INDEPENDENT RESEARCH Luxury Goods€¦ · All groups in the sector were affected by the slowdown with the exception of Prada and Hermès, whose sales momentum even increased rom 13%

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INDEPENDENT RESEARCH Luxury Goods 12th December 2012 Better news from China!

Luxury & Consumer Goods

BURBERRY NEUTRAL 1400p

Last Price 1316p Market Cap. GBP5,816m CHRISTIAN DIOR BUY vs; NEUTRAL EUR142 vs. EUR127

Last Price EUR128.55 Market Cap. EUR23,361m HERMES Intl NEUTRAL EUR186 vs. EUR170

Last Price EUR235 Market Cap. EUR24,861m LVMH BUY vs. NEUTRAL EUR155 vs. EUR140

Last Price EUR138.5 Market Cap. EUR70,320m PPR NEUTRAL EUR145 vs EUR132

Last Price EUR142 Market Cap. EUR17,888m PRADA BUY HKD72

Last Price EUR69.5 Market Cap. EUR177,838m RICHEMONT BUY CHF78 vs. CHF72

Last Price CHF73.7 Market Cap. CHF38,471m SALVATORE FERRAGAMO NEUTRAL EUR17.7 vs. EUR17.1

Last Price EUR17.05 Market Cap. EUR2,871m THE SWATCH GROUP NEUTRAL CHF455 vs. CHF420

Last Price CHF460.1 Market Cap. CHF23,989m TOD'S GROUP SELL EUR75

Last Price EUR95.5 Market Cap. EUR2,923m Prices as closed on 10th December

After the clear slowdown in the Luxury market in Asia-Pacific in Q3, encouraging macro-economic signs coming from China have prompted us to become more positive for 2013 and increase our sales and EBIT margin estimates for a number of groups in the sector.

After Q3 and even October performances confirmed the slowdown in the Luxury sector, particularly in Asia-Pacific and in both the Hard and Soft segments, we are forecasting a stabilisation, i.e. neither a deterioration nor an improvement in the situation in Q4.

A number of better macro-economic signs from China during October suggest that the environment could improve gradually during 2013. This trend, combined with a recovery in the gifting market as of Q2 means we are slightly more optimistic for Asia-Pacific. In addition, we are confirming our structurally positive stance on the Luxury sector.

Furthermore, comparison with the year-earlier period should also become more beneficial as of Q2 2013. In these conditions, we have notched up our sales growth estimates for 2013 relative to our initial assumptions and consequently our EBIT margin estimates especially for LVMH, Richemont and Swatch.

For all of the groups in our sample, we have now based our DCF valuations on 2013 figures. We have upgraded our recommendations on LVMH (new FV of EUR155 vs EUR140) and Christian Dior (FV of EUR142 vs EUR127) to BUY and are making no change to our BUY recommendation on Richemont with a FV of CHF78 (CHF72 previously). LVMH and Richemont, as well as Prada, remain our Top Picks in the sector.

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STOXX EUROPE 600 PERS & H/H GDS E - PRICE INDEX STOXX EUROPE 600 E - PRICE INDEX

Source: Thomson Reuters Datastream

Analyst: Sector Analyst Team: Loïc Morvan Nikolaas Faes 33(0) 1 70 36 57 24 Peter Farren [email protected] Cédric Rossi


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Table of contents

1. Slowdown during Q3 ................................................................................................................. 3

1.1. Virtually all groups affected… ......................................................................................................... 3

1.1.1. Soft and Hard segments both concerned ........................................................................ 3 1.1.2. Leading brands especially affected .................................................................................... 3 1.1.3. Stock rundown moves in Q3 ............................................................................................. 4

1.2. … by the slowdown in Asia-Pacific ............................................................................................... 5

1.2.1. A political transition implying uncertainty in the short term ....................................... 5 1.2.2. A boom in Chinese tourism ............................................................................................... 6 1.2.3. Increasingly sophisticated Chinese clients ....................................................................... 6 1.2.4. Stock rundowns definitely in place in mainland China ................................................. 7

2. The first signs of a return to normal in China ..................................................................... 10

2.1. Macro-economic factors ................................................................................................................. 10

2.2. Less demanding comparison as of Q2 2013 ............................................................................... 11

3. Upgrades to our estimates....................................................................................................... 13

3.1. Homogenous growth within the sector ....................................................................................... 13

3.2. Slight increase to EBIT margin estimates for certain groups .................................................. 13

4. Valuation .................................................................................................................................... 14

4.1. Recent rally by the sector ............................................................................................................... 14

4.2. Change to Fair Values ..................................................................................................................... 14

4.3. Peer comparison .............................................................................................................................. 15

Price Chart and Rating History ................................................................................................... 17

Bryan Garnier stock rating system .............................................................................................. 19


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1. Slowdown during Q3 As expected, Q3 2012 performances showed a clear slowdown in sales in the Luxury sector. Barring Hermès and Prada no groups in the sector were spared by the trend, the root of which lies in Asia.

1.1. Virtually all groups affected… Fig. 1 below highlights the clear slowdown seen in Q3 sales growth to 8% after the admittedly robust trend reported in H1 (+15%). While it is important to underscore this slowdown, we should not forget that the average growth reported by groups in our sample (+8%) remained high and was generally in line with historical average growth levels in the sector (+7%).

All groups in the sector were affected by the slowdown with the exception of Prada and Hermès, whose sales momentum even increased from 13% in Q2 to 16% in Q3, including growth of 22% in Asia-Pacific and even 26% in China! Hermès responds entirely to one trend concerning Luxury clients in China, namely the search for the most sophisticated products possible in order to stand out from the crowd.

Fig. 1: Quarterly organic sales growth:

LFL growth (%) Q1 2012 Q2 2012 Q3 2012

Burberry 15 11 5

Hermès 18 13 16

Salvatore Ferragamo 19 17 8

LVMH 14 10 6

o/w Fashion & Leather 12 8 5

Luxottica - Wholesale division 12 8 11

PPR Luxury 18 17 12

Prada 41 20 27

Richemont 25 15 10

Swatch 13 13 10

Tod's 7 8 -1

Average Luxury 18 13 8

Source: Company Data; Bryan, Garnier & Co ests.

1.1.1. Soft and Hard segments both concerned All segments in the Luxury sector, both Soft and Hard, were concerned. Indeed, Richemont suffered from this slowdown especially in its Watchmaking arm, which was the victim of stock rundown moves and was particularly harshly affected in September. After posting sales growth of 13% over the five months from April to August, six-month growth dropped back to 12%, thereby pointing to a level of just 7-8% in September. However, Soft Luxury groups were not spared either with Q3 sales growth totalling 6% at Louis Vuitton and 7% at Gucci vs. 10% and 11% in H1 respectively.

1.1.2. Leading brands especially affected The Q3 sales figures reported by Luxury groups also showed that leaders in Leather Goods such as Louis Vuitton and Gucci suffered more than other younger brands such as Bottega Veneta or those positioned more upscale such as Hermès. Indeed, like-for-like Q3 sales rose 7% at Gucci and 6% at LV whereas they leapt 20% at Bottega Veneta (PPR) and 16% at Hermès. In our view, neither LVMH's nor PPR's flagship brands reported growth in same-store sales during the quarter.


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The most emblematic brands in the sector were penalised in Asia, and especially in China by a product offering that is considered too "banal" in the eyes of the most upscale Chinese clients living in Tier One cities (Beijing, Shanghai, Canton). It is no coincidence that LV and Gucci were among the brands most affected by this "banalisation" given that it primarily concerns brands that have been present for the longest time (1992 for LV and 1996 for Gucci), and that have a larger store network in mainland China, as shown in the chart below. We are nevertheless optimistic further out in terms of the ability of these leading brands to reinvent their image and adapt their product offering to suit targeted cities and clients.

Fig. 2: Number of directly operated stores in mainland China (at end-September)


1.1.3. Stock rundown moves in Q3 Another common point among groups in the sector in Q3 was the clear outperformance by Retail networks at the expense of Wholesale networks. Indeed, at Richemont, whereas Retail sales growth remained buoyant in September (+15%) showing no signs of a slowdown relative to the end of August (+15%), Wholesale sales were virtually stable in September vs. growth of 12% at end-August.

These stock rundown trends at the Watchmakers have stemmed from cautious attitudes at both Luxury brands in view of the more uncertain backdrop, leading them to reduce deliveries to retailers, and at distributors, which have reduced orders in a bid to limit stock levels probably in view of a slowdown in sell-out sales, especially in Asia-Pacific. Apparently, the lessons provided by the 2008/2009 crisis have been learnt. In contrast, Jewellery brands have not witnessed these trends and end-demand remains high. As such, whereas at Richemont, Watch sales rose by 10% in H1 (April-September), Jewellery sales rocketed 18%.

The underperformance in the Wholesale segment was also visible in the Soft Luxury segment and stemmed from a double trend: i/ greater selectiveness by Luxury brands in the choice of their partners, especially in southern Europe, in order to better manage their receivables, ii/ increased caution in order-taking by partners. This double trend was particularly apparent for Italian brands such as Tod’s, Salvatore Ferragamo (see table below) and Fendi. As such, Wholesale sales at Ferragamo only rose by 4% in Q3 after climbing nearly 30% in H1.

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Fig. 3: Organic growth at Ferragamo and Tod’s by distribution network:

% growth H1 2012 Q3 2012

Salvatore Ferragamo – Retail 10.9 9.5

Salvatore Ferragamo – Wholesale 32.5 4.7

Total Salvatore Ferragamo 17.8 8.2

Tod’s Group – Retail 20.5 24.0

Tod’s Group – Wholesale -1.6 -8.0

Total Tod’s Group 9.8 7.3


1.2. … by the slowdown in Asia-Pacific The major characteristic of Q3 was clearly the sharp slowdown in Asia-Pacific and especially in China, whereas momentum remained buoyant in Europe, primarily thanks to tourist flows. Indeed, having stood at 18% in Q1, average sales growth at groups in our sample stood at just 8% in Q3.

Fig. 4: Sales growth by region

LFL growth (%) Q1 2012 Q2 2012 Q3 2012

Europe 20 13 11

North America 15 11 9

Asia-Pacific 29 22 8

Japan 7 3 3



In our recent sector report "A more uncertain backdrop in the short term", we set out the reasons why China could slow in the short term. The three main factors are the following:

(i) The political transition, which implies some uncertainty and poor visibility on the short term: measures to stimulate consumer spending that could be implemented as of early 2013, the fight against corruption, and the prospect of a recovery in the gifting market.

(ii) A boom in Chinese tourism in Europe: Chinese tourists are buying more and more Luxury products during their travels abroad, aware of the significant price difference in favour of Europe (up to 50% cheaper than in mainland China before the recent hike in the Euro and the increase in selling prices in Europe by a number of brands).

(iii) Greater maturity in Chinese clients aiming to stand out from the crowd, either by turning to more upscale articles and brands (Hermès, no logo lines at LV and Gucci), or to so-called younger brands in China (Bottega Veneta, Prada, etc.).

1.2.1. A political transition implying uncertainty in the short term The coming to power of the new authorities as announced during the XVIIIth Communist Party Congress (Wi Jinping designated new President and Li Kequiang the new Prime Minister), but with their functions not to be taken up officially until March 2013, has also caused some uncertainty. It remains to be seen whether the new government will implement a more aggressive economic policy in order to boost consumer spending which only accounts for 36% of Chinese GDP vs. 57% in Europe and 66% in the US.


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In this case, Luxury brands should clearly benefit to the same extent as Consumer Goods groups (L'Oréal, Adidas, Seb etc). However, as stated at the latest Congress, the government could fight against corruption far more strictly and this could affect the gifting market, which accounts for almost 30% of the Luxury market in China, although the corruption market only represents a portion of this 30%. In our view, the remainder depends far more on economic recovery. We are forecasting a steady increase throughout 2013 in the gifting market with an acceleration as of H2.

1.2.2. A boom in Chinese tourism Whereas Chinese tourists totalled around 65 million in 2011, professionals in the tourism sector are expecting 83 million tourists in 2015 and around 100 million in 2020. Chinese tourists are travelling to Europe more and more even though Hong Kong remains their favourite destination (28 million Chinese tourists in 2011). Chinese clients are making the most of the significant price differences between Europe and China (prices 35-50% cheaper in Europe) to buy more upscale products. This trend primarily explains the outstanding momentum seen in the European Luxury market at the beginning of the year (+17% on average over the first nine months of 2012).

The most efficient - but not the least dangerous - weapon for efficiently combating the transfer of purchases by Chinese tourists is to increase selling prices in Europe. Louis Vuitton increased its selling prices by 8% in Europe in early October. Combined with the 7% hike in the Euro relative to its low point of mid-July, this helped reduce the price difference by 15% between July and October for Chinese clients as well as for US clients, who therefore have far less interest in buying LV products in Europe. This is a first risk. The second is to partly cut out European clients who could become increasingly sensitive to price factors in view of the difficult economic backdrop.

1.2.3. Increasingly sophisticated Chinese clients A trend that has been increasingly taking shape in recent months is the rising sophistication of Chinese clients prompting them to seek out products and brands that still have little presence in mainland China, with the aiming of standing out from the crowd. This is particularly true in Tier One cities (Beijing, Shanghai, Canton). Indeed, Chinese clients in these cities were those that were the first to access Luxury brands and acquire the logo lines of brands (Louis Vuitton monogram and GG at Gucci). These clients would now like to find more elaborate ranges (especially leather bags). However, these lines are often under-represented in China relative to the offerings available in Hong Kong and Europe.

For example and on our estimates, the no-logo lines at Gucci which are positioned more upscale and are often 40-50% more expensive than the logo lines, account for 20% of the brand's sales in mainland China vs. 5% a few years ago, but still far below the 50% seen in Europe and even in Hong Kong. Louis Vuitton's strategy is to develop more and more leather bag lines in China. The success of Hermès in China (sales up 27% over nine months with more than 20 stores) is a good example of this search for increasingly upscale products. The high growth in Prada's sales in China (+29% over nine months) is another example of the search by Chinese clients for less exposed and therefore less banal brands (the Italian brand has just 21 stores in China vs. 40 for Louis Vuitton and 58 for Gucci).

However, in Tier Two cities, which are the capital cities of the provinces or the Tier Three towns, supply needs to be more focused on logo products given that clients in these town are new to the Luxury sector and are looking for the most emblematic product lines and brands such as LV and Gucci. Therefore, supply would ideally differ according to the city in question thereby complicating matters for Luxury groups.


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1.2.4. Stock rundowns definitely in place in mainland China Recent months have witnessed clear stock rundown trends in mainland China. Sales at Richemont in September and October, as well as Watch exports during the same months provided the clearest examples. Stock rundowns stemmed from the slowdown in Watch and Jewellery Retail sales to Hong Kong over several months with variations of +3% to -3% since May 2012 as shown by the chart below.

Fig. 5: Watch-Jewellery Retail sales in Hong Kong


The recovery in Retail sales seen in September (+3.4%) after the 3.4% decline in August (the worst performance since June 2009) was nevertheless only short-lived. Indeed, October Retail sales in Watches & Jewellery in Hong Kong dropped 3% despite the later Golden Week this year affecting October, which was not the case in 2011. However, the Golden Week figures communicated by the Hong Kong authorities showed a decline in the average shopper spend of around 10%. The current situation therefore reflects significant volatility from one month to the next. However, note that during the crisis in 2008/2009 when sales dropped by 15% at the height of the crisis, the Chinese PMI stood at 43 whereas it has just exceeded 50 for October 2012. As such, we could reasonably assume that the declines noted recently are a bottom and could pick up on the back of economic recovery.

The chart on Swiss watch exports below shows the stock rundowns implemented by Chinese retailers in recent months. The decline in watch exports in September was particularly sharp (-20% for Hong Kong and -27% for mainland China). October figures showed no real improvement with a 12% decline in exports to China and a rise of just 2% to Hong Kong, despite more advantageous comparison with the year-earlier period (+22% in October 2011 vs. +49% in September 2011), or a 1.8% decline in exports for Greater China (China plus Hong Kong) on October after a 22% fall in September.

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PMI: 43 Consumer Conf. Index : 100

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Fig. 6: Monthly change in Swiss watch exports to mainland China and Hong Kong (%):

Source: FHS

Furthermore, analysis of results published by Chinese retailers show that stock levels have tended to increase recently. Indeed, in H1 2012 (April to September), stocks at Oriental Watches Holdings, a medium-sized retailer in China and Hong Kong, rose by 8% whereas sales dropped by 7% over the same period.

Recent publications by Chinese Watch & Jewellery retailers showed a degree of decorrelation between performances achieved in Hong Kong and those in mainland China. Indeed, same-store sales at Chow Tai Fook dropped 6.3% in Hong Kong and Macau during H1 but rose 3.4% in China. Similarly, watch retailer Luk Fook, primarily positioned in the mid/upscale segments saw its sales rise 7.4% with virtual stability in Hong Kong (+1.2% but stable on a same-store basis) whereas same-store sales rose 12.6% in mainland China.

Chinese consumers travelling to Hong Kong seem to be changing their behaviour. With lower purchasing power, the average shopper-spend indeed dropped during H1. As such, Chow Tai Fook estimates that purchases concerned the mass luxury segment more than the upscale market, namely articles priced between HKD2,000 and HKD100,000 (EUR200 and EUR10,000) versus more than EUR10,000 previously.

This trading down trend stems from a change in client profile. Chinese consumers boasting the highest purchasing power (those living in Tier One cities such as Beijing, Peking and Canton) prefer to travel to Europe (France, Italy and Switzerland etc.) and no longer to Hong Kong in order to make the most of even more advantageous selling prices than in the former British colony. In contrast, Chinese consumers who currently travel to Hong Kong have lower purchasing power since they stem from Tier Two, Three and Four cities and towns.

Chinese retailers such as Chow Tai Fook have adapted their strategies with more aggressive store openings in Tier Three and Four towns while implementing a strategy to move upscale in Tier One and Two cities in order to meet the rising sophistication of Chinese consumers living in these cities. This trend therefore confirms the increasing complexity of the Luxury market in China, and even its

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bipolarisation between a sophisticated client base with tastes similar to those seen in Hong Kong and an emerging client base.


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2. The first signs of a return to normal in China

2.1. Macro-economic factors The various Chinese macro-economic indices have recently shown a tendency to improve. The November Chinese manufacturing PMI published by HSBC reached 50.4 after 49.5 in October. This was the first time in 13 months that the index has exceeded the 50-point mark, showing signs of an economic upswing.

Fig. 7: Change in Chinese PMI

Source: Datastream.

On the other hand, any decisions made by the new Chinese authorities in favour of consumer spending are bound to have a beneficial impact on the Luxury sector. Indeed, Chinese consumer confidence clearly improved during October with the index at 106 points vs. 100 in September, overstepping the 100-point mark for the first time since May 2012. This fresh positive sign suggests that coming months could see a rebound in Retail sales and hence the Luxury market.

Fig. 8: Chinese consumer confidence index

Source: Datastream

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In addition, although the rise in September Watches & Jewellery Retail sales to Hong Kong was too low to illustrate a genuine trend and needs confirming in coming months, in our view this could have been a first sign. However, the October performance (-3%) puts the September performance into perspective.

In contrast, since comparison with the year-earlier period concerning this indicator is set to become slightly less demanding as of November (+35% in November 2011 after +48% in September and 50% in October), figures could look healthier in coming months. Statistics for November 2012 are due to be reported in early January 2013.

For the moment however, signs stemming from companies are still modest. Salvatore Ferragamo has indicated that the backdrop improved slightly in China and Hong Kong in the last weeks of October. Similarly, Chinese retailer, Oriental Watch noted a gradual improvement in the last weeks of its H1 ending September 30, therefore stating in its press release that it was confident for October.

During the conference call following the Q3 earnings publication on December 6, Prada underscored the improving mood in China where the attitude seems to be more optimistic, as also confirmed by the Chinese consumer confidence index (see above). In addition, Prada's CFO stated he was confident for the Chinese market in 2013.

Recent H1 publications by Chow Tai Fook and Luk Fook showed some improvement in mainland China whereas business remains clearly under pressure in Hong Kong (see above).

2.2. Less demanding comparison as of Q2 2013 Our feeling is that sales in China should clearly pick up as of Q2 2013, a period set to coincide with the effective arrival of the new Chinese authorities and the nomination of various provincial governors and central administration directors, who are genuine decision-makers and often the first beneficiaries of corruption in China. As of this period, we therefore expect the gifting market to become more dynamic. In addition, the macro-economic backdrop should be more beneficial as the recovery in the recent Chinese PMI seems to indicate (see above). The gifting market accounts for almost 25-30% of the Luxury market in China on Bain & Cie estimates. However, not all of the gifting market can be assimilated with corruption, indeed some of this market is associated with classic business gifts between private individuals and this segment is more sensitive to the economic recovery and should therefore pick up in 2013.

Furthermore, Q2 2013 should also begin to benefit from less demanding comparison with the year-earlier period, which is set to remain difficult during Q4 2012 and Q1 2013. Indeed, whereas average organic growth in sales for our sample of Luxury stocks was still a lofty 18% in Q1 2012, it fell to 12% in Q2 and even 8% in Q3.


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Fig. 9: Organic growth in quarterly sales at Luxury groups

lfl growth (%) Q1 2012 Q2 2012 Q3 2012

Burberry 15 11 5

Hermès 18 13 16


LVMH 14 10 6

inc Fashion & Leather 12 8 5

Luxottica - Wholesale division 12 8 11

PPR Luxury 18 17 12

Prada 41 20

Richemont 25 15 10

Swatch 13 13 10

Tod's 7 8 -0.7


Source: Company data; Bryan, Garnier & Co ests

This easier comparison with the year-earlier period as of Q3 2013 is clearly just as valid for Asia-Pacific as shown in the table below. Q3 is set to benefit in the same zone from a low demanding comparison (+8%).

Fig. 10: Average quarterly growth in our Luxury sample by region

LFL chge (%) Q1 2012 Q2 2012 Q3 2012

Europe 20 13 11

North America 15 11 9

Asia-Pacific 29 22 8

Japan 7 3 3



In addition, as shown in the table below, Retail sales of Watches & Jewellery to Hong Kong are set to suffer from still-demanding comparison until November (+35% in November 2011) and should benefit as of December (+29% in 2011) and above all in January (+18% in January 2012) from less demanding comparison that should enable more attractive growth rates. The next figures due out in early January 2013 are November 2012 figures and could show the start of a clearer improvement likely to be confirmed in the first months of 2013.

Fig. 11: Monthly change in Retail sales of Watches & Jewellery to Hong Kong

Aug 2011 Sept 2011

Oct 2011

Nov 2011

Dec 2011 Jan 2012

Feb 2012 Mar 2012

April 2012 May 2012 June 2012 July 2012 Aug 2012 Sep 2012

Oct 2012

% chg. 53.2 50.6 47.5 35.0 29.0 18.3 14.1 18.4 15.1 2.9 3.0 1.2 -3.4 3.4 -3.0



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3. Upgrades to our estimates The improvement in the backdrop in China has prompted us to upgrade our 2013 organic growth forecasts for certain groups. We have nevertheless made no change to our 2012 sales and EBIT estimates. Indeed, we expect no genuine changes in Q4 and are generally expecting the same trends as in Q3 2013 with no genuine recovery, but no deterioration either in our view.

3.1. Homogenous growth within the sector The table below sets out our previous and new assumptions for organic growth in 2013 sales. We have raised our organic growth forecast for LVMH from 7% to 9% and for the Watchmakers from 8% to 9%. This upgrade stems from our higher organic growth estimate for Asia-Pacific, now at 16% for LVMH vs. 13% previously and 15% at Richemont and Swatch vs. 13%. We are making no change to our assumptions for Hermès (+10%), PPR's Luxury division (+9%) and Ferragamo (+10%). As such, we expect fairly similar growth rates throughout out sample of Luxury stocks.

Fig. 12: Upgrade to 2013 organic growth estimates

LFL change (%) 2012 2013 new 2013 prev

Hermès 14 10 10


LVMH 9 9 7

inc Fashion & Leather 7 9 6

PPR Luxury 13 9 9

Richemont 8 9 8

Swatch 9 9 8


3.2. Slight increase to EBIT margin estimates for certain groups

As a consequence of the increase in our 2013 organic growth estimates, we are more optimistic in terms of EBIT margins as shown by the table below. Indeed, for LVMH, our new organic growth estimate implies a 40bp widening in EBIT margin to 21.6% vs. the stable level of 21.2% initially expected. Similarly, we have raised our EBIT margin estimates for Swatch and Richemont to now expect a 20-30bp widening to 24.3% vs. our previous forecast for a stable margin. In contrast, given that we have made no change to our sales growth estimates for PPR's Luxury division, Ferragamo and Hermès, we have made no change to our EBIT margin estimates for other groups in our sample as shown below.

Fig. 13: Changes to 2013 EBIT margin estimates

EBIT margin (%) 2012 2013 new 2013 prev

Hermès 30.8 31.3 31.3

Salvatore Ferragamo 16.2 17.9 17.9

LVMH 21.2 21.6 21.2

PPR Luxury 25.9 26.1 26.1

Richemont 24.0 24.3 24.1

Swatch 24.1 24.3 24.0



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4. Valuation Despite the volatile backdrop with lacking visibility, Luxury groups have performed well in recent months, underpinned by the recovery on stockmarket indices. The upgrade to our 2013 organic growth forecasts and hence our EBIT estimates has also prompted us to change our Fair Values.

4.1. Recent rally by the sector Over the past three months, the most significant rallies were boasted by the Watchmakers, especially Richemont (+19%) and Swatch (+11%). The outstanding performance by Richemont, on which we are maintaining a BUY recommendation, was prompted by the high growth reported in H1 EBIT (+28%) despite the clear slowdown in sales in September, as confirmed also in October (+7% like-for-like). Over the past three months, LVMH has gained 5%, performing virtually in line with the DJ Stoxx Index. Christian Dior reduced its discount after gaining 11%, ahead of the increase by LVMH. The 11% rise in the PPR share was partly driven by the group's decision to float FNAC during H2 2013. Finally, the Salvatore Ferragamo share remained unchanged over three months, partly due to its demanding valuation with a premium of 16% vs. the sector average in terms of 2013 EV/EBIT.

Fig. 14: Stockmarket performances

Past three months Year to date

Source: Datastream

4.2. Change to Fair Values The table below sets out our new Fair Values in view of the upgrade to our 2013 growth estimates and the roll-over of our DCF assumptions to 2013. We have upgraded our recommendations on LVMH and Christian Dior to BUY with respective Fair Values of EUR155 and EUR142 vs. EUR140 and EUR127 previously. Christian Dior's FV stems from our new FV for LMVH after making no change to the current discount of 26%.

We are maintaining our BUY recommendation on Richemont (FV of CHF78 vs CHF72 previously) and NEUTRAL recommendation on Swatch (FV of CHF455 vs CHF420 previously).

The upgrade to our FV on PPR (EUR145 vs EUR132) follows the increase in the average valuation of our Luxury sample given the weight of the Luxury division in the group's NAV (EUR18.5bn out of a total of EUR19.7bn).

We are making no change to our recommendations on other shares in the sector. Ferragamo is trading on a 16% premium, which is unmerited in our view (NEUTRAL with FV of EUR17.7 vs. EUR17.1 previously). Despite its fundamental qualities, we are remaining at NEUTRAL on Hermès (FV of EUR186) in view of its valuation levels and above all the estimated level of free float at 4%.

Absolute performances4

RICHEMONTTHE SWATCH GROUP 'B'PPRCHRISTIAN DIORTOD'SLVMHPRADAHERMES INTL.COACHSALVATORE FERRAGAMOTIFFANY & COBURBERRY GROUPMULBERRY GROUP

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3 months

Absolute performances1

PRADASALVATORE FERRAGAMORICHEMONTTOD'SCHRISTIAN DIORPPRTHE SWATCH GROUP 'B'LVMHBURBERRY GROUPHERMES INTL.COACHTIFFANY & COMULBERRY GROUP

-40.0 -20.0 0.0 20.0 40.0 60.0 80.0 100.0

31 Dec. 11


15

In our sample, we now favour Richemont which is due to enter the Stoxx 50 at the end of December and on which we are maintaining a BUY recommendation, as well as LVMH. Indeed: 1/ LVMH has underperformed the majority of shares in our sample with the exception of Prada and Hermès and should reduce its performance difference with other Luxury groups. 2/ Our new FV on LVMH points to upside potential of more than 10%, thereby justifying our new BUY recommendation.

In contrast, our new FVs on Swatch and Ferragamo do not leave sufficient upside to justify a BUY recommendation on these shares. We are therefore maintaining our NEUTRAL recommendations. Elsewhere, we are making no change to our Fair Values on Burberry and Tod’s.

Fig. 15: New Fair value and recommendations

Company NEW FV OLD FV NEW

recommendation OLD

recommendation

Hermès 186 170 Neutral Neutral

Salvatorre Ferragamo 17.7 17.1 Neutral Neutral

LVMH 155 140 Buy Neutral

Christian Dior 142 127 Buy Neutral

PPR 145 132 Neutral Neutral

Richemont (CHF) 78 72 Buy Buy

Burberry (P) 1.400 1.400 Neutral Neutral

Swatch (CHF) 455 420 Neutral Neutral

Tod’s 75 75 Sell Sell


4.3. Peer comparison The table below sets out the comparison of Luxury group multiples. Richemont is trading on the highest discount (10%) in terms of average 2013 EV/EBIT multiples in our sample (excluding Prada and Hermès). Richemont is the stock trading on the most attractive levels in our sample. At the same time, the 16% premium shown by Salvatore Ferragamo in terms of average 2013 EV/EBIT is the highest among the European stocks excluding Hermès. LVMH is generally trading in line with the sector whereas its position as global leader in the sector and its well-balanced and diversified businesses are assets that merit a premium. The 5% discount shown by Swatch relative to the sector average could be explained by its six monthly rather than quarterly publications which reduce visibility for investors and a more cyclical profile.

In view of this table, our Top Picks are LVMH and Richemont.

Furthermore, in terms of EV/EBIT multiples, LVMH is trading on a 16% discount to historical average levels, whereas we are forecasting average organic growth in 2012 and 2013 of 9%, slightly ahead of the historical average of 8%. The Watchmaking groups' discounts relative to their historical averages stand at 14% for Richemont and 13% for Swatch.


16

Fig. 16: Peer comparison

x 2012e

EV/EBIT 2013e

EV/EBIT 2012 premium on

average (ii) 2013 premium on

average (ii)

Burberry 13.3 11.3 5% 3%

Hermès 22.9 20.5 - -

LVMH 12.2 10.8 -3% 0%

Prada 20.0 16.3 - -

Richemont 11.2 9.9 -11% -10%

Salvatore Ferragamo 15.6 12.7 23% 16%

Swatch Group 11.7 10.5 -7% -4%

Tiffany 10.9 9.5 -14% -13%

Tod’s Group 13.2 11.8 4% 8%

(i) Luxury average 14.4 12.5 - -

(ii) Luxury average (excl. Hermés & Prada) 12.7 10.9 - -

Source: Factset, Bryan, Garnier & Co ests

The table below sets out our 2013 EV/EBIT multiples relative to the 2011-2014 EBIT CAGR. On a 1.15x sector average for our sample, Richemont is the cheapest group with a 0.8x ratio, in line with the Ferragamo one whose growth profile is more at risk in our view, as shown with the 100 bp EBIT margin decline in Q2 and Q3 2012. The LVMH EV/EBIT to growth that 1.15x is close to sector average which is an attractive level given its strong brands.

Fig. 17: EV/EBIT to growth

Companies 2012e EV/EBIT

(x) 2013e EV/EBIT

(x) EBIT CAGR EV/EBIT 2012

2011-2014e (%) to growth

Burberry – GBP 13.3 11.3 14.0 1.0

Hermès 22.9 20.5 11.0 2.0

LVMH 12.2 10.8 10.0 1.1

Prada 20.0 16.3 23.3 1.1

Richemont – CHF 11.2 9.9 13.0 0.8

S. Ferragamo 15.6 12.7 19.0 0.8

Swatch – CHF 11.7 10.5 11.0 1.1

Tod’s Group 13.2 11.8 11.0 1.2

Luxury average (excl. Hermes & Prada) 12.7. 10.9 14.0 1.15


17

Price Chart and Rating History Burberry

Ratings Date Ratings Price 09/11/12 NEUTRAL 1312p 15/09/11 BUY 13.67p 14/10/10 SELL 988p 29/01/10 BUY 615p

Target Price Date Target price 12/09/12 1400p 11/09/12 Under review 13/07/12 1550p 15/09/11 1600p 17/06/11 1000p 24/05/11 1200p 19/04/11 1100p 18/01/11 1000p 14/10/10 950p 21/07/10 880p 27/05/10 740p 29/01/10 700p

Christian Dior

Ratings Date Ratings Price 10/10/12 NEUTRAL EUR107.45 28/11/11 BUY EUR89.18

Target Price Date Target price 10/10/12 EUR127 30/07/12 EUR130 16/03/12 EUR132 03/02/12 EUR121 28/11/11 EUR107

Hermès Intl.

Ratings Date Ratings Price 28/11/11 NEUTRAL EUR150

Target Price Date Target price 04/05/12 EUR170 28/11/11 EUR150

LVMH

Ratings Date Ratings Price 10/10/12 NEUTRAL EUR122.1 10/10/11 BUY EUR107.3

Target Price Date Target price 10/10/12 EUR140 27/07/12 EUR144 15/03/12 EUR149 03/02/12 EUR140 18/10/11 EUR130 10/10/11 EUR128

PPR

Ratings Date Ratings Price 28/11/11 NEUTRAL EUR101.35

Target Price Date Target price 17/02/12 EUR132 28/11/11 EUR127

Prada

Ratings Date Ratings Price 10/10/12 BUY HKD59.5

Target Price Date Target price 07/12/12 HKD72 10/10/12 HKD70

10/12/12

2010 2011 2012400

600

800

1000

1200

1400

1600

BURBERRY GROUP


10/12/12

2010 2011 201260

70

80

90

100

110

120

130

CHRISTIAN DIOR


10/12/12

2010 2011 201280

100

120

140

160

180

200

220

240

260

280

300

HERMES INTL.


10/12/12

2010 2011 201270

80

90

100

110

120

130

140

LVMH


10/12/12

2010 2011 201270

80

90

100

110

120

130

140

150

PPR


10/12/12

2010 2011 201230

35

40

45

50

55

60

65

70

75

PRADA



18

Richemont

Ratings Date Ratings Price 28/11/11 BUY CHF56

Target Price Date Target price 18/05/12 CHF72 02/04/12 CHF64 16/01/12 CHF60 28/11/11 CHF56

Salvatore Ferragamo

Ratings Date Ratings Price 30/08/12 NEUTRAL EUR17.07 06/06/12 BUY EUR15.36 23/03/12 NEUTRAL EUR16.22

Target Price Date Target price 30/08/12 EUR17.1 15/05/12 EUR17.5 28/03/12 EUR16

The Swatch Group

Ratings Date Ratings Price 10/10/12 NEUTRAL CHF378.3 28/11/11 BUY CHF331.6

Target Price Date Target price 10/10/12 CHF420 08/02/12 CHF440 28/11/11 CHF425

Tod's Group

Ratings Date Ratings Price 23/05/12 SELL EUR80.7 13/05/11 NEUTRAL EUR91.85 27/07/07 BUY EUR57.9419

Target Price Date Target price 09/08/12 EUR75 24/11/11 EUR70 13/05/11 EUR94 18/03/11 EUR86 23/11/10 EUR84 06/09/10 EUR68 14/05/10 EUR62 23/03/10 EUR58 16/10/09 EUR53 20/11/08 EUR40 08/09/08 EUR52 30/01/08 EUR48 18/01/08 EUR50 18/09/07 EUR75

10/12/12

2010 2011 201230

35

40

45

50

55

60

65

70

75

RICHEMONT


10/12/12

2010 2011 20129

10

11

12

13

14

15

16

17

18

SALVATORE FERRAGAMO


10/12/12

2010 2011 2012200

250

300

350

400

450

500

THE SWATCH GROUP 'B'


10/12/12

2010 2011 201240

50

60

70

80

90

100

TOD'S



19

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Distribution of stock ratings

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Documents

INDEPENDENT RESEARCH Luxury Goods€¦ · All groups in the sector were affected by the slowdown with the exception of Prada and Hermès, whose sales momentum even increased rom 13%