The company offers its long-standing expertise to more than 40,000 clients spanning 100 countries; its clients include Nike, Michelin, Decathlon and Ikea.

The company's core business is manufacturing thread for the fashion industry and it now boasts a global market share of 21% thanks to carefully controlled organic growth in a very mature market where many of the smaller players are going under. By contrast, its second business line, which accounts for 25% of sales and focuses on high-performance technical products (airbags, optical fibre, fire-resistant products), has made various acquisitions such as the recent takeover of America's Pharr Yarns.

International fashion brands have increasingly shown how keen they are to keep their supply chains under control and avoid being carelessly dependent on clothing manufacturers located on the other side of the world. They are making their supply chains less complex by focusing on a smaller number of suppliers with the capacity to deliver on a global scale, primarily in order to bring their supply chains closer to their end markets.

Coats has a major advantage in this respect as it has over 50 operations spanning 6 continents and unequalled global positions enabling it to systematically provide a rapid response to the supply needs of its clients operating in different regions.

We have identified two major trends in the fashion industry that are likely to create considerable momentum for Coats:

1 - Respect for environmental and social standards

Fashion brands are now factoring in environmental criteria as a matter of course. They are now well aware that increasing transparency among the general public about the fashion industry's environmental footprint poses a threat to them, and they have fully recognised that social and environmental controversies can have a considerably damaging impact on their brand image.

Coats acknowledges this collective awareness by devoting half of its annual investment budget to sustainability and compliance issues.

For instance, the company launched the first fully recycled thread and wants 100% of its premium range to be made up of recycled materials by 2024.

This poses a technical challenge that smaller players in the sector will struggle to meet, so competition is likely to ease off in this premium segment of the market.

In addition, public authorities are increasingly putting pressure on small firms, particularly in China, to the benefit of larger groups which have the capacity to address these environmental issues (China has forced hundreds of companies to shut down); we can also see that fashion brands are increasingly keen to have peace of mind by forming partnerships with suppliers boasting the most solid environmental credentials.

2 - Labour costs trending upwards

Production facilities thus need to be upgraded. A wave of relocations to Asia took off in the clothing industry in the late 1990s with the aim of making the most of the cheap labour available in the region. Wage inflation in Asia, particularly China, has now taken off and it is essential for companies to offset rising labour costs by automating their production facilities.

Automation will improve thread quality even further as high-speed machines sew at a faster rate and require less human intervention. This gives Coats a major competitive edge as its product range is renowned for being of top quality.

By upgrading its internal production facilities, Coats was able to increase its sales per employee from USD 63,000 to USD 81,000 between 2008 and 2019.

Coats itself is at the cutting edge of technology in its own industry, but the sector as a whole lags behind the automotive industry which is among the most optimally automated and will be the example to follow over the next 10/15 years according to Coats.

The fashion industry has also seen outsourcing from China to other Asian countries (Vietnam, Indonesia, Bangladesh) in recent years. Coats is generally less exposed to China than its competitors are (China accounts for 10% of its sales versus 40% for the clothing market as a whole) and also boasts a bigger market share for instance in Vietnam. So this structural trend will automatically expand its market shares.

Impact of the public health crisis

Coats' share price has lost 50% during Covid-19. We believe the market's reaction is overdone in the short term because it is linked to the store closures that have hit the clothing industry so hard. Coats' end clients are certainly having a very hard time because not only have their stores had to shut for 2 months or more, but they will also no doubt have to sell their inventory at steep discounts. However, we expect the clothing industry to pick up again to pre-crisis levels relatively soon.

Oil prices are likely to reduce Coats' polyamide and polyester sourcing costs, which could partly offset the impact of weaker sales on this year's earnings. But, even more importantly, the serious disruption to the industry could further exacerbate the situation for smaller leveraged and/or low-margin firms, which could indeed encounter serious problems.

The Covid-19 pandemic and its long-term repercussions could create fresh commercial opportunities for the high-performance materials segment in the areas of personal protection and hospital products (e.g. antimicrobial thread).

We could consider Coats' business sector to be a cyclical one in the sense that the supply chain is generally quick to respond and to downscale production if necessary to reduce the risk of unsold goods. This is necessary as end products in this industry are seasonal by definition.

End demand, on the other hand, is not all that cyclical as it is linked to a very fundamental need – to wear clothing – and Coats' activities cover the full range of needs worldwide. This is the reason why recessions have tended to be followed by a vibrant recovery, as was the case in 2009-2010.