Market Pulse | Status Quo

Savigny Luxury Index March 2012 | Source: Savigny Partners

LONDON, United Kingdom — The Savigny Luxury Index (SLI) traded in a relatively narrow bandwidth this month, slipping 0.3 percent, whilst the benchmark MSCI World Index (MSCI) edged up 0.2 percent. Worries over a slowdown in China were offset by yet another string of exceptional results announcements, resulting in a status quo for the month of March.

Big news

  • The sector has been awash with strong results announcements with Prada, Michael Kors and Tiffany all beating expectations.  China continued to be the main driver of growth for the sector, but recovery in the US as well as lessened fears over the Eurozone debt crisis caused confidence to return somewhat to the sector.
  • Newsflow on China has nevertheless had a conflicting impact.  The country revised its growth estimates downwards to 7.5 percent for 2012, the lowest in decades, but the possibility of lower import duties boosted share prices amongst our SLI constituents.
  • Corporate activity in the watch sector has resumed, with Hermès announcing it was in talks to buy Swiss high-end dial maker Nateber, only months after having bought a stake in case maker Joseph Erard.
  • Trading in Ports’ shares was suspended as the company delayed its results announcement.  This, along with the resignation of Deloitte as auditor to Chinese milk formula products maker Daqing Dairy Holdings Ltd and Boshiwa International Holdings (clothing licensee for Harry Potter and Bob the Builder), has triggered heavy selling on small non-state owned Chinese companies.  We have temporarily excluded Ports from our SLI metrics this month whilst its shares are suspended.
Going up
  • Prada continues its ascent, gaining 17 percent on the month, and well over 40 percent since the beginning of the year.  The company posted excellent year-end results, with a 72 percent rise in net income.
  • Ferragamo also posted solid gains for the month, based on strong improvement in sales and profits.

Going down

  • Hermès’ share price tumbled 11 percent during the month of March, despite great results, a promising outlook and a massive hike in its dividend. It was the first sign of takeover speculation cooling off.

What to watch

  • Upstream consolidation in the watch sector is likely to continue, due to the reduction in supply of components by Swatch.
  • Menswear grew at double the rate of womenswear last year and is becoming an increasingly strategic category.  Coach has benefitted from investment in this category.  It is likely that others will follow suit.
Sector Valuation

Valuation multiples: making sense of the madness

At first sight some valuation multiples look staggering, with for example Michael Kors and Mulberry both enjoying EBITDA multiples in excess of 30 times.  This contrasts with the multiples of some industry leaders barely notching above 10 times.  Why such discrepancy?

The answer is clearly and resoundingly market anticipation of growth prospects.  The graph below plots EBITDA multiples against the analysts’ consensus for sales growth estimates in the current fiscal year for each of our SLI constituents.  The correlation is very strong indeed.

EBITDA Multiples vs. Estimated Sales Growth

 

Three groups stand out from this:

  • Hermès: surely the LVMH situation, including a non-existent float today, is the continued cause of such lofty valuation.
  • Richemont: in our opinion, the stock is slightly penalised by its concentration on the watch and jewellery sector, and the greater risk implied in case of a slowdown.
  • Ralph Lauren: the group’s maturity in its core domestic market and its very wide brand architecture seem to have taken the shine off the “luxury-ness” of Ralph Lauren.
Pierre Mallevays is a contributing editor at The Business of Fashion and founder and managing partner of Savigny Partners, a corporate advisory firm focusing on the retail and luxury goods industry.