JNBY Design sells apparel, footwear and accessories to women, men and children primarily in China. The name "JNBY" is derived from Jiang Nan Bu Yi (or Just naturally be yourself"). It was started by a group of design students in 1994 as a single clothing shop in Hangzhou China. In 1997, as the number of stores expanded the founders Li Lin and Wu Jian (who are married) established Hangzhou JNBY with a focus on women's clothing. More than 20 years later, the group is still going strong and expanding across China and into developed markets.
Mrs. Li Lin (Chief creative office) started designing clothes at the early age of 12 and her passion continues even today. Mr. Wu Jian (Chairman and Chief executive officer) is mostly responsible for the operations of the company and further development. Together, they both own 61% of the company according to the latest annual report. JNBY is not a brand that is riding the wave of recent popularity, rather the company has churned out successful designs and products for more than 20 years and launched several well-known brands for women, men and children. The company is repeatedly ranked among top 10 women designer brands in China according to Fung Business Intelligence report. Between years 2005-2011 the company launched the brands CROQUIS, jnby by JNBY and less. In 2016, they have expanded their portfolio by introducing Pomme de terre, an apparel brand targeted at younger generations. In the same year, JNBYHOME was born, a designer brand for furniture and household products. The company primarily targets middle to high-income customers, which means their products cost somewhere between $15 to $1000. The company gives significant leeway to its team of experienced designers, who are lead to come up with their own original designs, instead of responding to latest fashion trends.
The main driver of revenue is their loyal fan base, which as of December 2017 had 1.9 million subscribers on WeChat (up 27% since July 2017), 800,000 followers on Weibo (up from 200,000) and 2.3 million followers on their Tmall store (up 28% in the same period). Active membership accounts (those that made at least two purchases in last 12 months) reached 290,000, up 26% since December 2016. You might say, that every fashion brand has its followers and members, but those at JNBY contributed 67% of revenue in the 6 months ending December 2017. That's a significant number and the company collects a lot of data points about their purchases, spending patterns, online visitation and shopping frequency.
In addition, the company has been very smart with their expansion, focusing mostly on lower-tier cities, where competition is limited and foreign brands are less dominant. Only 12.4% of their stores are located in Tier 1 cities (Beijing, Shanghai, Chengdu, Hangzhou, Shenzhen etc.) and 87% are in Tier 2 or smaller ones. As a result, they have been able to build a very large reach and position in smaller cities, and now can expand from a position of strength to the larger ones. The company sells their products in 3 ways: self-operated stores (557), distributor operated stores (1211) and online. Revenue from the online channel grew 31% in fiscal 2017, and 45% over the 6 months ending December 2017 but still represents only 8.5% of total sales. There is significant room to expand their online presence thanks to a large and growing fan base on WeChat and Tmall. Self operated stores are usually stand alone shops, but can also be smaller shops located within department stores in shopping malls.
JNBY financial data
Now I'm no fashion expert but JNBY's numbers just make me salivate. Their 4-year average ROA is 19%, while 4-year average ROE is 50%. You won't find such returns in many companies, let alone in the retail industry. This one is truly exceptional. Their return on equity actually went down in 2017 to 26%, because the company raised a lot of cash in the IPO, which hasn't been used yet. If we look at return on invested capital, the number is even more staggering. In fiscal 2017, their equity reached 1.26 billion RMB, while they had 828 million in cash and short-term investments with no debt, which means their invested capital was only 429 million RMB. Dividing net income by this figure, we get a 77% return on capital, that is just outstanding.
Growth has been driven primarily by opening new stores around China and abroad, but also by rising same-store sales as evidenced in this chart. An expanding fan base is the main reason for the increase in traffic in stores, while their customers generally spent more per visit in 2017 than 2016. Rising discretionary income is helping fuel a boom in China's apparel industry, which grew approximately 5% in 2017.
Chinese apparel market
The Chinese apparel market is highly fragmented with over 10,000 brands fighting for customer's attention. According to Fung Business Intelligence, JNBY had a market share of 0.4% in 2015 and was the 38th most popular womenswear brand in China. JNBY brand is visible only in the womenswear category, as shown in the table below. Brands like CROQUIS, less or Pomme de terre and not yet so popular or known around China, and I believe there is significant room to expand them.
It seems that JNBY is the most expensive from the group based on their P/E ratio alone. That might be a bit misleading as it's growing way faster than average and taking market share from competitors. It's also still small compared to Heilan Home or La Chapelle, based on their revenue. In addition, the company has room to improve profit margins further (although it already has the highest gross margin from the group), thanks to better cost control and increasing leverage over suppliers, which would reduce their P/E further. I am so optimistic on JNBY primarily because they earn very high returns on capital, are continuously launching new successful brands and have recently begun their international expansion. I don't think they will be very successful in Europe, as their designs are very different from those popular here, but I might be wrong in the end. On the other hand, United States has a very large Chinese population, and they might capture some market share there.