The recent collapse of the Rana Plaza building in Dhaka, Bangladesh, which housed clothing factories with roughly 5,000 employees, killed more than 1,000 people and led to intense pressure on major retailers to improve the safety and quality of their operations in the country. We decided to compare companies whose production facilities have recently come under fire, and others who have avoided the criticism.
Building the List
This stock list compares two targeted companies, Wal-Mart Stores Inc. (WMT) and Gap Inc. (GPS), and contrasts them with retailers who do not produce clothing in conditions described by the Pope as 'slave labor'.
We began with WMT and GPS for two reasons - both companies recently announced they would not sign on to a legally binding safety agreement intended to ensure fire safety and building improvements in factories used by retailers in Bangladesh. And yet WMT and GPS are two of the largest clothing retailers by market capitalization, relying heavily on exporters such as Bangladesh for millions of dollars worth of products.
After examining both stocks' key financial data, including recent returns and projected earnings growth, we then looked for companies in the apparel industry who do not manufacture their goods in similar conditions, and who may present more socially responsible investing opportunities.
To do this we first screened for consumer goods stocks that sell apparel in the US. We then limited our search to those companies attracting institutional investors. We ran a screen for stocks that experienced significant net institutional purchases over the last quarter representing at least 5% of share float.
This indicates that "smart money" investors such as hedge fund managers and mutual fund managers expect these stocks to outperform in the future. In addition, these institutional investors may be drawn to companies with more socially responsible practices, after witnessing the maelstrom of frustration hurled at manufacturers in Bangladesh.
We were left with a list of three companies: PVH Corp. (PVH), Quicksilver Inc. (ZQK) and Delta Apparel Inc. (DLA). As they represent a good cross section of the apparel industry, we decided to take a closer look at their financials.
Some factors we looked for included positive trends in accounts receivable, with increases in quarterly revenue year-over-year outpacing changes in quarterly accounts receivable. We also considered whether these stocks appear undervalued relative to earnings growth, meaning P/E ratio below 15 and PEG below 1. And we included data showing which stocks are trading at a low Price to Free Cash Flow (P/FCF) ratio.
Finally, we searched for signs of optimism regarding the companies' current and/or future earnings per share.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Does social responsibility in manufacturing have an impact on your investment decisions? Use this list as a starting point for your own analysis.
1. Wal-Mart Stores Inc. : Operates retail stores in various formats worldwide, divided into three business segments: Walmart US, which covers all 50 US state, Puerto Rico and walmart.com and accounted for 60% of net sales in FY2012; Walmart International, includes retail operations in 26 countries; and Sam's Club, which consists of membership warehouse stores in 47 US states and Puerto Rico and samsclub.com.
- Market cap at $262.93B, most recent closing price at $78.42.
P/FCF: 35.85 (much higher than TJX Companies, Inc. (TJX) (P/FCF ratio at 21.27)
EPS growth this year: 10.52%
EPS growth next year: 10.11%
EPS growth past 5 years: 9.69%
EPS growth next 5 years: 9.37%
WMT has returned 1.0% since 4/15/13, making it one of the worst performing stocks in its industry. It has fallen behind competitors such as Target Corp. (TGT), Costco Wholesale Corporation (COST) and Dollar General Corporation (DG), which returned 1.92%, 6.89% and 5.79% respectively, during the same time period.
As indicated above, WMT has a lower than average projected earnings growth rate over the next 5 years (9.37%). While this is much better than JC Penney (JCP) (-14.78%), it is significantly below the analyst projections for Dollar General Corporation (projected EPS growth over next 5 years at 15.71%).
WMT is attempting to counter the media backlash by announcing its own safety agreement and will publish the results of inspections at the 279 factories in Bangladesh it currently employs. While the company stresses its own actions will be more substantial than its competitors, The Guardian reports that the deal WMT will adhere to is not legally binding and makes no offer of financial support to factories in need of fire and safety upgrades.
2. Gap Inc. : Operates as a global specialty retailing company. Brands include Gap, Banana Republic, Old Navy, Piperlime and Athleta. Has over 3,300 stores and franchise stores in North America, Europe, Asia, Australia, Latin America, the Middle East and Africa.
- Market cap at $19.09B, most recent closing price at $41.13.
EPS growth this year: 48.82%
EPS growth next year: 9.93%
EPS growth past 5 years: 16.33%
EPS growth next 5 years: 10.97%
MRQ net profit margin at 7.43% vs. 5.09% y/y. MRQ sales/assets at 0.633 vs. 0.577 y/y. MRQ assets/equity at 2.581 vs. 2.694 y/y.
GPS has performed in line with the rest of its industry since 4/15/13, returning 10.70% over the last month. This performance has been better than Ross Stores Inc. (ROST) and Limited Brands, Inc. (LTD), but worse than industry leaders like Michael Kors Holdings Ltd. (KORS) and Nordstrom Inc. (JWN), which returned 13.59% and 11.08% respectively.
GPS has a lower than average projected earnings growth rate over the next 5 years (10.97%). This is significantly below the analyst projections for KORS (projected EPS growth over next 5 years at 30.18%) and ROST (projected EPS growth over next 5 years at 12.10%).
Quartz reports that Gap, which currently has clothing produced in 78 factories across Bangladesh, actually walked away from talks on a fire and safety accord in 2011, similar to the one it recently refused to sign. A Gap spokesperson at the time was quoted as saying it "turned down the proposal because it did not want to be vulnerable to lawsuits and did not want to pay factories more money to help with safety upgrades."
The More Socially Responsible Retailers
3. PVH Corp. : Designs and markets branded dress shirts, neckwear, sportswear, footwear, and other related products worldwide. Brands and licensed brands include Van Heusen, Bass, Calvin Klein, Izod, DKNY, Geoffrey Beene, Kenneth Cole, Tommy Hilfiger, BCBG Max Azria, Sean John.
- Market cap at $9.55B, most recent closing price at $117.77.
EPS growth this year: 55.33%
EPS growth next year: 16.79%
EPS growth past 5 years: 12.83%
EPS growth next 5 years: 12.10%
Net institutional purchases in the current quarter at 6.8M shares, which represents about 8.81% of the company's float of 77.21M shares.
Revenue grew by 6.74% during the most recent quarter ($1,636.2M vs. $1,532.84M y/y). Accounts receivable grew by -8.24% during the same time period ($441.32M vs. $480.96M y/y).
Receivables, as a percentage of current assets, decreased from 27.65% to 18.11% during the most recent quarter (comparing 13 weeks ending 2013-02-03 to 13 weeks ending 2012-01-29).
PVH has recorded a solid performance over the last month, returning 13.82% since 4/15/13. This performance has eclipsed the likes of V.F. Corporation (VFC) and Ralph Lauren Corporation (RL), which returned 11.10% and 9.19% respectively.
The company has reported strong earnings growth over the last year, with EPS growing by 55.33%, notably higher than competitors like UA (EPS growth over the last year at 31.61%) and RL (EPS growth over the last year at 24.0%).
PVH has agreed to spend up to $2.5M in support of the Accord on Fire and Building Safety, the agreement created in response to the factory collapse in Bangladesh. As Yahoo! Finance reports, the deal was reached in partnership with groups such as The International Labor Rights Forum and Bangladeshi trade unions, and has also been signed by retailers including Tchibo, H&M and Inditex.
TheStreet has singled out PVH as a buy despite slow growth in net income, citing reasons such as encouraging ROE, revenue growth and increasing profit margins.
4. Quiksilver Inc. : Designs, produces, and distributes branded apparel, footwear, accessories, and related products. Specializes in surfwear and boardsport-related clothing. Brands include Roxy, DC, Hawk, Raisins, Radio Fiji, Leilani.
- Market cap at $1.29B, most recent closing price at $7.76.
EPS growth this year: 49.96%
EPS growth next year: 166.67%
EPS growth past 5 years: -13.36%
EPS growth next 5 years: 15.00%
Net institutional purchases in the current quarter at 17.4M shares, which represents about 14.94% of the company's float of 116.49M shares.
Revenue grew by -4.14% during the most recent quarter ($431.02M vs. $449.62M y/y). Accounts receivable grew by 7.96% during the same time period ($372.46M vs. $345.01M y/y).
Receivables, as a percentage of current assets, increased from 37.95% to 40.24% during the most recent quarter (comparing 3 months ending 2013-01-31 to 3 months ending 2012-01-31).
Shares shorted have increased from 12.96M to 14.26M over the last month, an increase which represents about 1.12% of the company's float of 116.49M shares. Days to cover ratio at 6.94 days.
ZQK has recorded great gains over the last month, when compared to its closest competitors. The stock returned 23.50% since 4/15/13, better than Fifth & Pacific Companies, Inc. (FNP), LULU and PVH, which returned 9.19%, 17.30% and 13.82%, respectively, during the same holding period.
ZQK created The Quicksilver Foundation in 2004, to promote environmental, educational, health and youth initiatives worldwide. Recent projects include the Bali Beach Clean Up and a partnership with Cœur de Forêt benefitting villages in Senegal. Quicksilver also supports the Tony Hawk Foundation, assisting with their mission to empower at-risk youths and challenged communities in the US.
5. Delta Apparel Inc. : Operates as an international design, marketing, manufacturing, and sourcing company that features a portfolio of branded and private label activewear apparel and headwear. Brands include Soffe, Intensity Athletics, Salt Life, Junk Food, The Game, The Cotton Exchange
- Market cap at $111.49M, most recent closing price at $13.89.
EPS growth this year: -114.61%
EPS growth next year: 66.98%
EPS growth past 5 years: -0.90%
EPS growth next 5 years: 15.00%
Net institutional purchases in the current quarter at 1.0M shares, which represents about 14.77% of the company's float of 6.77M shares.
The stock's average daily alpha vs. the S&P500 index stands at -1.13% (measured close to close, over the last month). During this period, the longest losing streak lasted 5 days (i.e. the stock's daily returns underperformed the S&P 500 for 5 consecutive days). The longest winning streak lasted 2 days (i.e. a win streak / losing streak ratio of 0.4).
DLA has returned -11.35% since 4/15/13, and is one of the worst performing stocks in its industry. The company is falling behind competitors such as UniFirst Corporation (UNF) and Perry Ellis International, Inc. (PERY), which returned 4.79% and 9.91%, respectively, during the same time period.
The company's earnings growth looks weak, with EPS growing by -114.61% over the last year. This is worse than PERY (EPS growth over the last year at -39.59%), and is considerably weaker than competitors like PVH (EPS growth over the last year at 55.33%) and LULU (EPS growth over the last year at 46.46%). However the company's projected EPS growth looks much more solid.
According to the DLA corporate website, the company manufactures its clothing at factories in the US, El Salvador, Honduras and Mexico and employs 7,200 people full time, including approximately 1,800 in the US. Besides a standard workplace ethics policy, DLA has received Worldwide Responsible Accredited Production (OTCPK:WRAP) certification for all of its manufacturing facilities, and the company is a provisional participating company with the Fair Labor Association.
*Accounting data sourced from Google Finance, institutional data sourced from Fidelity, EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.