When it comes to the world of fashion, brands and brand loyalty are key. That’s because, in order to generate above-average margins (and, ultimately, higher profits), customers must be willing to pay a higher price for goods, with a perceived higher quality or added desirability allowing the more successful fashion retailers to charge more than their less successful peers.
And, while we often think of brands as being only towards the higher price points within a given industry, companies such as Next (LSE: NXT) and Marks & Spencer (LSE: MKS) have shown that mid-tier operators can also develop a significant amount of brand loyalty. Evidence of this can be seen in Next’s bottom line performance during the last five years, with its net profit rising by 123% even though the UK economy (its main market) has endured a very challenging period – especially for consumers who have seen the real-terms value of their disposable incomes fall.
Similarly, Marks & Spencer has a history of stable growth. Certainly, the last few years have seen its clothing division struggle to compete (especially in womenswear) and, as such, its premium food division has picked up the slack. But, after a long and painful transitional process that has seen major changes to its supply chain, online presence and store layout, the company seems to be finally on the up once more, with growth in earnings of 6% being forecast for next year to go alongside a relatively defensive business model.
Of course, success in one space can lead to growth opportunities in another. For example, Jimmy Choo (LSE: CHOO) has achieved near-cult status for its high-end high-heels and, due to this success and the popularity of the brand among women of all ages, it is expanding into accessories, other clothing and fragrances, including menswear. This could allow Jimmy Choo to develop a true lifestyle brand and, thus far, it appears to be making excellent progress with growth of 23% forecast for the current year and a rise in earnings of 26% pencilled in for next year.
Meanwhile, Ted Baker (LSE: TED) is also attempting to increase the diversity of its brand. Certainly, it is much further along than Jimmy Choo and already has considerable customer loyalty among both men and women and, looking ahead, this should allow it to develop improved margins over the long run. And, in the nearer term, Ted Baker is expected to post earnings growth of around 18% per annum over the next two years, which could act as a positive catalyst on its share price.
Against the backdrop of these four top-notch companies is ASOS (LSE: ASC). Clearly, it is a highly successful business and is a Great British success story, but it does not offer the same degree of brand loyalty as the likes of Jimmy Choo, Ted Baker, M&S or Next. In fact, ASOS is more akin to a fashion reseller which stocks a number of attractive brands, but whose own brand is not as strong as many investors currently believe.
Certainly, there is scope for this to change but, with ASOS expected to see its bottom line fall for the third year in a row in 2015, there appears to be little reason to buy right now. That’s especially the case when the other four clothing retailers appear to be so attractive at the present time.
