Sustainable Suit of Clothes

Power generation is not the only vertical where fossil fuels are in use.  About 4% of global oil production is used for plastics, including polyesters, a polymer in which the monomer units are linked together by the ester group COO.  Over two-thirds of polyester ends up as fibers and the rest is used for plastic bottles, including the ubiquitous clear plastic bottles used for individual drinking water.  

How important at these polyesters in our daily life?  Just think about the clothes hanging in closet.  According to the Textile Exchange, over 65% fibers manufactured around the world are synthetics made from petrochemicals.  No doubt about it synthetic fabrics are popular.  They are soft and pleasant to the touch.  Polyesters and blends wear well, rarely needing an iron and snapping back into like-new shape after washing.  For those who enjoy the out of doors or live in extreme climates, there is nothing like a polyester blend jacket to keep warm and cry or to wick the away perspiration. 

The problem with synthetic clothing is the same as those clear plastic bottles  -  they are a source of pollution.  Even after breaking down from the original product, polyesters never really disappear.  The world is just now beginning to understand the ramifications of micro-plastic pollution, especially in the oceans. Data collected by a race team participating in the Volvo Ocean race in 2017, revealed over 3.0 million micro-plastic particles per square kilometer of ocean.  The micro plastic ends up in fish digestive systems and ultimately in the food chain, never to return to an organic state.

The prospect of micro-plastic pollution has textile manufacturers going back to nature for sustainable fabrics.  Others are using recycled polyesters.  The grassroots effort has given rise to organizations like the Textile Exchange, a trade association of sorts dedicated to providing tools and resources for achieving sustainable production of natural materials.  Cradle-to-Cradle Products Innovation Institute certifies products based on material sustainability, renewable energy, water efficiency, and health, among other standards.  The Sustainable Apparel Coalition based in California has developed the Higg Index for manufacturers to evaluate their own operations for sustainable and environmentally friendly production. In the U.S. the Council for Textile Recycling focuses exclusively on the nascent textile recycling industry. 

The textile industry trend appears clear even if it is not a watershed movement.   Investors are always well advised to follow key industry developments.  Unfortunately, investment opportunities related to natural fabrics or even recycled polyester are few in number.

Fenix Outdoor International AG (FOI-B:  STO) is a Swiss company listed on the Stockholm exchange.  Management claims sustainability is at the core of Fenix business as a manufacturer and retailer of high-end outdoor clothing and sports equipment.  Fenix has a holding company structure into which has been folded some well recognized brands, including FjallRaven, Tierra and Primus.  A commemorative version of the ubiquitous FjallRaven canvas backpack features recycled polyester.

In 2017,the company reported Euro 60.7 million in net income on Euro 539.9 million in total sales. Growth in sales was 11.0%, largely on the contribution of the Swedish backpack and outdoor clothing manufacturer FjallRaven.  The company converted 12.7% of sales to operating cash flow, filling the cash kitty for investment in the coming year.  Shares of Fenix Outdoor trade at 16.8 times projected 2018 earnings.  A forward dividend yield of 0.73% gives the stock additional appeal.

A tour of the crowd funding platform Kickstarter could provide some private company investment opportunities.  Kusaga Athletic in Australia markets The Greenest Tee, a t-shirt made from biodegradable fibers that provide the same high performance characteristics as polyester blends.  Called ECOLITE, the fabric is used by Kusaga as an alternative to cotton for t-shirts, dresses, tops and shorts.  The company has developed its own fabric blends from renewable plant materials that require less water to grow and process than cotton.  Unlike polyester, Kusaga’s fabrics are fully biodegradable.  The company is accepting pledges of AUS$5 or more as a part of a Kickstarter funding campaign.  The effort seems more like an advertising and marketing campaign than a capital raising effort.  

Another privately-held development of fabrics is Nau International Ltd.  The company has made drastic changes in its supply chain, such as sourcing recycled down and eliminating perfluorocarbons from its water repellant products.  It proprietary fabrics are based on hemp, merino wool and organic cotton.  Financial stresses have put Nau on the sale black a couple of times.  It is currently owned by Black Yak Compnay Ltd., a  South Korea manufacture of outdoor clothing and equipment.  

It is likely that other small, innovators will join the sustainability trend.  We expect it to move beyond athletic and outdoor clothing in the coming years.  For example, fast fashion retailers Uniqlo and H&M have engaged their customers in a recycling campaign.  We expect both to eventually begin filtering sustainable practices into the beginning of their supply chains as well.  

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.