Hong Kong-based apparel production firm Lever Style reported growth during the first six months of 2022, but chairman and executive director Stanley Szeto sees “storm clouds forming on the horizon” that could offset the industry’s post-Covid rebound.
In a Nutshell:
Lever Style’s first half of 2022 revenue increased by 65 percent from the year ago period. Profits jumped 195 percent, which Szeto attributed to rising consumer demand post-pandemic.
Despite these gains, the company, which owns and manages manufacturing operations spanning China, Vietnam, India, Cambodia and Indonesia, “was again saddled with supply chain challenges” over the past six months, stemming primarily from Covid lockdowns in China that have become “more frequent and unpredictable,” Szeto said.
What’s more, December’s passage of the Uyghur Forced Labor Prevention Act is giving U.S. brands and retailers pause when it comes to sourcing fabric and garments from China, he pointed out. “We have managed to tackle such challenges by flexibly adapting our material sourcing and garment production to suit our customers’ needs, thus once again demonstrating the versatility of our asset-light model,” he said. Lever Style has a globally diverse portfolio of suppliers that help it mitigate the fallout from the UFLPA’s passage.
While the apparel sector has seen gains over the past 12 months, Szeto said “There is a perfect storm facing the western consumers,” including inflationary pressure driving up the cost of food and gas, as well as higher interest rates and mortgage payments. He believes these economic conditions could lead to “reduced appetite for discretionary spending such as apparel,” and noted that Lever Style’s brand and retail partners have already “turned very conservative in placing future orders.”
“The weak financial markets have resulted in the reverse wealth effect, so consumers are psychologically less prone to spend,” he added.
Lever Style’s revenue jumped from $58.4 million in the year-ago period to approximately $96.7 million during the first six months of 2022. The company attributed the increase to Western consumers returning to retail, new customer relationships, and market share growth in clients’ procurement mix. Flexibility in speed, assortment, order quantities and country of origin are some of Lever Style’s selling points, Szeto said.
Meanwhile, the cost of sales increased by about 69.9 percent due to heightened material costs and subcontracting fees, hitting $70.1 million (up from $41.3 million in 2021). Cost of sales as a percentage of the company’s total revenue grew from about 70.7 percent last year to 72.5 percent during the period under review, which the company attributes to inflation and supply chain disruptions.
Gross profit grew 55 percent from about $17.1 million during the first six months of 2021 to around $26.6 million during the same period in 2022. Gross profit margin fell from 29.3 percent in 2021 to about 27.5 percent during the period under review, which Lever Style said was mainly caused by inflation, price pressures in Asian supply chains and a drop in Landed Duty Paid business. Lever Style recorded net profits of approximately $5.1 million for the period ended June 30, up from $1.7 million from the year-ago period.
Lever Style’s cash and cash equivalents totaled about $24 million at the end of the reporting period, compared to $19.9 million at the end of December 2021. The company reported net assets of $31.5 million.
Lever Style said it had obtained bank facilities to fulfill its working capital requirements, finance raw materials purchase and pay contractors. Through June 30, the company had available banking facilities of $54.3 million.
Executive director’s take: Szeto said that China’s frequent lockdowns and zero-Covid policy have “drastically slowed economic growth,” impacting Lever Style’s factories in the region. Lever Style made three acquisitions in 2020, setting the “foundation for outsized growth” over the past year.
“If the world tips into recession, China is probably not in position to buck the trend like it did in the global financial crisis in 2008,” Szeto said, adding, “unless there is a change in China’s Covid policy, it is hard to see economic activity and consumer demand rebounding.”