margin are you expecting over the coming periods and how do you interpret the company’s recent guidance that trading margins will be under pressure in the second half of the year?
What sales growth do you assume in getting to your PE of 10? I note sales trends were slowing into the critical Christmas sales period.
It looks like online growth represented the majority of the growth last year. Are you concerned that the stores are probably comping barely positive and there is risk of negative operating leverage coming through in the business if slowing sales trends continue?
Why has the cost of doing business gone up so much and whats the outlook from here?
Happy to speak by email if that’s too much to address here.
Hi Mike – thanks for your interest.
I’ll try to answer all your questions here. First, I try not to focus too much on short-term results. I think consumer confidence will impact HLG in the same way as other retailers. HLG has been operating profitably for a long time though, even through periods of volatile sales. The balance sheet strength gives me confidence that the company can withstand some periods of low sales. Likewise with margins – they have fluctuated historically and I expect them to continue to do so. It’s worth noting that we thought margins looked high when we purchased the stock and this was factored into our analysis. I was quoting a historical multiple in my blog – HLG is trading at less than 10x FY18 earnings. In relation to FY18 revenue growth, more than 60% of growth in dollar terms came from the retail store network. The company reduced the number of stores over that period, by adding only two stores while closing three. I can’t comment on like-for-like sales (as it wasn’t reported) but store rationalisation appears to be coming along nicely. SG&A costs have increased, but are lower as a percentage of sales. A big portion of the increase can be attributed to additional staff supporting the growth in the Glassons Australia segment. I think these new staff should be able to sustain a significant amount of additional growth.
A growth stock in the Forager International Shares Fund!? Wonders never cease!!
Sounds like an interesting investment, Chloe. As a fellow millenial, I am intrigued to see how this one will work out. Also great to see that some gender diversity on the investment team is reaping rewards in terms of ideas generation. Fingers crossed for some performance to back this up.
Hi Yong, we have a few businesses in the International Fund that will grow faster than this one. We would love to own some in the Aussie Fund too … they just tend to be expensive in this part of the world.
It seems Forager has avoided investing in retailers historically for qualitative reasons. Now you are investing in one as the housing market is heading south and consumer sentiment is arguably looking more likely to be deteriorating than it has in recent history. How do you think about HLG in this context?
A number of years ago my girlfriend, now wife, bought me a number of garments from Hallenstein Brothers.
One tee that was medium sized fitted like a crop top (butfor guys?!?). Never wore it.
A shirt that was also medium was so big it would fit my dad, but it was too cool for him, again never wore it.
I told my gf never to buy from them again.
Hopefully things have changed for then, but I know I won’t be back.