Rising orders, but exchange rates weigh on fashion OEMs

[Financial News] Expectations for third-quarter results are dimming at fashion original equipment manufacturing (OEM) companies that produce apparel for global brands such as The North Face. Orders from clients are increasing, but forecasts for sales translated into won are falling as the won strengthens.
According to financial data provider FnGuide on the 25th, Youngone Corporation is expected to post consolidated third-quarter revenue of 1.3102 trillion won, up 8.8% from a year earlier. Operating profit for the same period is forecast to rise 13.2% to 205.2 billion won. Revenue and operating profit forecasts are down 2.9% and 3.1%, respectively, from a month earlier.
HANSAE CO., LTD.'s earnings forecasts have also been revised downward. Its third-quarter revenue is expected to increase 8.7% from a year earlier to 590.5 billion won. Operating profit for the same period is forecast to fall 1.9% to 36.3 billion won. Compared with a month earlier, the operating profit forecast is down 13.2%, while the revenue forecast is down 2.9%.
The fall in the won-dollar exchange rate is cited as a major factor behind the lowered earnings forecasts for fashion OEMs. They count global brands such as The North Face, Zara and H&M among their major clients, giving them a high share of dollar-denominated sales. A decline in the won-dollar exchange rate reduces exporters’ sales when translated into won.
On the 23rd, the won-dollar exchange rate stood at 1,326.9 won per dollar, up 0.03% from the previous day. It was the first time in more than two years that the rate had been in the 1,320-won range. The exchange rate, which had traded in the 1,500-won range earlier this year, has fallen by about 10%.
By contrast, orders from global clients are increasing. Youngone Corporation is seeing more orders from new clients as well as existing ones such as The North Face and Patagonia. As of the end of June, total inventories had risen 3.1%, while work-in-process inventory put into production was up 32%; the increase is expected to be reflected in second-half results. Orders from fast-growing emerging global brands such as On and Alo are also increasing, raising expectations for second-half order growth.
However, the impact of weak U.S. consumer sentiment is expected to persist for HANSAE CO., LTD. The University of Michigan’s consumer sentiment index for October stood at 48, its lowest level in five months. High prices and interest rates are seen as increasing the burden on consumers. A large share of HANSAE CO., LTD.'s clients are U.S. retailers such as Target and Walmart Inc., as well as mid- to low-priced brands. Still, orders, which had remained at their lowest levels amid the U.S. economic slowdown, appear to be recovering. Park Hyun-jin, an analyst at Shinhan Investment & Securities, said, “We understand that the normalization of orders from major retailers is driving an increase in volumes.” As of the end of June, HANSAE CO., LTD.'s work-in-process inventory had risen 5%.
An industry insider said, “Demand for functional apparel is increasing, and orders for Youngone Corporation are rising, but the exchange-rate burden is growing given the nature of export businesses. It is positive that client order volumes are also increasing for HANSAE CO., LTD., but external conditions are not favorable for exporters.”
[email protected] Kang Myeong-yeon Reporter