1 00:00:04,080 --> 00:00:06,840 Adam Lang: Welcome to the Fear and Greed Daily interview. I'm Adam 2 00:00:06,840 --> 00:00:09,750 Adam Lang: Lang. We talk about investing in a range of sectors 3 00:00:09,750 --> 00:00:12,330 Adam Lang: here from miners and the banks to the energy sector. 4 00:00:12,330 --> 00:00:16,740 Adam Lang: But one sector sometimes overlooked by fund managers is fashion. 5 00:00:17,220 --> 00:00:20,340 Adam Lang: It comes within retail, which is a fascinating space for 6 00:00:20,340 --> 00:00:24,239 Adam Lang: investors. Remember that this is general information only and you 7 00:00:24,239 --> 00:00:26,730 Adam Lang: do need to get professional advice before making your own 8 00:00:26,730 --> 00:00:31,530 Adam Lang: investment decisions. Chloe Stokes is a senior analyst, international shares 9 00:00:31,530 --> 00:00:34,920 Adam Lang: at Forager Funds management. Chloe, welcome to Fear and Greed. 10 00:00:35,610 --> 00:00:37,080 Chloe Stoke: It's a pleasure. Thanks for having me. 11 00:00:37,650 --> 00:00:40,320 Adam Lang: Chloe, can you set the scene for me. When we're talking about fashion 12 00:00:41,610 --> 00:00:43,949 Adam Lang: and beauty, what companies are we looking at? 13 00:00:45,420 --> 00:00:48,479 Chloe Stoke: Well, they're all different types of companies within those spaces. 14 00:00:48,570 --> 00:00:53,309 Chloe Stoke: You have your general retailers, you have big brands that 15 00:00:53,310 --> 00:00:57,150 Chloe Stoke: everybody's heard of like Nike or Adidas, and you have things 16 00:00:57,150 --> 00:01:02,040 Chloe Stoke: like luxury houses that are largely listed in Europe, like 17 00:01:02,070 --> 00:01:06,270 Chloe Stoke: LVMH who owns Louis Vuitton and Kering who owns Gucci. 18 00:01:06,270 --> 00:01:10,020 Chloe Stoke: But it's quite a broad ranging number of companies and 19 00:01:10,020 --> 00:01:12,750 Chloe Stoke: types of companies within that space. 20 00:01:12,750 --> 00:01:17,670 Adam Lang: So generally speaking, when you consider those companies, how exposed 21 00:01:17,670 --> 00:01:22,619 Adam Lang: are they to an economic downturn or economic fluctuations? When 22 00:01:22,620 --> 00:01:25,170 Adam Lang: customers have less money in their pockets, are they less 23 00:01:25,170 --> 00:01:27,120 Adam Lang: likely to spend it on fashion and beauty? 24 00:01:28,440 --> 00:01:33,479 Chloe Stoke: Well, that depends. Obviously all retailers prefer a booming economy, 25 00:01:33,870 --> 00:01:38,010 Chloe Stoke: but it does really depend on the particular company and 26 00:01:38,040 --> 00:01:42,990 Chloe Stoke: the customer demographics. For example, rising interest rates will really 27 00:01:42,990 --> 00:01:46,440 Chloe Stoke: impact the cost of housing for some retailers, which will 28 00:01:46,440 --> 00:01:50,010 Chloe Stoke: have a negative effect on things like Nick Scali, which 29 00:01:50,010 --> 00:01:54,690 Chloe Stoke: are furniture retailers where products are large discretionary purchases. But 30 00:01:54,900 --> 00:01:57,360 Chloe Stoke: if you contrast that with something like Lovisa, which is 31 00:01:57,360 --> 00:02:01,860 Chloe Stoke: a jewelry retailer listed in Australia where most of their 32 00:02:01,860 --> 00:02:05,430 Chloe Stoke: customers don't have a mortgage and we've got high employment 33 00:02:05,430 --> 00:02:09,930 Chloe Stoke: and wages increasing. These customers might actually be a beneficiary 34 00:02:09,930 --> 00:02:13,350 Chloe Stoke: of this kind of environment. And then you have ultra 35 00:02:13,350 --> 00:02:16,830 Chloe Stoke: luxury customers, and this isn't necessarily fashion, but it's just 36 00:02:16,830 --> 00:02:19,980 Chloe Stoke: an interesting tidbit like Ferrari. And they said on a 37 00:02:19,980 --> 00:02:23,220 Chloe Stoke: call recently that their customers just don't do recessions, which 38 00:02:23,220 --> 00:02:23,490 Chloe Stoke: must be nice. 39 00:02:27,030 --> 00:02:27,929 Adam Lang: Yeah, that's a privilege. 40 00:02:28,830 --> 00:02:32,280 Chloe Stoke: Exactly. So it really depends on the demographics, but obviously 41 00:02:32,280 --> 00:02:35,880 Chloe Stoke: a booming economy is ideal for most retailers. 42 00:02:36,090 --> 00:02:39,389 Adam Lang: You bet. So how much has the sector changed in 43 00:02:39,389 --> 00:02:41,880 Adam Lang: recent years, particularly with the eCommerce boom? 44 00:02:42,960 --> 00:02:45,870 Chloe Stoke: Well, there has been a shift towards eCommerce, and that 45 00:02:45,870 --> 00:02:49,950 Chloe Stoke: has been really pushed forward throughout COVID. A lot of 46 00:02:49,950 --> 00:02:53,460 Chloe Stoke: companies who hadn't spent too much time thinking about their 47 00:02:53,460 --> 00:02:57,330 Chloe Stoke: online offering before were forced to because their stores were 48 00:02:57,330 --> 00:03:00,240 Chloe Stoke: shut and they had no other way to sell their 49 00:03:00,240 --> 00:03:03,870 Chloe Stoke: products. And what we saw was a really dramatic increase 50 00:03:03,870 --> 00:03:09,269 Chloe Stoke: in online penetration across all retailers. But interestingly, and perhaps 51 00:03:09,270 --> 00:03:13,230 Chloe Stoke: surprisingly definitely to us, we've almost seen in a lot 52 00:03:13,230 --> 00:03:16,110 Chloe Stoke: of cases things just go back to trend lines, which 53 00:03:16,110 --> 00:03:20,340 Chloe Stoke: is kind of proving the business case for bricks- and- 54 00:03:20,340 --> 00:03:24,750 Chloe Stoke: mortar retailers. Consumers still like going into stores. They do 55 00:03:24,750 --> 00:03:27,720 Chloe Stoke: like using online as well, but those bricks- and- mortar 56 00:03:27,720 --> 00:03:30,840 Chloe Stoke: stores are always going to be important for shopping and 57 00:03:30,840 --> 00:03:32,250 Chloe Stoke: consumer experience. 58 00:03:32,790 --> 00:03:35,070 Adam Lang: Yeah, sometimes we just need to see how it feels 59 00:03:35,070 --> 00:03:37,380 Adam Lang: and see how it looks before we make a decision. 60 00:03:37,920 --> 00:03:40,589 Chloe Stoke: Exactly. And a lot of people actually enjoy the process 61 00:03:40,590 --> 00:03:41,130 Chloe Stoke: of shopping. 62 00:03:41,550 --> 00:03:45,660 Adam Lang: Some people do. Stay with me, Chloe. We'll be back 63 00:03:45,660 --> 00:03:54,990 Adam Lang: in a minute. I'm speaking to Chloe Stokes, senior analyst 64 00:03:55,050 --> 00:03:58,710 Adam Lang: in international shares at Forager Funds Management. So when you 65 00:03:58,710 --> 00:04:01,410 Adam Lang: are looking for value in these companies, what are you 66 00:04:01,410 --> 00:04:02,100 Adam Lang: looking for? 67 00:04:02,460 --> 00:04:04,320 Chloe Stoke: I try to think about it in the same way 68 00:04:04,320 --> 00:04:07,290 Chloe Stoke: that I think about stocks in all other industries. I 69 00:04:07,290 --> 00:04:09,240 Chloe Stoke: want to buy stocks where I think we're going to 70 00:04:09,240 --> 00:04:13,890 Chloe Stoke: get above- average returns over long periods of time, so 71 00:04:13,920 --> 00:04:16,979 Chloe Stoke: I focus on businesses where I have a variant perception. 72 00:04:17,640 --> 00:04:21,450 Chloe Stoke: Essentially, the price of the stock reflects the market's future expectations 73 00:04:21,450 --> 00:04:24,510 Chloe Stoke: for a business, so if your view of the future 74 00:04:24,510 --> 00:04:26,669 Chloe Stoke: is the same as the wider market, then the stock 75 00:04:26,670 --> 00:04:30,060 Chloe Stoke: is probably not mispriced. Essentially, I just want to pay 76 00:04:30,060 --> 00:04:33,240 Chloe Stoke: the right price for any business. But within the retail 77 00:04:33,240 --> 00:04:37,200 Chloe Stoke: sector specifically, there are a couple of different models for success. 78 00:04:37,589 --> 00:04:41,550 Chloe Stoke: Businesses can have rapid growth from store rollout programs, which 79 00:04:41,550 --> 00:04:45,450 Chloe Stoke: is obviously great. And then others can be a bit 80 00:04:45,450 --> 00:04:48,630 Chloe Stoke: more disciplined in their store rollout and they roll them out 81 00:04:48,630 --> 00:04:52,320 Chloe Stoke: slower, but they have impressive same- store sales and they 82 00:04:52,380 --> 00:04:54,930 Chloe Stoke: like to attach a lot of online sales to those 83 00:04:54,930 --> 00:04:58,170 Chloe Stoke: fewer stores that they have, and you can see nice 84 00:04:58,170 --> 00:05:01,110 Chloe Stoke: results from that model too. But there are a lot 85 00:05:01,110 --> 00:05:03,870 Chloe Stoke: of value traps in retail as well. A business might 86 00:05:03,870 --> 00:05:07,290 Chloe Stoke: be trading at five or six times earnings, so it 87 00:05:07,290 --> 00:05:10,920 Chloe Stoke: looks really cheap but retail is a generally quite low- 88 00:05:10,920 --> 00:05:14,310 Chloe Stoke: margin businesses, so it doesn't take much to change for 89 00:05:14,310 --> 00:05:19,080 Chloe Stoke: earnings to shrink significantly. A stagnant retailer is a dead 90 00:05:19,080 --> 00:05:23,070 Chloe Stoke: retailer really because wages go up every year, rents go 91 00:05:23,070 --> 00:05:25,830 Chloe Stoke: up every year, and as I mentioned, margins are already 92 00:05:25,830 --> 00:05:29,580 Chloe Stoke: quite low. So if you're not growing, it's often catastrophic. 93 00:05:30,060 --> 00:05:33,299 Chloe Stoke: So I'm open to different strategies, but I definitely want 94 00:05:33,300 --> 00:05:36,210 Chloe Stoke: to buy retail businesses when they have a decent amount 95 00:05:36,210 --> 00:05:38,310 Chloe Stoke: of growth ahead of them and I want to buy 96 00:05:38,310 --> 00:05:40,170 Chloe Stoke: them when I think that growth is going to be 97 00:05:40,170 --> 00:05:43,470 Chloe Stoke: higher than what the market is anticipating or pricing in. 98 00:05:44,610 --> 00:05:47,520 Adam Lang: So really, the game is in the detail, isn't it? 99 00:05:48,150 --> 00:05:52,770 Chloe Stoke: Absolutely. It's individual businesses and looking at those fundamentals, and 100 00:05:53,760 --> 00:05:56,790 Chloe Stoke: also trying to invest when the market is being pessimistic 101 00:05:56,790 --> 00:06:00,870 Chloe Stoke: about that business in particular, or more pessimistic than you 102 00:06:00,870 --> 00:06:01,710 Chloe Stoke: think they should be. 103 00:06:01,980 --> 00:06:05,279 Adam Lang: Right. And if you consider the traditional companies in this 104 00:06:05,279 --> 00:06:08,460 Adam Lang: space, have some of them adjusted better than you thought 105 00:06:08,460 --> 00:06:10,860 Adam Lang: they would or not as well as you thought they would? 106 00:06:12,270 --> 00:06:16,619 Chloe Stoke: There were a couple of interesting ones during COVID. A 107 00:06:16,620 --> 00:06:19,890 Chloe Stoke: business that we own called Hallenstein Glasson Holdings. It's listed 108 00:06:19,890 --> 00:06:22,650 Chloe Stoke: in New Zealand and it owns Glasson stores in Australia 109 00:06:22,650 --> 00:06:26,219 Chloe Stoke: and New Zealand. And throughout the last three years, they 110 00:06:26,370 --> 00:06:30,570 Chloe Stoke: grew their sales on average 7% per annum. And in 111 00:06:30,570 --> 00:06:33,630 Chloe Stoke: the last financial year, that number still includes a chunk 112 00:06:33,630 --> 00:06:37,260 Chloe Stoke: of time where stores were shut. And this is a 113 00:06:37,290 --> 00:06:40,529 Chloe Stoke: business that was only doing 15% of sales online in 114 00:06:40,529 --> 00:06:44,729 Chloe Stoke: 2019. So I was really impressed with its ability to 115 00:06:44,730 --> 00:06:49,170 Chloe Stoke: pivot between online and in- store. And their online offering 116 00:06:49,170 --> 00:06:52,230 Chloe Stoke: is still going well. And now that consumers are back 117 00:06:52,230 --> 00:06:55,830 Chloe Stoke: in store as well, they can service customers really well 118 00:06:55,830 --> 00:06:59,130 Chloe Stoke: across both channels, which is obviously a huge advantage. 119 00:06:59,640 --> 00:07:01,620 Adam Lang: Are you seeing any other standout performers? 120 00:07:02,220 --> 00:07:05,040 Chloe Stoke: Another one that I found was interesting was US- listed 121 00:07:05,430 --> 00:07:08,219 Chloe Stoke: Ulta Beauty. It was for a bit of a different 122 00:07:08,220 --> 00:07:12,720 Chloe Stoke: reason, though. They grew their online channel significantly throughout the 123 00:07:12,720 --> 00:07:15,690 Chloe Stoke: pandemic, but what they did was really focused on something called " 124 00:07:15,690 --> 00:07:19,440 Chloe Stoke: buy online pickup in store," which is much higher margin 125 00:07:19,440 --> 00:07:23,190 Chloe Stoke: than straight online sales due to cutting out delivery costs. 126 00:07:23,580 --> 00:07:27,780 Chloe Stoke: They focused on keeping as many sales dollars as possible 127 00:07:27,810 --> 00:07:31,380 Chloe Stoke: while still being really focused on the bottom line. And 128 00:07:31,410 --> 00:07:33,870 Chloe Stoke: it's the same thing: consumers are going back in store, 129 00:07:34,170 --> 00:07:38,370 Chloe Stoke: but the online business is very strong, and that " buy 130 00:07:38,370 --> 00:07:41,340 Chloe Stoke: online pickup in store" is a huge chunk of online, 131 00:07:41,340 --> 00:07:42,990 Chloe Stoke: which is great for their margins. 132 00:07:43,650 --> 00:07:46,320 Adam Lang: I'm just wondering if that " buy online pickup in store" 133 00:07:46,320 --> 00:07:50,130 Adam Lang: also improves their returns, so the wrong item wouldn't get 134 00:07:50,130 --> 00:07:52,110 Adam Lang: delivered because it wouldn't be picked up or the wrong 135 00:07:52,110 --> 00:07:54,300 Adam Lang: size. Have you seen anything there? 136 00:07:54,810 --> 00:07:57,300 Chloe Stoke: I think it really depends because during COVID there was 137 00:07:57,300 --> 00:07:59,550 Chloe Stoke: a lot of dropping off and no touching. 138 00:07:59,550 --> 00:08:00,510 Adam Lang: Contactless, yeah. 139 00:08:00,510 --> 00:08:03,840 Chloe Stoke: And no booking. But definitely I think in current days 140 00:08:03,840 --> 00:08:07,110 Chloe Stoke: I haven't seen anything stand out in the results, but 141 00:08:07,710 --> 00:08:10,380 Chloe Stoke: returns would be a lot cheaper if you get into 142 00:08:10,380 --> 00:08:12,060 Chloe Stoke: your car and you look at it, even if you 143 00:08:12,060 --> 00:08:14,130 Chloe Stoke: have taken it and you just walk back in the 144 00:08:14,130 --> 00:08:17,880 Chloe Stoke: store rather than having to deal with shipping and going 145 00:08:17,880 --> 00:08:19,230 Chloe Stoke: to a distribution center. 146 00:08:19,920 --> 00:08:24,330 Adam Lang: Chloe, in recent years, we've seen fast fashion and then 147 00:08:24,330 --> 00:08:28,380 Adam Lang: a trend towards a greater consciousness of the environmental impact 148 00:08:28,380 --> 00:08:32,520 Adam Lang: of fashion: disposal, recycling different fabrics. Are you seeing any 149 00:08:32,520 --> 00:08:33,330 Adam Lang: impact there? 150 00:08:34,020 --> 00:08:37,650 Chloe Stoke: It's definitely something we're thinking about and it's top- of- 151 00:08:37,650 --> 00:08:42,390 Chloe Stoke: mind for a lot of consumers, especially I would say 152 00:08:42,870 --> 00:08:48,239 Chloe Stoke: younger consumers and ESG in general is something that we 153 00:08:48,240 --> 00:08:50,850 Chloe Stoke: think about across all businesses and we make sure that 154 00:08:50,850 --> 00:08:54,870 Chloe Stoke: we're pricing it in when we're valuing a business. It's 155 00:08:55,020 --> 00:08:59,070 Chloe Stoke: really important and top of mind. The thing is, when 156 00:08:59,070 --> 00:09:03,750 Chloe Stoke: customers are demanding more from these companies and regulations are changing 157 00:09:04,380 --> 00:09:08,340 Chloe Stoke: in terms of sustainability, these companies need to respond when 158 00:09:08,340 --> 00:09:11,160 Chloe Stoke: the consumer demand is there and there are definitely costs 159 00:09:11,160 --> 00:09:11,940 Chloe Stoke: related to that. 160 00:09:13,260 --> 00:09:15,570 Adam Lang: With all this talk of fashion, Chloe, I have to 161 00:09:15,570 --> 00:09:18,210 Adam Lang: ask you, what would be your favorite fashion item? 162 00:09:19,620 --> 00:09:23,850 Chloe Stoke: My favorite fashion item, actually, it's kind of dropping out 163 00:09:23,850 --> 00:09:28,170 Chloe Stoke: of season right now, but it's my trench coat. I 164 00:09:28,170 --> 00:09:29,910 Chloe Stoke: love it. It's just one of these things you can 165 00:09:29,910 --> 00:09:33,720 Chloe Stoke: wear anywhere, over anything, for any occasion. The cost per 166 00:09:33,720 --> 00:09:35,010 Chloe Stoke: wear, incredible. 167 00:09:35,309 --> 00:09:37,590 Adam Lang: Especially in La Nina, right? 168 00:09:37,740 --> 00:09:41,280 Chloe Stoke: Exactly. I've been wearing it into November, which is unheard of. 169 00:09:42,450 --> 00:09:44,760 Adam Lang: Chloe, thank you very much for talking to Fear and Greed. 170 00:09:45,450 --> 00:09:46,320 Chloe Stoke: Thank you for having me. 171 00:09:47,040 --> 00:09:50,550 Adam Lang: That was Chloe Stokes, senior analyst in international shares at 172 00:09:50,550 --> 00:09:53,849 Adam Lang: Forager Funds Management. This is the Fear and Greed daily 173 00:09:53,850 --> 00:09:57,059 Adam Lang: interview, and remember that this was only general information and 174 00:09:57,059 --> 00:10:01,020 Adam Lang: you should seek professional advice before making investment decisions. Join 175 00:10:01,020 --> 00:10:03,300 Adam Lang: us every morning for the full episode of Fear and 176 00:10:03,300 --> 00:10:07,830 Adam Lang: Greed, Australia's most popular business podcast. I'm Adam Lang. Enjoy 177 00:10:07,830 --> 00:10:08,040 Adam Lang: your day.