Category Archives: Luxury goods

11th Annual Bain Luxury Goods Worldwide Study, October 2012 (ii): long-term trends

November 20, 2012 By in Bain luxury goods study, Industry Analysis, internet, Luxury goods, Retail, Stock ideas, Strategy Tags: , , , , , , , Leave a comment

post # 2

This is Day two (of three) blogging about the 2012 Bain global study of personal luxury goods.  Yesterday I wrote about Bain’s analysis of the industry’s growth prospects.  The consulting company’s general picture seems to be that after a post-Great Recession surge in luxury goods spending the industry is settling back toward trend growth.

In the Worldwide Study, Bain has pencilled in 4% – 6% annual revenue expansion as being “trend.”.  My sense, however, is these numbers are there more as prudent (read: low-ball) placeholders than the product of hard core analysis.

Trends

That was yesterday.  Today I’m going to write about the major trends Bain sees in the luxury goods market.  They are:

–tourism  

According to Bain, 40% of the total money spent by buyers outside their home country!  I knew that this phenomenon was big, but I didn’t realize it was so large.

Why not spend at home?

—price   Prices are cheaper in the EU than anyplace else.  This is partly because luxury goods makers set prices higher in Asia and partly because of government duties imposed on foreign luxury goods imports.   Outlet shopping may also not be available in the home country (more below).

—selection  Two-thirds of worldwide luxury goods distribution is through third parties like department stores, which may focus on only a small number of items.  In some cases (think: China) there may not be stores nearby

—anonymity  Buyers may prefer to make purchases that don’t advertise their affluence to their friends and neighbors

–authenticity  Buying from a luxury firm’s retail store gives greater assurance that the merchandise isn’t counterfeit

—vacation atmosphere  buyers may be less careful about spending when abroad.

How does Bain know this?  Traditionally, the information comes from credit cards, although in today’s world more progressive companies will be using “big data.”  If so, they’re probably not telling anyone, though.

the geographical spending mismatch

Chinese citizens do 25% of global luxury goods spending; China accounts for 7% of worldwide sales

Europeans do 24% of global spending; Europe accounts for 35% of worldwide sales

Americans do 20% of global spending; the US accounts for 31% of worldwide sales

Japanese do 14% of global spending; Japan accounts for 9% of worldwide sales

Everyone else does 17% of global spending, everywhere else accounts for 18% of worldwide sales.

In the aggregate this is an East/West phenomenon.  Yes, Americans do a little bit of luxury shopping in Europe and Europeans in the US.  But Japanese and Chinese citizens do the majority of their personal luxury goods buying abroad.

–China accounts for 25% of the global luxury goods market.  That’s more than any other country.  And it’s up from basically nothing 12 years ago.

–accessories, not apparel   Accessories, typified by leather goods and shoes, are now the largest segment of the luxury goods market, comprising 27% of total sales vs. 26% for the #2 category, apparel.  They’re also growing faster than apparel.  Reasons:  lower prices, greater recognizability, faster innovation

–men, not women…  Fifteen years ago, men made up a third of the luxury goods market.  Today, that’s up to 41%.  The impetus for this change is the emergence of younger male consumers in China.  Now luxury brands are beginning to cultivate males in the US and Europe as well, where men hav e traditionally been second-class citizen, on the view that men “normally” buy less than women–and are much more highly business cycle sensitive customers.

–…except maybe for China, where Bain notes, for the first time I’m aware, that women business owners, “power women,” are becoming a significant force in luxury goods consumption

–off-price  Outlet shopping, long a staple in the US (59% of global off-price sales this year) , has arrived in Europe–and is being rapidly developed from a very low base in Asia.  Bain reports growth in luxury outlet sales from Chinese customers in Europe of up to 100%+.

The category as a whole will likely grow at a 30% clip in 2012, although it will only account for about €13 billion in total sales.

–online  This market, which is still tiny at an estimated €7 billion in sales this year, is growing at about a 25% annual rate.  It’s 2/3 full price, 1/3 off-price, with off-price growing faster.  Private sales, flash sales and sites for men are the hottest sub-categories.

That’s it for today.  Tomorrow, structural features of the personal luxury goods market.

11th Annual Bain Luxury Goods Worldwide Market Study, October 2012 (i): short-term performance

November 19, 2012 By in Bain luxury goods study, Current Market Thoughts, Industry Analysis, Luxury goods, Portfolio management, Retail, Stock ideas, Strategy Tags: , , , , , , , , Leave a comment

the study

Bain and Company published its 11th annual study of the global luxury goods industry in Milan last month.  The study is authored, as usual, by Claudia D’Arpizio, the head of Bain’s luxury goods practice.  It’s developed in cooperation with Altagamma, the Italian luxury goods trade association.  (Thanks to Bain for giving me access to the study, a summary of which can be found on the Bain website.)

three posts

I’m going to write about this year’s study in three posts.

Today I’ll cover Bain’s assessment of the personal luxury goods industry’s prospects for the upcoming holiday season and for full-year 2012, as well as what’s likely to be in store for 2013 and beyond.

Tomorrow I’ll write about the longer-term trends developing in the luxury goods market.

On Wednesday, I’ll add Bain’s view of the geographical structure of the luxury goods market, in addition to–something new this year–the consultant’s sense of where the €212 billion in annual sales of luxury goods stands in the context of the overall €750 billion “market of markets” of all worldwide luxury expenditure.

€ vs. constant currency

The Bain study is framed in euros.  This makes sense, since a majority of the important luxury brands are European and the largest single bloc of affluent customers still remains the EU.  Also, historically the € has been relatively stable.  However, the currency has been uncharacteristically volatile over the past several years, as the Great Recession has brought long-simmering economic, political and demographic issues in the EU to a head.

From an equity investment point of view, it’s no bad thing in an area under economic strain to hold stock in companies with strong global brand names and lots of overseas sales.  So luxury goods firms will find support from local investors.

We’re not all €-based buyers, however.   Also, almost 2/3 of luxury goods sales, and the lion’s share of the growth, lie outside the EU.  For both these reasons, it’s important to separate underlying expansion in demand from fluctuations in currency.

2012

the recent past

The personal luxury goods market hit what was then an all-time peak of €170 billion in 2007.  The market fell by 10% over the following two years to €153 billion in 2009, before rebounding to hit new highs of €173 billion (+13%) in 2010 and €192 billion (+11%) in 2011.

Bain predicts another new record of €212 billion in personal luxury goods sales (+10%) for 2012.

2012 to date

The first two quarters of 2012 are already in the books, showing +14% growth.

Although publicly traded companies have by and large not yet reported 3Q12 earnings (many have fiscal periods ending in October), monthly sales announcements, industry data and anecdotal evidence give us a good sense of how the quarter will play out.  Year on year deceleration is the operative word.  Bain has pencilled in a 7% yoy revenue advance.

two forecasts for the holidays

For the upcoming holiday season, Bain has two forecasts.  Its base case is that 4Q12 will show the same yoy gain as 3Q12, up 7%.  It’s optimistic case is that the holidays will show the same yoy growth they did in 2011, +12%-+13%.  (For what it’s worth–personally, I’m not familiar enough with Ms. Arpizio’s work to have an opinion–both Bain’s base case for 4Q11 (+8%) and is optimistic case (+10%) were conservative.)

Bain continues to project annual +4% to +6% growth in personal luxury goods growth in constant currency over the next several years.  This will be driven by Asian consumers, tourism, deeper penetration of emerging markets and of second-tier cities in developed markets, and rapidly expanding online and outlet channels.  I think this figure may prove to be too low.

Accessories–leather goods and shoes–will likely be the best categories.

weaker than it looks in 2012

2010 industry growth of +13% breaks out into +8% in constant currency and +5% from € weakness

2011 growth of +11% breaks out into +13% in constant currency and -2% from € strength

2012 growth of 10% breaks out into +5% in constant currency and +5% from € weakness.

The Bain study, then, is projecting a continuation of the current environment of slower growth through 2015.

my take

There’s an increasingly large separation between the nationality of the buyers of luxury goods and the places where the purchasing takes place (more about this tomorrow).  If we look at the economies where the large groups of buyers reside,

–China (25% of the market) is, I think, at a cyclical low point from which growth will accelerate next year.  Luxury purchases should be a high-beta function of this rebound.  +20% in 2013?

–Europe (24%) is a continuing mess, from which I’m expecting no better than flat

–the US (20%) is an enigma.  Layoffs of high paid bankers will continue to dampen growth in luxury goods purchases.  But the current slowdown in luxury goods sales is more widespread.  Who knows why?  My guess is that this isn’t the affluent anticipating higher personal income taxes.  Rather it’s the worry, symbolized by the “fiscal cliff,” that gridlock in Washington will undermine economic growth.  Legislators on both sides of the aisle appear refreshingly open to compromise in their post-election statements.  The administration doesn’t sound so willing.  Negotiating stance?…tin ear?  We’ll know more in the coming few weeks.

If I’m correct about Chinese growth in 2013, that country alone will provide Bain’s 5% constant currency growth.  The big imponderable for me is how much the US will add to that number.

At this point, therefore, to me the safest bet–maybe the only safe one–seems to be on accessories sold to Chinese luxury consumers.

the curious case of Chow Tai Fook Jewellery (HK:1929)–Tiffany (TIF), too

September 18, 2012 By in Casinos, Current Market Thoughts, Entertainment, Industrials, Industry Analysis, Luxury goods, Retail, Stock ideas, Strategy Tags: , , , , , , , , , , , , , Leave a comment

…toss in Wynn Macau (HK: 1128), as well.

Chow Tai Fook

Chow Tai Fook is a Hong Kong-based jeweler that IPOed there last December.  The company’s main business is chuk kam (24 karat) gold objects, the stuff that’s sold by weight, not market up by 100% (or more) over direct costs.  It’s not only decoration, but you can bury it in the back yard if you’re wary of banks.  And you can wear your wealth to work, in case you find out you have to flee the country right away.   (You wouldn’t chuckle if you’d lived through 1940-1960s China.)

The firm has expanded from the SAR into the mainland, and from chuk nam to high-end “fine” jewelry designed to flaunt your wealth, not hide/preserve it.  In recent years, the latter has become an increasing percentage of Chinese jewelry consumption.

a December 2011 IPO

The IPO was anything but a rousing success.  The stock was priced at HK$15, to raise US$ 2 billion.  But it came to market just as Beijing’s efforts to slow down the domestic economy were causing affluent mainlanders to cut back consumption.

The issue closed on day one at $13.80–and headed south from there.  It finally bottomed some months ago at HK$8.40.  Ouch!!

…so, what’s curious?

Here’s the thing.

The economic evidence over the past few months is that China is slowing further, despite signals from Beijing of its change to a more expansive government economic policy.

The EU is a mess.

US industry is slowing down and the “fiscal cliff” is getting closer.  Burberry and Tiffany have revised down earnings, in large part because of disappointing sales in China.  So too have tech companies like Intel.

Nevertheless,

since July 27th,

Chow Tai Fook share are up by 26.5%–vs. the Hang Seng index up 6.9%

BTW, Wynn Macau shares are up by 30.0% over the same time span

TIF began rising a little earlier in the month, but has gained almost 25% from its low–compared with about an 8% rise in the S&P 500.

why this good performance?

It’s a little like the case of Benjamin Button, whose body went through the opposite of what nature usually does.

Possibilities:

–If this were ten or fifteen years ago, I’d say investors are seeing through current weakness and beginning to discount in advance the recovery that the government policy change will likely bring.

But reacting to government cues is not the winning strategy it once was.  That’s partly because the economic problems the world faces today are more structural than cyclical.  Also, the rise of hedge funds has reoriented markets sharply in the direction of short-term trading than they have ever been.

Besides, luxury goods makers like Hermes and LVMH haven’t experienced the same stock price lifts.

–new bets on China?  But, if so, why no response from Hermes, LVMH or Coach?  Also, why would UK-US (lower-end) jeweler Signet be having better stock performance than the other three?

–influence of EU investors?  My impression has been that a lot of the damage to Hong Kong stocks during the middle months of 2012 was due to panicky selling by EU-based investors.  The clear new bullishness emanating from Europe may be resulting in portfolio managers plowing back into Asia.  That might explain why 1929 or 1128 are doing well.  But why TIF?  …or why SIG and not LVMH?

–minimizing exposure to the EU?  For aesthetic reasons, I like this better than “bets on China,” because it’s a more sophisticated wager–one based on avoiding a bad experience rather than necessarily having a good one.  Still, why TIF?

You could build a “synthetic” TIF-ex-the-EU, by combining SIG +1929.  Not a perfect replacement, but if the main idea is to avoid the EU probably an acceptable one.

my take

I’m sure there’s a method to the apparent madness.  At this point, however, I don’t know what it is.

I could say that professional investors are shifting their portfolios toward secular growth areas (as opposed to more cyclical ones) where they see profit growth will be the strongest next year.  Yes, that’s true, but it’s what most managers always do.  So it’s flirting with tautology.  The crucial question is why jewelry and casino gambling?

Is there something special about these two areas?  …or is there something awful about everything else?

One thing I am convinced of is that solving the puzzle correctly can bring investing rewards.

I own 1128 and 1929 but none of the rest of the names I’ve mentioned here.  I have no burning desire to add to any–although if I can figure out what’s going on I might develop one.

If someone were forcing me to buy  one of the names, it would probably be 1929.  The fact that it’s the most speculative of the stocks is not a coincidence.  I should knock off the caffeine instead.

Tiffany’s 2Q12: interesting stock market reaction

August 30, 2012 By in earnings conference calls, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , Leave a comment

the report

Prior to the New York open on August 27th, TIF announced its 2Q12 (ended July 31st) results.  Earnings were up by 2%, year on year, at $92 million.  Eps were $.72/share, also up 2% yoy.  Ex non-recurring items, which depressed 2Q11 eps by $.16, the yoy earnings comparison was negative–down 17%.

Quarterly sales came in at $887 million, also a 2% yoy advance.   Negative currency effects–a 2% decline of Asia-Pacific currencies against the dollar, and a 9% fall of European, reduced that figure from what would have been a 3% constant currency gain.

EPS were a penny below the Wall Street consensus of $.73.

Although TIF said its 2Q12 performance met its expectations, it lowered full-year guidance for the seond time in two quarters.  The new full-year eps range is $3.55-$3.70 vs. guidance of $3.70-$3.80 announced with 1Q12 results.

The stock?  It rose by 7%+ on this news.

the details

the Americas 

Same store sales were down 5% yoy, and minus 9% in the flagship store in NYC.  All the weakness came from domestic customers.  Sales to foreign tourists were flat, with a falloff in EU buying offset by increases in Asian visitor purchases.

Florida, Texas, and Guam were notable areas of strength.

Asia-Pacific

Same store sales were down by 7%, two of those percentage points due to currency weakness.  Slight price increases, lower unit volume.

Japan

12% same store sales growth in local currency, offset somewhat by 2% yen weakness vs. the US dollar.  Continuing recovery from Fukushima-related weakness.

Europe

2% same store sales growth was more than erased by 9% currency weakness.  Continental Europe was stronger than the UK.  Foreign tourist buying made the figures look better than they would have been from local customers alone.

the balance sheet

It’s not something I’ve commented on before.  But the yoy change is remarkable.

During 2Q12, TIF raised $250 million in long-term debt, $60 million of which went to retire maturing borrowings.

Total debt now stands at $940 million, cash at $367 million.  A year ago, the figures were $694 million and $565 million.  Put another way, the company has gone from net debt of $129 million to net debt of $573 million, a $444 million negative swing, over the past twelve months.

The figure means TIF invested close to half a billion dollars in excess of funds generated by operations in business expansion.  Most seems to me to have been used to build inventories, with a modest amount for expanding the store network.

market reaction has been positive…

…even though there’s evidence of a continuing slowdown in high-end jewelry buying in both the US and China.  Nevetheless, TIF shares appear to have bottomed around $50 in June.  They’ve been rising steadily–and outperforming the overall market–since.

my take

TIF shares are up over 20% during July and August, despite the weak business outlook.  I hadn’t expected this.  I’d thought the stock would likely languish until there were clear signs of a pickup among either Asian or US customers.

Yes, the company is very well-managed.  The newly raised debt gives it a larger cash cushion, in case its business remains in the doldrums for an extended period.  It seems clear to me that TIF has, prudently, shifted out of rapid expansion mode and into a more defensive cash generation stance.  If this turns out to be the last downward earnings revision, the stock was inexpensive at $50.

Still, I think it’s interesting that the market is willing to pay for an anticipated recovery in TIF’s business so far in advance.  It conveys to me the suggestion of an underlying bullishness among market participants that contrasts sharply with bearish media sentiment.

As for TIF shares themselves, I’d prefer to wait either for a price in the mid-$50s or the 3Q12 earnings announcement rather than buy here/now.

AAPL’s 3Q12: more questions than answers

July 25, 2012 By in earnings conference calls, Industry Analysis, internet, Luxury goods, Retail, Stock ideas, Technology, Wireless Tags: , , , , , , Leave a comment

the results

After the New York close yesterday, AAPL reported financial results for 3Q12 (APPL’s fiscal year ends in September).  The company recorded revenue of $35.0 billion (+22.4%, year on year) for the three months and net profit of $8.8 billion (+20.3%).  Earnings per share were $9.32 (+19.6%).

For most companies, these figures would have been great news.  But for AAPL, the results represent a marked deceleration from the growth rate it had been achieving over the past few quarters.  And, although the eps exceeded AAPL’s always ultra-conservative guidance, they fell substantially below the Wall Street consensus estimate of $10.37.

earnings revisions underway

As I’m writing this, those analysts are in the process of revising down their expectations for 4Q12.  Although the process isn’t yet complete, it looks like the 4Q12 consensus will drop by about a dollar a share, from $10.50 to $9.50.  That would leave the consensus for the current fiscal year at around $45.

Next fiscal year is a more interesting issue.  The current earnings consensus is about $55.  I don’t think there’s any particularly penetrating insight built into this number.  I view it more as an extrapolation of the earnings progress we’ve seen (until) recently, with some room left for upward revision.

If, however, we do the same kind of back-of-the-envelope calculation based on 3Q12 actuals and the new 4Q12 estimates, we get a full-year run rate–without factoring in any growth–of $40-.  We’re also looking at what would now appear to be very challenging earnings comparisons for 1Q13 and 2Q13 (the actuals for 1Q12 and 2Q12 are $13.87 and $12.30 = $26.17).  I don’t think analysts will change their year-ahead numbers today.  But I’d expect their earnings forecasts for fiscal 2013 to drift down toward $45-$48 over the next month or two.

details

–Mac sales (14% of the AAPL total) were flat, quarter on quarter, and up 2%, year on year.  That’s better performance than the PC market overall had, but not by much.  Buyers may have held back until late in the quarter when a new line of laptops, containing more powerful INTC chips, was launched.  Still…

–iPhone sales (46%) were down 26% qonq and up 28% yoy.  Here, too, results may have been negatively affected to some degree by potential buyers waiting instead for the next iPhone, rumored to appear in the fall.

–iPad sales (26%) were the high point of the quarter, growing by 44% sequentially and 84% yoy.

–the rest, which probably won’t make much difference to investors:  iTunes sales were $1.8 billion; iPod units were down 10% qonq and -12% yoy.

–Europe, which accounts for somewhat less than a quarter of AAPL’s business, showed no growth at all.

my thoughts

The strength of the dollar, buyers holding back with the expectation that fresh versions of new products will soon be on offer, and distributors shrinking their inventories all seem to have subtracted a bit from AAPL’s 3Q sales.  But I see all these as minor negatives, whose absence wouldn’t have materially changed results.  Ex the iPad, AAPL’s business has slowed down considerably from the torrid pace of the first half of the fiscal year.

The question is why?

Certainly, the slowdown in world economic growth caused by the EU financial crisis is playing a role.

Other, structural, factors might include:

–changing market dynamics in smartphones, as weaker competitors like RIMM and NOK have no more market share to lose, and the new, more difficult, struggle for customers is between AAPL and Samsung

–the development of $100 and $200 smartphones for low-end customers, a segment AAPL won’t participate in, is cutting into business in China

–the emergence of ultrabooks as lower-cost, Windows-based competitors to the Macbook Air

–higher-end buyers of tablets deferring purchase so they can see new Windows 8-based offerings in the fall.

My guess is that the main culprit–if that’s the right kind of term to use for a $8.8 billion profit–is the macroeconomy.  But I also think we’re seeing the first signs of a serious competitive response to AAPL’s market dominance of the past few years.  Usually, though, structural market share shifts don’t happen all at once.

the stock

How much does pondering about the competitive environment for AAPL actually matter for the stock?

Not much, in my view, unless you take an extremely negative view of how competition in the smartphone and tablet markets will play out for AAPL–in other words, unless you think AAPL is going to turn into a CSCO or MSFT.  My basic thought is that the worst that can reasonably be expected to happen has already been discounted by the market by the repeated reluctance of AAPL’s PE multiple to expand in response to stellar earnings reports.

To fool around with a few figures,

…let’s assume that AAPL will have eps of $45 a share in fiscal 2012.  That’s not a super-conservative number, but I don’t think it’s aggressive, either.  Were world economies to turn up over the coming year, it might end up being pretty low.

The current share price is about $575.  Subtract out the $150/share in cash AAPL will have by the end of fiscal 2013.  That leaves a price of $425–meaning a PE, ex cash, of 9.4x.

That’s too low, to my mind.

9.4x is about 10% below the forward PE on the S&P 500.  It’s about the same rating as MSFT gets, and it’s about a point above CSCO’s.  But both of these latter firms have weak management and negligible profit growth prospects.

In other words, AAPL already trades as if it has gone ex-growth.  I think that’s the reason AAPL is only down 4% as I finish this post, despite having missed the Wall Street consensus by a mile.

The risk is, of course, that AAPL somehow goes the way of MSFT or CSCO.  If it can manage to avoid that fate–and I think it will–downside appears relatively limited.  And the upside in a stronger world economy could be large.