10th annual Bain Luxury Goods Worldwide Market Study, October 2011 (I)

the study

Bain released its tenth annual Luxury Goods Worldwide Study on October 17th.  It’s based on data from 230+ luxury goods companies, compiled by Bain in cooperation with Altagamma, the Italian luxury goods trade association.  The analysis is directed by Claudia D’Arpizio, the well-known consultant who heads Bain’s fashion and luxury goods practice. (Thanks to Bain & Company for giving me a copy of the study.  You can find a summary on the Bain website.)

the results

I’m going to write about the Bain study in two posts.  Today’s will cover prospects for the full year, and for the holiday selling season, in 2011.  Tomorrow’s will deal with secular trends in the luxury goods industry.

another year of exceptional growth

Despite a litany of macroeconomic woes–the nuclear disaster in Japan, Libya, Greece, slowdown in emerging markets, political craziness in the US and EU–Bain is predicting that luxury goods sales in 2011 will reach €191 billion this year.  That’s up 10% from the all-time high of €173 billion posted in 2010.

Bain is projecting 6%-7% annual sales growth for the luxury goods market from 2012-2014.  I take these figures as general indicators rather than point estimates.  I think the ideas they are intended to communicate are that growth in this industry will continue to be healthy but that the torrid pace of the past two years is likely to slow somewhat.

the most important forces

Three factors are key to this assessment:

–affluent clients in the developed world continue to spend heavily on luxury goods.  This phenomenon is more than a bounce back to pre-financial crisis levels.  It’s a genuine upsurge in demand, despite a slowdown in overall GDP expansion in these markets.

–Chinese customers continue their buying binge, both at home and as tourists abroad.

–the negative effects in Japan of the earthquake/tsunamis have been milder than expected.  In fact, luxury goods’ consumption may be rising again after several years of decline.

the holiday season

Bain thinks the holiday selling season will be a good one.  Its base assumption is that sales will be up 7% vs. 2010.  However, it figures the chances of the season being considerably better than that, at +10%, are twice as high as that sales will be disappointing.  The more positive outcome would bring full-year sales to an 11% gain.

currency effects

Bain keeps score in euros.  This only makes some sense since it’s in partnership with an Italian trade association for this study and because many luxury goods companies are based in either France or Germany.  But political/economic instability in the EU has caused its currency to fluctuate more than usual in the past couple of years–which affects the results of the Bain study.

Constant currency numbers, which give a better idea of underlying unit volume growth worldwide.  They present an even rosier picture of the luxury goods industry today.  The 2010 results of up 13% break out into 8% constant exchange rate growth + a 5% boost from a weak euro.  Bain projects that this year’s underlying growth will be 13%, with a strong euro lowering the figures by 6%.  In other words, global demand for luxury goods is currently accelerating, not decelerating, as the euro-denominated results suggest.


Chinese customers now make up over 20% of global luxury goods sales.  Bain estimates that business in Greater China (the mainland + Hong Kong, Taiwan and Macau) will hit €23.5 billion in 2011, a year on year gain of 29%.  In addition, Chinese tourists will likely buy another €12-15 billion worth of luxury goods on trips abroad.  While the impact of Chinese tourists is noticeable in Hawaii and New York, in cities like Milan and Paris they are probably the main factor driving growth in sales.

Note:  In addition to the fact that travelers like to buy souvenirs, luxury goods prices are generally higher in China than everywhere else except possibly Japan.  You’re also much more confident the items you buy outside China aren’t counterfeit.  And there are outlet stores, as well.   On anti-terrorist grounds, both the US and the UK have made it very difficult for Chinese to get travel visas, a fact that merchants and hoteliers there complain about bitterly.  One result of this policy is to funnel Chinese tourists into continental Europe.


For many years, Japan has been nirvana for luxury goods companies.  Japanese have been persistent buyers of luxury goods, whether the general economy has been good or bad.  Domestic prices are very high.  And the market there is very deep.  It comprises perhaps the top half of the population, as opposed to the top quarter in the US or EU.

In 2007, the music–and Japanese luxury goods sales growth–finally stopped.  No one quite knows why.

For 2011, however, despite a 12% year on year drop in luxury goods purchasing during 1Q due to the earthquake/tsunamis, Bain is projecting a small (+2%) year on year gain for Japan.  The consulting company thinks results will come in at €18.5 billion, meaning Japan retains its place as the second-largest luxury good market in the world.

world rankings

The top five luxury goods markets in the world at year-end 2010 are:

US        €48.1 billion         28% of the world market  (NY at €15 billion represents 9% of the world)

Japan     €18.1 billion     10.6%

Italy       €17.5 billion     10.2%

France     €13.3 billion     7.8%  (Paris = €8.5 billion    5%)

China     €9.6 billion     5.6%

Strong growth propelled China up from 7th a year earlier, displacing the UK and Germany in the rankings.

That’s it for today.  Market trends tomorrow.

thoughts on Las Vegas Sands (LVS)

a big valuation discount

As I wrote on Friday, the most striking thing to me as an investor about LVS is the huge valuation discount at which it trades compared with its global rivals WYNN and MGM.

To recap:  if we take the current market price in Hong Kong of the firms’ interests in Macau, and in LVS’s case us the same multiple to value its Singapore casino, we get the following results:

market cap of WYNN  = $17 billion  =  market cap of Macau interests   +   $5 billion

market cap of MGM  = $6 billion = market cap of Macau   +   $2 billion

market cap of LVS  =  $34 billion = market cap of Macau + Singapore   – $11 billion.

LVS shares would have to be trading about a third higher just to have its Las Vegas interests valued at zero.


Q:  Why is LVS trading so cheaply?

A:  I don’t know.  What is striking, however, is not necessarily that LVS is so cheap on an absolute basis (although I think it is) but that is so cheap relative to its industry peers.

Possible reasons:

the financial crisis

LVS was in the midst of aggressive expansion when the financial crisis hit.  In late 2008 the company announced that its auditors were questioning LVS’s ability to avoid being crushed by a mountain of debt.  It took a $2.1 billion capital raising and a modification of LVS’s expenditure plan for the accountants to issue a clean bill of health.  Not LVS’s finest hour.


Every company is involved in lawsuits or one type or another.  Wall Street typically ignores them.

In LVS’s case, however, even though little, if anything, is put down on paper, a series of legal actions appear to have analysts and investors concerned.  Here’s a quote from the company’s latest 10-K (LVSC is Las Vegas Sands Corp.; SCL is Sands China Ltd.:

“On October 20, 2010, Steven C. Jacobs, the former Chief Executive Officer of SCL, filed an action against LVSC and SCL in the District Court of Clark County, Nevada, alleging breach of contract against LVSC and SCL and breach of the implied covenant of good faith and fair dealing and tortious discharge in violation of public policy against LVSC. Mr. Jacobs is seeking unspecified damages. This action is in a preliminary stage. The Company intends to vigorously defend this matter.
On February 9, 2011, LVSC received a subpoena from the SEC requesting that the Company produce documents relating to its compliance with the Foreign Corrupt Practices Act. The Company has also been advised by the Department of Justice that it is conducting a similar investigation. It is the Company’s belief that the subpoena emanated from allegations contained in the lawsuit filed by Steven C. Jacobs described above. The Company intends to cooperate with the investigations.”
LVS fired Mr. Jacobs in mid-2010.  He sued for wrongful termination.  Press reports indicate that in his lawsuit Mr. Jacobs maintains that LVS asked him to compile files on prominent Macau politicians and to offer some of them improper benefits.  These assertions appear to have prompted a number of regulatory inquiries, both in the US and in Hong Kong/Macau.   As far as I’m aware, Singapore, which runs a very strict regulatory regime and which awarded LVS one of two casino licenses there, has taken no action.
An article in the Wall Street Journal from October 21 outlines the issues.  This article prompted the question from a reader which has led to this post.
As an investor, not a lawyer, I find it impossible to predict an outcome to all this.  I do have a number of observations:
–It seems to me that LVS has done the right thing by beefing up its legal staff with Washington regulatory experts.  This gives them people who understand the regulatory environment and whom the regulators presumably trust.
–As a stock, LVS is up less than 5% over the past year.  This compares with a gain of 8.8% for the S&P 500 and 28.8% for WYNN).  Sands China, on the other hand, is up 46.1% over the same time period, vs. +32.7% for Wynn Macau and a loss of 13.3% for the Hang Seng index.  So investors closest to the Macau situation don’t seem troubled by the legal issues surrounding LVS/Sands China; if anyone, it’s US investors who are.
–To my eye, Sands China’s results have perked up considerably since Mr. Jacobs was replaced.
–If the discount to its peers is due solely to legal worries, then the numbers above imply that Wall Street is anticipating a negative outcome on the order of $15 billion.
The correct number for legal damages may be zero, it may be a significant figure.  I don’t know.  I own LVS, which means I’m betting that $15 billion isn’t in the right ballpark, or even in the right town.  (This isn’t how I usually invest.  Normally, I’d want to have a precise downside estimate, which I don’t have here.  So my position is small.)
family control
About half the stock in LVS is owned by CEO Sheldon Adelson and his family.  As the 10-K notes, Mr. Adelson’s financial interests may not be fully aligned with those of other shareholders.  In particular, I’d characterize Mr. Adelson as a very aggressive investor in mammoth new projects who has gotten his fingers burned recently. He’s not one to quietly sit by and let his financial leverage decrease to zero.
That doesn’t bother me so much.   It’s just a fact of life.
Based on my limited observation, though, because it’s “his” company, Mr. Adelson doesn’t seem to go to great lengths to cultivate the global securities analyst community.  In his latest conference call, for example, he says he’s going to send analysts towels in the mail, so they can wipe the egg off their faces for underestimating LVS’s prospects.  Maybe that’s a joke and I don’t realize it.   Yes, it’s emotionally satisfying for Mr. Adelson.  But it’s not a gesture aimed at making analysts feel all warm and cuddly about LVS shares  …quite the opposite.
analysts are skittish
This is only partly because of the “us vs. them” undertone the company seems to foster.  Analysts on this stock seem to me to divide into two types:  Wall Street analysts who know a lot about Las Vegas-style gambling but nothing about Asia; and Singapore or Hong Kong analysts who know the local market but nothing about the hotel or gambling industries.  The biggest risk to either group is to be too bullish.
what to do
LVS has a special situation aspect to it, to my mind, because I think it trades at an undeserved discount to its peers.  Operations around the world are going better than expected.
On the other hand, maybe I’m wrong.  Although the stock has performed relatively well recently, it may take time for the discount to narrow.  Negative news on the legal front probably won’t help performance, either.
LVS shares aren’t for the faint of heart, but I’m content to own them.  They may, or may not, have a possible place in your portfolio.  Don’t make this your largest position, though.


LVS’s 3Q11: very strong, across the board

the report

After the close of New York trading on October 27th, LVS reported 3Q11 results.  Revenue was a record $2.41 billion, up 26% year on year.  Property EBITDA (earnings before interest, taxes and depreciation and amortization) was up 43.2% to $924.1 million.  EPS were $.55, a 61.8% boost over earnings in 3Q10.  The Wall Street consensus eps estimate was $.52.

LVS shares are up by about 4% in aftermarket trading as I’m writing this.

the details

In what follows, it’s important to remember that what a casino company reports as gambling revenue is not the total amount of money bet, but rather the portion of the money bet that it retains or “wins.”  Over a long period of time, the casino’s winning percentage is relatively steady.  In any given quarter, however, it can move away substantially from the long-run average.  In analyzing quarterly results, we should note any short-term deviations and at least mentally adjust for them.


Year on year comparisons for the Marina Bay Sands aren’t that helpful, because the casino/resort complex is so new. I’m using quarter on quarter comparisons, instead.

Gambling activity continues to grow rapidly.  EBITDA, which was $413.9 million for 3Q11 vs. $405.4 million in 2Q11 doesn’t show this clearly, though.  That’s because the high roller winning percentage at Marina Bay was 2.99% in 2Q11 and 2.69% in 3Q11 (LVS thinks the normal range for quarterly win in the VIP segment, by far the casino’s largest, should be 2.8%-3.0%).  The q-on-q decline in winning percentage clipped about $35 million from 3Q EBITDA.  The real quarter on quarter growth rate is 10%+, not the 2%+ the accounts show.

VIPs bet an eye-popping $16.7 billion at Marina Bay during 3Q11.  This compares with $12.2 billion in 2Q11 and $10.2 billion in 3Q10–both breathtaking numbers in their own right.


Same story here.  EBITDA in 3Q11 was $388.3 million, down $3.3 million compared with 2Q11–at a time when market growth, quarter on quarter, was about 10%.  Adjusting Sands China’s winning percentage up to 2Q11 level adds $40 million to the EBITDA line.  This suggests that Sands China held its own in a growing market, despite not adding any casino space this year.

Sands China’s newest, 13.7 million square foot casino in Cotai is slated to open in five months.

I’m going to ignore Bethlehem, PA because it’s so small (EBITDA of $25.2 million in the quarter).

EBITDA in Las Vegas was $94.3 million for the seasonally weak 3Q, up slightly from $92.9 million in 2Q11 but up sharply from $58.3 million in 3Q10.   About $10 million of the increase on a year over year basis is due to higher royalty income from Macau and Singapore.  Most of the rest is a halving in the level of giveaways from the $40 million or so LVS needed last year to get customers to come to its Las Vegas properties.


In short, LVS is holding its own in the US and is making money hand over fist in Macau and Singapore.

valuation remains compelling, in my view

(Remember, I own LVS, WYNN and 1128 (if it weren’t for a software glitch Fidelity can’t find/fix, I’d own 1928, too)).

Look first at WYNN, which I consider to have the strongest gambling company management.  Its interest in 1128 is worth about $11.5 billion at today’s market price.  Therefore, the market is valuing the US interests of WYNN at about $5.5 billion.

Next, MGM, the weakest of the big firms.  Its interest in MGM China is worth $3 billion, implying its other interests, including its entanglement with Pansy Ho, are worth $2.7 billion.

What about LVS?  The market in Hong Kong values its interest in 1928 at $17 billion.  Arguably, Marina Bay should be valued at a premium to Sands China.  But capitalizing its earnings on the same basis as 1928 yields a value for the 100%-owned Singapore subsidiary of $25 billion.  This would mean the market values the rest of LVS–Las Vegas and Pennsylvania–at minus $9 billion.  LVS shares would have to be almost 30% higher just to get the needle out of the minus column.

is there a reason for the apparent undervaluation?

A friend who’s a regular reader of PSI asked about ongoing litigation involving LVS, based on a Wall Street Journal article a week or so ago.  I’ll write about this on Sunday.

The litigation may well be a serious issue.  I don’t know.  On the other hand, the stock price already seems to me to be discounting a very unfavorable outcome.

Also, arguably LVS’s leading position in two major Asian markets and its tourist/convention emphasis make it attractive to other countries interested in creating a tourism/gaming industry.  Both WYNN and LVS are seeing synergy effects in Las Vegas from their Asian exposure;  LVS is seeing this in Singapore.  One might therefore expect LVS to be trading at a premium to its competitors, not a steep discount.

Europe’s deal on Greek debt

the Greek sovereign debt deal

Europe appears to have reached another milestone in its circuitous journey toward resolution of its twin debt crises–Greece and its banks’ unknown, but presumably very large, exposure to sub-prime mortgage debt.

Yesterday’s development is that commercial banks in the EU have agreed to “voluntarily” agree to forgive half the amount the Greek government owes them and write down the value of their Greek sovereign debt by 50%.

Although sharply higher stock prices in Asia, Europe and in pre-market trading in the US signal investor relief, I don’t think it’s particularly surprising that the banks would accede to the wishes of their governments to do so.  For one thing, defying your central bankers is never a good idea.  But in this case agreement brings tangible advantages to the banks as well.

Press reports have made it clear that, earning once again their reputation as the world’s ultimate “dumb money,” the big EU commercial banks had enabled hedge funds to bet heavily on a Greek default by taking the other side of hundreds of billions of euros of credit default swaps.  So the banks would be facing mammoth losses if Greece defaulted and they had to pay off.

But the EU has found what it considers a loophole in the language of the CDS contracts. Technically speaking, it argues, if creditors “voluntarily” forgive a portion of Greece’s debt–which they have just agreed to do–that action doesn’t count as a default; the CDS payoffs aren’t triggered.

Maybe this interpretation is sound, maybe not.  But it’s what the EU is going to do.  National regulators will certainly order their banks not to pay any CDS claims.  Hedge funds can sue.  Litigation would doubtless be long and expensive, however.  And it would provoke the ire of EU politicians, who might find ways to make litigants’ lives more difficult in other areas.

So the bank agreement appears to make the threat to bank solvency of their CDS exposure go away.

what I make of the EU situation

To my mind, resolution to the EU financial crisis has three possible outcomes:

1.  The Greece et al sovereign debt crisis spins out of control–causing the failure of one or more major banks, a run on the euro and a collapse of the EU political structure.  While this is going on, we discover that one of the now-defunct institutions has a crucial, but hitherto unappreciated, role in world commerce.  So the global economy comes to a screeching halt, just like it did after the Lehman bankruptcy.

There’s no evidence there’s an EU Lehman and it’s hard to believe the world would shoot itself in the foot a second time.  On the other hand, the EU has shown itself particularly ill-suited to deal with a financial crisis.  recent trading show clearly that global equity investors have been worried about this possibility, but I regard Lehman II as about as unlikely as you can get.  It’s even less likely today.

2.  Same as #1, except no Lehman.  That is to say, a big banking failure paralyzes the EU.  Most of the economic damage is domestic.  There are ripple effects elsewhere, but they’re not gigantic.

It seems to me that today’s news is also the start of taking this worry off the table.

how important is the EU?

Sizing the problem in the most simple-minded way (all I’m capable of), the world economy is divided about 50-50 into emerging and developed markets.  Half the developed part is the US and another 5% is the UK.  That leaves 20% for Euroland.

Suppose banking failure(s) caused a severe recession in the euro area.  Real output drops by 5%.  That would reduce total world output by 1% (5% x .2), and developed world output by 2%, in the year following the blowup.  factoring in ripple effects, the developed world would stagnate; the developing world would power along, but a bit more slowly.  The whole world would grow at, say, 2.5% next year instead of 3.5%-4.0%, if the blowup happened now.

…something you’d like to avoid, but not such a big deal.

As surprising as this thought may be to Americans with cultural roots in Europe, Euroland is no longer big enough to matter that much to overall world growth, except in extreme circumstances.

True, Europe has a lot of accumulated wealth–which we’ve seen on display, I think, in the periodic panic selling that has marked the past few months.  But it’s too wrapped up in what looks to an outsider like petty regional politics to focus on getting GDP to expand.  And much of the rest of the world is passing it by.

3.  The financial crisis is addressed, the banks recapitalize and the EU begins to heal its wounds, following the general trajectory of the US economy with a three-year lag.  Dreary as it sounds, I think this is both the most favorable and most likely case.

equity implications

Not much different from what I’ve been writing for a long time.  In cases #1 and #2, equity investors would be better off not holding EU-listed securities and should shade their other holdings away from companies with a large percentage of their business in the EU.

In case 3, it’s safe to dip a toe in the water.  But growth outside the EU will likely be much better than growth inside.  So the relative winners will be EU-listed firms with large exposure to foreign markets.  In a non-recessionary EU, these stocks stand to be winners on the world equity stage as well, since EU investors will likely concentrate heavily on them.