What makes Specialty Fashion Group special?

It is fair to say that the last 12 months have not been kind to local fashion retailers.

As International fast-fashion brands such as H&M and Zara and local discount fashion retailers like Kmart and Cotton On continue to expand aggressively across the country, many local brands have become irrelevant to customers who now have more choice than ever.

The casualty list is long. Herringbone, Rhodes & Beckett, Marcs, David Lawrence, Laura Ashley, Willow, Payless Shoes and Pumpkin Patch have all entered administration and other brands, such as OrotonGroup (ASX:ORL) have seen sales and profitability continue to decline.

So who wants to own an Australian specialty fashion retailer?

Well, it seems some folks in Doha do after beginning discussions to take over Specialty Fashion Group (ASX:SFH). The news came as a surprise and led to its share price rising around 25%.

At first glance, the shock was understandable.

Specialty Fashion's bottom line has been in decline since its $30m peak in 2010 and the company generated losses over the past two years following its troubled purchase of Rivers. Its share price was at the same level as it was back in 1998 and almost 90% below its 2001 high of $4.63.

However, recently there were signs Specialty Fashion Group was starting to turn things around. Its losses from Rivers halved in 2016, like-for-like sales across the group's brands increased for the second year in a row and online sales were up 42%. Finally, the company is continuing to expand its City Chic brand internationally.

Clearly, despite the incredibly competitive environment that led to so many others shutting up shop, Specialty Fashion has been doing something right. But what?

One of Specialty Fashion Group's advantages is that it operates in a niche that is frequently ignored by the fast-fashion giants, and that may be one of the reasons the folks at Al Alfia Holdings have come calling.

Apart from Rivers and Katies, Specialty Fashion's brands target mature and/or plus-size woman (see Chart 1).

Indeed, the average size of a Specialty Fashion Group brand is around three sizes larger than those available at its larger international peers. Also, some sizes sold at Specialty's brands are not even available at the likes of Zara and Topshop.

The above also assumes that the international brands order sizes equally which is unlikely to be the case. Ordering would be skewed towards lower sizes and larger sizes would be unavailable on many of its products. The sizing gap is likely much higher.

Regardless of age or size, women across Australia still want to look glamourous and Specialty Fashion Group has positioned itself to take advantage of this niche while others ignore it. It's also likely a big reason why its performance has been improving at a time so many other companies have experienced a decline.