[Corporate Insight] F&F, MLB's Explosive Growth Despite China's Lockdown... Aggressive M&A

Despite concerns about an economic recession, some companies have posted 'earnings surprises' that far exceed market expectations for the second quarter. Factors such as price increases, exchange rate fluctuations, and reopening (resumption of economic activities) have collectively driven performance, bolstering the stock market even amid challenging economic conditions. This is good news for investors weary from a prolonged downturn. Among them, Asia Economy analyzed Hansol Paper and F&F.

[Asia Economy Reporter Jang Hyowon] Fashion company F&F is on a growth trajectory. It broke expectations of poor performance due to Shanghai's lockdown in China during the second quarter and recorded an earnings surprise. This growth trend is expected to continue throughout this year. Currently, F&F is actively pursuing mergers and acquisitions (M&A) based on its high growth potential and cash-generating ability.

China's Advancement... Continuing This Year

F&F is a clothing company that produces and sells licensed brands Discovery (DISCOVERY), MLB, and its own brands Stretch Angels (STRETCH ANGELS) and Supra (SUPRA). It was newly established in May last year through the spin-off of the fashion business division from F&F Holdings. Most of F&F's sales come from the Discovery and MLB brands.

In the second quarter of this year, F&F recorded sales of 371.4 billion KRW and operating profit of 95 billion KRW, marking increases of 18.9% and 25.8% respectively compared to the same period last year. This was an earnings surprise, exceeding the market consensus operating profit estimate of 87.6 billion KRW by about 8%. Until just last month, some analyses predicted that F&F's second-quarter operating profit would fall short of consensus, but the company reported better-than-expected results.

The main driver of the performance was MLB's sales in China. MLB's sales in China for the second quarter reached 107 billion KRW, a 77% increase compared to the same period last year. By channel, offline sales were 89.4 billion KRW and online sales were 17.6 billion KRW. F&F currently operates 25 directly managed stores and 656 agency stores in China.

Initially, the market expected MLB sales to be weak in the second quarter due to the resurgence of COVID-19 and the lockdown in Shanghai, China. However, the local lockdown impact bottomed out in April and May and began to ease from June, with existing store sales turning to growth.

Heo Jena, a researcher at DB Financial Investment, analyzed, "Compared to the first quarter, the number of stores in China increased by 100, and agency store sales grew 92% year-on-year. Including the amount sold online by each partner during China's '618 Shopping Day,' sales grew by about 100% or more, which indicates that demand for the MLB brand remains strong locally."

Domestic MLB sales also held up well. Domestic MLB sales in the second quarter were 171 billion KRW, down 8% year-on-year. Although duty-free store sales dropped 38% due to restrictions on Chinese daigou visitors, domestic sales grew by more than 26%, helping to defend overall performance.

Experts expect F&F to continue its strong performance through the end of this year. According to financial information provider FnGuide, the average sales forecast for F&F on a consolidated basis this year is 1.8609 trillion KRW, a 70.8% increase from last year's 1.0892 trillion KRW. Operating profit is expected to rise 73.6% year-on-year to 560.3 billion KRW.

Active M&A Backed by Strong Cash Generation

Even before the spin-off from F&F Holdings, F&F maintained a stable financial structure with net borrowings in negative territory for several years, meaning it held more cash than total debt. Although borrowing increased during last year's acquisition of a stake in golf brand TaylorMade, as of the end of the first quarter this year, the company still showed a healthy financial status with a debt ratio of 112.8% and a borrowing dependency of 21.7%.

Despite investment burdens such as the Icheon logistics center, F&F generated an average free cash flow of 66.7 billion KRW annually from 2016 to 2020. After the spin-off in 2021, it is estimated to have generated about 274.5 billion KRW in free cash flow based on high profitability. As of the end of the first quarter, cash and cash equivalents held were around 117.3 billion KRW.

With this cash-generating capability, F&F is actively pursuing mergers and acquisitions. Last year, it acquired a stake in TaylorMade, and recently it purchased 100% of the shares of the company holding intellectual property (IP) rights and the brand operating company of the U.S. tennis brand Sergio Tacchini for 82.7 billion KRW. This move captures the trend of younger generations shifting interest from golf to tennis.

F&F is also acquiring content production companies that can create synergy with its clothing brands. In March, F&F acquired 50.8% of drama production company Victory Contents for 23.5 billion KRW. Additionally, through its investment affiliate F&F Partners, it has invested in multiple content companies including Bambunetwork, Why Not Media, and By4M.