Category Archives: Luxury goods

Coach’s new Hong Kong Depository Receipts

December 14, 2011 By in China, emerging markets, Hong Kong, Industry Analysis, Luxury goods, Retail, Securities regulation Tags: , , , , , , , , , , , Leave a comment

Hong Kong Depository Receipts (HDRs)

I didn’t know until I was reading the Wall Street Journal this morning that Hong Kong had depository receipts (DRs).  But COH just issued one.

Sure enough, checking with the Hong Kong Stock Exchange website, HDRs have been permitted in that market since mid-2008.  Not many takers so far, however.  The HKSE lists Vale, the Brazilian iron ore company, with two HDRs; SBI, a Japanese internet-based financial, has one.  And now there’s COH (6388 is the Hong Kong ticker symbol).

what they are

The basic idea behind a DR is to provide a simple way for a domestic investor to buy a foreign stock without having to set up a brokerage account in the foreign country or to deal with foreign exchange, either in buying and selling or in receiving dividends.

The buyer doesn’t actually get a share of stock, however.  Instead, he gets an IOU (the receipt) from some financial entity, usually a bank, that holds the real shares in a depository account.  The bank handles all the necessary administrative details, like foreign exchange and the sometimes messy business of meeting the foreign country’s securities and tax regulations.

ADRs

The company whose stock underlies the DR may use the DR issuance to raise capital in a new market, where investors may well pay a higher multiple for shares than would be possible in the home market.  In the biggest DR market, the US, I’ve found this often the case–and regard it as a bad sign.  In my experience, seeing a mature company launch an ADR means it has lost its allure for more knowledgeable home market investors.  (Another important factor in ADR issuance in particular is that it circumvents the more stringent disclosure and reporting requirements that the SEC has for US-based companies.)

In the COH case, however, the firm has not created 6388 to raise new funds–after all, operations are generating $1 billion in annual net cash.  It has created a DR to raise its public profile in Greater China.

their Achilles heel

The bane of DRs, in my opinion, is low trading volume and potentially Grand Canyon-wide bid-asked spreads.  I’ve found the problem especially acute in cases, like this one, where the operating hours of the home and DR exchanges don’t overlap.  According to the HKSE website, trading in 6388 over the past five days has only totaled about US$11,000.  The bid-asked spread shown is about 2% (my experience in the US is that the spread for a stock like this could be more like 10%).  December is usually a dreary month for investors, so January will probably give a better read on volume.

worth watching

Nevertheless, COH has probably gotten more publicity in China through the HDR listing than it would have been able to buy with the money it spent to create its HDR.  The phenomenon itself it worth watching, as well.   Two reasons:

–we may ultimately reach a tipping point where having a HDR acquires a cachet that exerts a positive influence on the home market security price, and

–pioneers like COH may have a leg up on obtaining an eventual listing on a mainland exchange.

Tiffany(TIF): strong 3Q11 + weak guidance = 8.7% stock drop

November 30, 2011 By in Asian economic development, China, Current Market Thoughts, earnings conference calls, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Recent Market Action, Retail, Stock ideas Tags: , , , , , , , , , , Leave a comment

the results

TIF reported its 3Q11 (ended October 31st) earnings results before the start of New York trading yesterday morning.  For the three months, the company took in revenue of $821.8 million.  It earned $89.7 million, or $.70 per share.  This represents a 52% increase over the $.46 a share the company earned in 3Q10.  The 3Q11 figure handily beat the Wall Street consensus of $.60 a share, even exceeding the most optimistic estimate, which was $.67.

TIF also continues to buy back stock at around the $65-$66 level.

the guidance

TIF says it expects 4Q11 earnings to come in between $1.48-$1.58 per share.  This represents a (mere) 6.3% increase over the $1.44 per share the company posted for 4Q10.  This guidance falls near the bottom of the 4Q Wall Street analysts’ estimate range of $1.51 – $1.69.  The median estimate, which  may be revised down, has been $1.64.

Just for reference, a year ago TIF guided to eps of $1.29 and reported $1.44.  If we adjust management guidance for possible lowballing of the same magnitude, we arrive at a figure around $1.65.  That would be a year on year gain of 15% or so.

the details

3Q11 business was stellar.  By areas:

–the Americas, 47.9% of TIF’s sales (49.7% a year ago), rose by 17% yoy.

–Asia Pacific, 22.6% (19.6%), was up by 44%

–Japan, 18.1% (19.1), rose by 12%

–Europe, 11.4% (11.6%), was up by 19%.

Strength was in high-end merchandise.

Where’s the problem?

In its guidance, TIF alluded to “recent sales weaknesses” it has noticed in Europe (no surprise there–and it’s still a tiny part of TIF’s overall business) and in the eastern US.  In its conference call, the company said the western US remains strong and buying by foreign tourists continues to be a significant positive.  But it has noticed a slowdown in purchases by domestic customers in the Northeast and Mid-Atlantic states.  That’s the reason for its relative caution.

my thoughts

On the surface, the Boston-Washington corridor slowdown seems odd.  The just-released National Retail Federation survey (see my post) highlights the Northeast as an area where holiday spending is surging.  However, I’d already heard the same story as TIF’s from another (privately held) luxury retailer doing business along the East Coast.  I’d attributed that to company-specific problems, but it’s sounding like I’m wrong.

What could be the cause?  …pent-up demand from the recession being satisfied over the past year?  …lower bonuses on Wall Street?  …Newt Gingrich taking a lower spending profile (a joke)?

TIF is still projecting sales in the Americas to be up by 15%-20% yoy in 4Q11, but is now expecting the lion’s share of the sales growth to come from buying by foreign tourists.  This contrasts with the 50-50 split the company has seen in sales growth  between locals and foreigners during recent quarters.

TIF is currently earning at a $4 per share annual rate.  This means it’s now trading at a bit over 15x earnings.  That’s an unusually low multiple by historic standards.  It’s also where the TIF management sees considerable value, as evidenced by its stock buybacks.  In addition, Asia Pacific sales probably amount to about a third of revenues, if we factor in sales to tourists in the US and Europe.  Those sales alone seem to me to be enough to grow the entire company’s profits by at least 10% per year.

On the other hand, if US sales of luxury goods to domestic buyers are beginning to flatten out after an extraordinary burst of buying over the past year–and continue flat for a while–then earnings comparisons for TIF over the next few quarters will likely be lackluster.  Any potential bids from European luxury goods firms (I’ve regarded this possibility as very small, in any event) will likely stay on the shelf until the EU’s economic future is less cloudy.

All in all, I’m content myself to wait before adding to my holding.  If I owned no TIF at all, however, I’d be tempted to buy a small amount now and await further developments.

 


the 10th Bain luxury goods study, October 2011(II): trends

November 1, 2011 By in Asian economic development, Bain luxury goods study, China, Current Market Thoughts, emerging markets, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas, Strategy Tags: , , , , , , , , , , Leave a comment

Yesterday, I wrote about prospects for the luxury goods industry this year.  Today’s post is about trends in the business.

areas of current strength

Bain’s estimates current growth prospects by category as follows:

hard luxury (jewelry, watches)     +18%

accessories          +13%

luxury goods in general     +10%

apparel          +8%

perfume/cosmetics          +3%

art de la table          +3%

cyclical forces…

As you’d expect, more expensive items, those sold through wholesalers (who stop buying, period, in recession and turn all their efforts into converting their existing inventory into cash) and those with a large percentage of aspirational buyers all fare the worst in an economic downturn.  Luxury watches are the prime example.  Anything sold through department stores might also qualify.

Men’s apparel is also highly cyclical.  For whatever reason, women continue to buy luxury goods during a downturn.  True, they may trade down a bit and space their purchase farther apart.  But men tend to stop dead in their tracks.  One reason is that big traditional men’s categories like business suits and formal wear are expensive and easily postponable purchases.  Another is that women control the purse strings in most households around the world.

So it’s no surprise that this year watches, expensive jewelry and men’s apparel are all doing extremely well.

Maybe the unusual strength of luxury goods indicates there’s some pent-up demand being met.  In any event, luxury buyers are clearly signalling with their wallets that, for them,  the economic downturn is a thing of the past.

…and secular

who

The traditional picture of a luxury goods buyer is: female, older, from either Europe or Japan.

That’s changing.  Increasingly, customers are younger, more casual,  and male.  These may be trends in many geographies.  However, the main reason theses attributes are appearing on the radar screen is that they describe the Chinese luxury goods consumer.  At 20% of the market, Chinese buying is already very big, and it’s growing very quickly as well.

where

For at least the past decade, makers of luxury goods have been upping their own retail presence.  They are doing this so they can capture the wholesale-to-retail markup.  It also gives them greater control over their brand image and their inventories.

Nevertheless, the luxury goods industry is still predominantly wholesale.  But Bain thinks that the percentage of industry sales through wholesale channels will have shrunk in 2011 to 72% of the total from 75% just two years ago.  This comes despite the business cycle strength of department stores.

online

Internet sales comprise only 3% of total luxury sales at present.  But the category is expanding very rapidly.  Bain thinks online sales will be up by 25% this year, to €5.6 billion.

Online has two segments:  full price and off-price.

Full price is is growing faster than overall luxury sales and comprises about two-thirds of all internet business.  But it’s being left in the dust by off-price, which is one-third today but which amounted to only 20% of online sales four years ago.  Private “flash” sales are the fastest growing part of off-price.

outlets

Off-price non-internet sales amount to about €10 billion, or 5% of the overall luxury market.

Outlet sales grew by 22% last year.  Bain projects them to expand by another 13% in 2011.  That’s faster than the overall luxury goods market, despite the return to health of the full-price market and the consequently smaller amount of unsold merchandise sloshing around in the system.  (Although Bain doesn’t talk about it, part of the answer to this apparent contradiction is that luxury goods companies also produce low-end “outlet only” merchandise.)

This isn’t news.  Outlets are a long-standing, mature channel in the US and Europe.

What is noteworthy is the rapid growth–around a +30% clip–that’s just starting in off-price sales in Asia and Latin America.

brand proliferation, company consolidation

Over the past ten years, the market share of the top five luxury brands has shrunk from 26% of the market to 21%.  In contrast, the share of the top five luxury goods companies has risen from 30% to 35%.

To me, this means market power is shifting from the owners of iconic individual brands to companies that are sophisticated enough provide a common platform–supply chain, support for in-house retail, dealing with consumer preferences in many different geographies–on which a group of disparate brands can operate in an increasingly complex global environment.

More and more, these technology and management factors will be the keys to success.  This also implies that these factors will increasingly be the selling points used to convince acquisition targets to join a luxury conglomerate.  The recent sale of Bulgari to LVMH is a case in point.

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

October 31, 2011 By in Bain luxury goods study, Current Market Thoughts, economics, Industry Analysis, Luxury goods, Retail Tags: , , , , , , , , , 1 Comment

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.

China

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.

Japan

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.

the China-US trade route: getting goods into the stores for the holidays

October 16, 2011 By in Asian economic development, China, Current Market Thoughts, emerging markets, Hong Kong, Industry Analysis, Luxury goods, Retail, Strategy Tags: , , , , , , , , , Leave a comment

planning for the holidays

It can take a surprisingly long time for a retailer to go from a hazy concept of what a store (or a chain) should look like for the holiday sailing season to seeing the shelves actually stocked with merchandise.

Let’s skip over the planning time it takes to figure out exactly what items, and in what quantities, the retailer wants to buy and start with what happens once he calls up a manufacturer or wholesaler and places an order.

Let’s also, for the moment, not focus on computer and consumer electronics items.  There, the issues are making sure enough components and manufacturing capacity are available.  That’s what takes months (a complex semiconductor, for example, may take three months to fabricate).  Actually assembling and testing a device takes a day or two; day three gets it to the plane; on day five, the Fedex truck is rolling to deliver the item.  So  …a week, more or less from manufacturing order to warehouse.

timing order flow from China

For, say, garments from China the story is completely different.  Assuming manufacturing capacity is available, it may take a week to manufacture/assemble a large order and get it to a port.  Pencil in another day for loading, two weeks for a container ship to reach Long Beach, California.  Add a day or two (or three…) for unloading there, and the better part of a week for the train the shipment is placed on next to reach the East Coast  Then there’s a trip to a company warehouse, where the goods are parceled out into smaller lots for delivery to the back rooms of retail stores.

That all adds up to about two months for an isolated rush order that sails through the system without any problems.

But problem-free order flow won’t always (ever?) be the case.  Rush orders cost extra.  And you can’t have all the merchandise arriving at the retail stores on the same day–no one has enough trucks or doorways that are wide enough.  So three months is probably a better figure.

using the data

What does this mean if we want to monitor port activity as a way of assessing retail plans for the holiday season?

Figuring merchandise should be in the stores in early November, look for a pickup in port activity in the area around Hong Kong in late July or early August, and an uptick in the ports around Los Angeles–LA and Long Beach–in late August or early September.

…so far?

So far there’s no pickup to be seen.  Hong Kong-area ports are flattish, and the southern California ports were down 5% year on year in August.  Li & Fung, the well-known Hong Kong-based logistics company, indicates in its latest monthly Chinese Purchasing Managers Index report that new orders in China are perking up a bit in September.  But these seem to be for domestic consumption, not exports–and stuff being made right now can’t get to foreign markets before yearend anyway.

investment implications

Hong Kong figures are doubtless depressed by the current situation of the EU.  Also, to the degree that they can (not much), importers have been avoiding Long Beach for years because of the port’s stunning inefficiency.  Therefore, there may be some room for a contrary bet that the upcoming holiday season will be better than dreary port figures suggest.  WMT, M or KSS might be ways to participate.

I have no desire to do so, right now at least.

The pluses would be that the stocks are trading at low PEs, and that expectations are low.  But I don’t know that well the mid-to-lower-end merchandisers who would be beneficiaries of a surprising Christmas spending surge.  So I’m certain to be the dumb money in this trade.

For another thing, I think we’re in for a luxury goods and gadget-driven holiday–jewelry, smartphones, tablets, e-readers and stuff like that.  So, as an investor I’m more comfortable betting on a continuation of the current haves vs. have-nots trend than on its reversal.

But I will be keeping an eye on the ports over the next few weeks for new data that might change my mind.