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Global Fashion Group – bringing the catwalks of Paris to Frankfurt

European Assets Trust Manager, Sam Cosh discusses Global Fashion Group, one of the companies in his portfolio.
October 2021
Sam Cosh

Sam Cosh

Director, Portfolio Manager, Global Smaller Companies Equities

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Risk Disclaimer

The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Investments in smaller companies carry a higher degree of risk as their shares may be less liquid and investment values can be volatile.

Investments which are concentrated in a specific sector or country may result in less diversification and hence more volatility in investment values.

We added Global Fashion Group (GFG) to the European Assets Trust portfolio because we believe that their business model and unique market position has the potential to harness the future spending habits of the growing populations of emerging markets. The company looked attractively valued when compared to comparator businesses who operate in more mature markets who arguably do not have as long a runway of growth as GFG.

If Europe’s listed fashion stocks were parading down the catwalk, there would be more than enough in their collections to keep the style journalists amused.

At the London show, there might be Burberry, the luxury retailer known for its elegant gabardine trench coats and strong sales in Asia. In Madrid, the Spanish group Inditex, which owns Zara, would probably impress with how quickly its outfits had responded to the latest vogues.

And when LVMH made its entrance in Paris, the audience would be eyeing the jewellery on show as well as the frocks, following the French conglomerate’s landmark acquisition late last year of Tiffany & Co of the US.

Us fashionistas within the European Assets Trust, however, have been drawn to Frankfurt, where shares in the Global Fashion Group (GFG) have been listed since the middle of 2019. We bought into the company relatively recently, but it counts as one of our 10 biggest holdings.

GFG is an online retailer specialising in selling fashion and lifestyle brands in the emerging markets of Latin America, the Commonwealth of Independent States and Southeast Asia, as well as Australasia.

As well as its own outfits, the group acts as a conduit for other international brands to enter its markets; these include Ralph Lauren, Gap and watchmaker Swatch. It sells children’s clothing; sports gear by the likes of Puma, Asics and Sweaty Betty; a beauty range from Elizabeth Arden, among others; and home products including La Prima and Joseph Joseph.

The business has 17 offices and nine delivery centres catering to more than 16m customers in a market of more than 1bn people. It prides itself on being close to its local markets, operating a wide variety of payment methods and delivery in certain areas inside three hours.

GFG was effectively founded in 2011 with the launch of brands The Iconic, Dafiti and Lamodo, each selling clothes separately in their local markets from their own warehouse operations.

Following the creation of several other brands, the business was consolidated into a single entity and named Global Fashion Group. The main financial backers at the time were the Swedish investor Kinnevik and the German start-up backer Rocket Internet.

GFG’s move to become a listed company, however, was not quite as seamless as a well-turned hem.

Having initially aimed to sell its shares for between €6 and €8 apiece, the offer price subsequently had to be cut to €4.50 and the deadline for subscription extended amid lacklustre investor demand. In the end GFG raised considerably less than the more than €300m that it had originally hoped for to fund its future growth plans.

Two years later, however, and things are looking a little more cutting-edge. Although the company remains loss-making in headline terms (before tax and interest), if the effects of special charges and other items are stripped out, it turned its first profit last year. Revenues, customer numbers and profit margins were all up healthily over the 12 months.

In fact, GFG enjoyed a record first quarter in 2021, and reaffirmed targets for the full year that include revenues of €1.5bn and a modest increase in adjusted profit.

The company is the dominant player in its markets; its popularity drives customers to its sites, while the big brand names enter into partnerships knowing they can reach the widest audience.

Online shopping is less developed in emerging markets than in mature ones, so the growth potential is significant. Many big brands still have limited operations in developing economies, so the potential to grow the partnerships is also sizeable.

Adding to the attraction for the trust’s managers, GFG actively encourages sustainability in the fashion industry and ethical trade across its markets.

The company has started to produce annual reports that detail its progress in its strategy to reduce carbon emissions, both in the parts of the business it controls directly and in its supply chain. It has embraced a commitment to diversity and inclusion that means that, as it stands, GFG has a female chairman of its supervisory board and half of the executive team are women.

There are caveats, of course. The onset of Covid-19 hit the global fashion industry hard. It also had a knock-on effect on productivity as garment manufacturers had to adjust their operations to allow for social distancing requirements.

Some emerging markets are volatile, both politically and economically, which could severely hamper sales were a dramatic event such as a coup to happen, for example.

Nonetheless, the evidence strongly suggests that the pandemic has accelerated the trend among shoppers of buying their goods online, which should bode well for GFG’s sales.

GFG’s share price, while off more recently from the highs reached in February, has begun to reflect a growing optimism about the future. As the fashion journalists might say, far from being retro, GFG is very next-season.

Risk Disclaimer

The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Investments in smaller companies carry a higher degree of risk as their shares may be less liquid and investment values can be volatile.

Investments which are concentrated in a specific sector or country may result in less diversification and hence more volatility in investment values.

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