China’s economic recovery and a burgeoning middle class make Ever-Glory International Group (NASDAQ:EVK) stock an interesting play. The shares of the apparel manufacturer have increased by 95% over the last year. And it doesn’t look like their momentum is going to stop anytime soon. As a result, EVK stock is a penny name that you should add to your portfolio before it gains more ground.
However, many are wondering why the Chinese fashion apparel maker and retailer is doing well. The retail apocalypse has been pretty much a universal phenomenon, and China has not been able to escape it. In 2020, the sales of brick-and-mortar stores stopped growing, leading to major strategy changes among retail leaders. However, companies like Ever-Glory are effectively integrating online sales and conventional operations to grab market share.
Ever-Glory’s big advantage is its vertically integrated business model. Specifically, it directly controls the sourcing of raw materials, manufacturing, design, and marketing. As a result, it can quickly launch new products. Once the company identifies a design or a popular trend, it utilizes them in new products that it puts on shelves in less than three months. Its brands — LA GO GO, Velwin, Sea To Sky, and Idole — are also becoming very popular in their own right.
It will take time fort the company to become as valuable as Nike (NYSE:NKE) and Under Armour (NYSE:UAA). But if Ever-Glory’s third-quarter earnings are any indicator, the company is making significant inroads.
A Hidden Gem
Many people in the U.S. first heard about EVK stock in October. Its shares shot up on no news. InvestorPlace columnist Louis Navellier made an interesting observation, saying that the rally could have been caused by one or more large-scale stockholders who may have made a series of “block trades” involving millions of shares.
NIO (NYSE:NIO) and other electric-vehicle names have dominated conversations about Chinese stocks. That’s why hidden gems like EVK stock can get lost in the shuffle.
The strong performance of EVK stock is confusing against a dismal sales backdrop. Covid-19 continues to brutalize the retail sector, and Ever-Glory has certainly been hurt by the pandemic.
In the third quarter, its total sales fell 30% year-over-year to $79.9 million. However, what’s interesting is that the sales of its branded fashion apparel retail division grew by 10% YOY to $34.8 million.
Not surprisingly, e-commerce sales sparked the unit’s growth. That’s why Ever-Glory is focusing on selling its products online instead of in physical stores. It had 923 retail stores as of Sept. 30, 2020, compared with 1,157 retail stores as of Sept. 30, 2019.
Demography Is Destiny
China’s middle class expanded substantially as the nation’s urban population increased from 19% of its population in 1980 to 58% in 2017. And that percentage is continuing to grow at an exponential rate.
Meanwhile, as InvestorPlace columnist Josh Enomoto points out, Europe is aging and, as a result, its retail companies will be hurt. Clearly, the future of retail giants is largely in the Far East. EVK stock provides investors with a great opportunity to buy into a Far Eastern company with several local brands.
But you may ask yourself, why not invest in Nike or Lululemon Athletica (NASDAQ:LULU)? They offer stable returns, plus they have a sizeable presence in China.
You could do that, and certainly, for Nike, China now accounts for a major slice of its overall revenue. However, there are two things to consider. First, companies that are diversified conglomerates do not concentrate on one particular region. And second, the Chinese are famous for supporting their local brands; that’s why Huawei, and not Samsung (OTCMKTS:SSNLF) or Apple (NASDAQ:AAPL), is the biggest smartphone player in China.
EVK Stock Is Worth Considering
Recommending any retail company these days is a tough job. But EVK stock seems to be too good of an opportunity to pass up. Its strong local presence, attractive business model, and reasonable valuation make it a worthwhile investment.
Its management needs to keep shifting towards e-commerce and reduce its overhead by bringing down the store count. The shares are trading at a price-to-sales ratio of 0.2 times and are down about 60% from their 52-week high.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.