Thanks to canny marketing, Christmas has somehow become associated with lingerie colourful underwear is the perfect romantic gift, apparently.
But as men and women across the UK splash out on underwear for their other halves, investors might want to consider splashing out on the companies that make the goods. After all, only so much cotton and silk goes into those price-tags. Alongside champagne and cosmetics, lingerie is one of the most profitable businesses going.
Take Van de Velde, a high-end lingerie manufacturer based in Belgium. It earns gross margins each year of more than 75%. A bra on the shelves in Mayfair or Chelsea priced at £120 might have cost around £30 to commission from its production facilities in Tunisia. After all costs, including its boutiques, distribution and advertising, Van de Velde's margins are on a par with LVMH, the owner of Veuve Clicquot and Dom Prignon.
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High margins attract competition and the lingerie sector has drawn its fair share of flash, caddish upstarts, who leverage up their balance sheets and use debt to fund glitzy shopfronts and billboard campaigns private equity groups, for example, can't stay away. Investment giant 3i owns Agent Provocateur, whilst French turnaround specialist Perceva recently bought four lingerie brands from Fruit of the Loom.
But not everyone wants to spend hundreds of pounds on pants. Next, Debenhams and John Lewis all stock their own lingerie lines, while Marks & Spencer boasts the biggest market share. It does not report figures for its underwear segment separately, but claims to have a 26% cut of the £2bn UK market. M&S is one of the top spenders on TV advertising each year and its lingerie models are a regular source of gossip for The Daily Telegraph and MailOnline. It has far lower prices (£12 to £30 for an M&S bra), but gross margins in its clothing unit are still high, at 52%. Other public companies offer more direct exposure.
New York-listed L Brands, the sector heavyweight, is valued at $28bn. It owns Victoria's Secret, currently being rolled-out across Canada and the UK, and La Senza, which it bought for $628m in 2006. The roll-out of Victoria's Secret has been accompanied by a media fanfare models of the moment, Kendall Jenner and Gigi Hadid (pictured), both recently signed up as brand ambassadors. But all this publicity comes at a cost: L Brands spent $2.9bn on marketing last year, equal to 25% of sales. It has borrowed to open new stores, including a mega-store on London's Bond Street, although its debt is modest at $3.1bn.
A similar conglomerate is HanesBrands, also in the US. Hanes has been acquisitive, buying Maidenform for $547m in 2013 and DB Apparel for $550m last year, landing it the global rights to Wonderbra and Playtex. Sales came in at $5bn last year, versus $11.5bn for L Brands. But for investors, the most interesting plays are the ones we highlighted at the start of this piece smaller, high-end businesses that sell most of their goods wholesale, via independent boutiques and department stores, rather than their own shops.
Couple the high margins of lingerie with the low-fixed costs of wholesale distribution and the returns on capital can be mammoth. Van de Velde, which owns Rigby & Peller in the UK, has a small number of its own boutiques, but the majority of its sales are wholesale and its return on assets is reliably above 20%. We look at the stock in more detail below.
Two lingerie stocks to keep an eye on
Van de Velde's (Belgium: VAN)
L Brands (NYSE: LB) has many of the same attributes, hefty margins and consistently impressive returns, while its market cap of $28bn offers significantly better liquidity. But it's not cheap, trading on 26 times next year's estimated earnings, according to Bloomberg. Its marketing-led business model and taste for flamboyant pinks could also be susceptible to changes in fashion over time.
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