Category Archives: Luxury goods

LVMH’s acquisition of Bulgari

March 13, 2011 By in Current Market Thoughts, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , Leave a comment

The LVMH bid

About a week ago, LVMH announced a successful bid for control of the publicly traded Italian jewelry manufacturer and retailer, Bulgari.  Bulgari’s offerings, many of which reflect the founding family’s Greek heritage, mostly range in price from $2,000-$10,000.

The terms:

LVMH will issue shares of its stock in exchange for the 51% of Bulgari controlled by the Bulgari family.  It is offering €12.25 in cash for the 49% held by third parties.

what’s in this for Bulgari?

1.  A significant part of Bulgari’s business is high-end watches, the most extremely cyclical category in the fine jewelry business.  Watch sales are especially difficult to monitor, since wholesalers play such a large role in their distribution.  As a result, economic downturns have tended to be white-knuckle events for the company–and its stock.  Being part of a larger, more stable conglomerate will mean less wear and tear on management’s stomach linings.

2.  The Bulgari family gets two seats on the LVMH board, so it retains a management presence in luxury goods.

3.  Younger-generation family members who don’t want to be involved in the business and would rather have their inheritance right now and in cash will be able to sell without endangering the Bulgari family’s control position.

4.  Francesco Trapani, a Bulgari nephew and the current Bulgari CEO, will become head of the LVMH watches and jewelry business, an organization twice the size of Bulgari.

…and for LVMH?

1.  The larger fine jewelry business means LVMH will be in a stronger competitive position versus other luxury goods conglomerates like Richemont.

2.  The willingness of an entrepreneurial luxury goods family like Bulgari to join the LVMH fold contrasts sharply with the frosty reception of the Hermès management when it learned LVMH had acquired a large ownership position.  The Bulgaris, fellow entrepreneurs, may be able to smooth ruffled feathers in a way that Bernard Arnault has been unable to.

3.  The Bulgaris will likely also be instrumental in convincing other European luxury goods families to follow their lead.

What’s next?

Wall Street rumors have TIF (I own it) as the next target of LVMH and Mr. Trapani.

I don’t agree.  The main attraction of TIF would be the fit between its business and Bulgari’s.  TIF is a dominant factor in “statement” jewelry costing $25,000-$50,000 or more.  The company is unique in its ability to–at the same time–be a leader in the market for jewelry and other gifts that retail for $500 and below, without diluting its brand image (i.e., alienating the very big spenders).   I don’t know why, but TIF has never been very good in the middle; Bulgari would fill the doughnut hole in Tiffany’s offerings.  That’s the positive side.

On the other hand,  Europeans don’t regard TIF as a legitimate luxury brand.  That’s partly because it’s an American company, partly because of its lower-end business.

What is Mr. Arnault’s game plan?  I think it’s to collect up as many small, inefficiently run European family luxury goods businesses as he can over the next few years.  He’ll doubtless be able to use the brand names he acquirers more effectively than their current owners.  And he’ll enjoy manufacturing, distribution and marketing synergies.

His main selling points will be two:  the positive experience of the Bulgari family, and the ego appeal of joining a very exclusive club.  Were he do anything so déclassé as acquiring an American “quasi-luxury” company like TIF, a lot of the positive effect of the Bulgari merger on potential European luxury acquisition candidates would be lost.  Yes, TIF is doing a land office business in Europe currently.  But that’s because the affluent there are trading down.

TIF may eventually be on the Arnault to-do list, but I think he’s gunning for smaller, local game first.

 

Tiffany’s excellent 3Q2010

November 26, 2010 By in Current Market Thoughts, earnings conference calls, Industry Analysis, Luxury goods, Retail, Shaping a portfolio for 2011, Stock ideas Tags: , , , , , , , Leave a comment

the results

Tiffany reported surprisingly good results for 3Q2010 before the market opening on Wall Street Wednesday morning.  Earnings per share were $.46  vs. analysts’ consensus expectations of $.37.  Sales were up 14% year on year, again higher than anticipated.  Worldwide comparable store sales were up 7%.  In contrast to 2Q2010, when TIF reported strong results but saw its stock fall 6% on the news, the shares rose over 5% in Wednesday trading.

The company reported that results improved month over month through the quarter, and that 4Q2010 sales growth “is exceeding our expectations” so far.

Based on the strength of the third quarter, TIF is raising full-year guidance to a range of $2.72-$2.77, compared with the previous range of $2.60-$2.65.  In other words, the company is raising its fourth quarter guidance by $.03.  The content and tone of the company’s remarks, however, suggest that this is a really conservative number.

highlights

Generally speaking, TIF’s third quarter followed the overall pattern of the second (see my post), only business was stronger in almost all areas.

Sales outside the US were higher than domestic sales for the first time.  Given the much faster growth rate of the Pacific ex Japan and Europe for TIF, it may be a long time before US sales catch up, if they ever do.

Third quarter revenues break out as follows:

US     $331.8 million, up 9% year on year,  49.7% of total sales

Japan     $130.8 million, up 12%, 19.6%

Asia Pacific     $127.1 million, up 24%, 19.1%

Europe     $77.5 million, up 22%, 11.6%.

There were significant currency fluctuations during the quarter, with the yen rising and the euro falling.  On a constant currency basis, sales in Japan would have been up only 2% and those in Europe would have been up by 29%.

Comparable store sales were up as follows:

Worldwide     +9%, +7% on a constant currency basis

Americas     +6%, +5%

Asia Pacific     +15%, +11%

Japan     +8%, -2%

Europe     +16%, +24%

Let’s say that the current geographical growth rate continues at the same level for the next five years.  Unlikely (something unexpected always happens), but if so, the company’s geographical sales breakout would look like this:

US     39%

Asia Pacific     29%

Europe      21%

Japan     11%

In 2015, then, TIF would have about half its sales coming from Greater China and Europe, the US would remain a significant contributor, and Japan wold grow a little in absolute terms but shrink in relative size.  Not a radical transformation from where the company is today, but a more than subtle shift in the sources of earnings.

details of the quarter

Americas

Sales were driven by higher prices rather than more units.  Sales of items priced under $500, mostly silver ,were down year on year.  In contrast, sales of items price over $500 were up 10%.  Management said it sees this divergence as reflective of the shape of economic recovery in the US, not the effect of trading up.  I presume this isn’t a social/political opinion, but rather a statement of what its customer analysis software is telling it–that wealthier Americans are feeling more comfortable, but that the less affluent are not.

A greater proportion of sales is coming from foreign tourists.

Year on year sales growth was +1% in August, +6% in September, +10% in October.

Comp sales in the flagship Fifth Avenue store were down 3%, but that’s likely because the Annual Blue Book sales event at the store was held in October last year vs. in November this year.

TIF is “pleased” with the early reception of its new leather goods line (I don’t know the company well enough to understand whether “pleased” is good or bad).

Asia Pacific

Half the sales come from Greater China.  This half also has the highest growth.  As in the US, year on year comparisons strengthened as the quarter progressed.  Fine jewelry and engagement rings were especially strong.

Europe

Sales growth was driven both by increasing units sold and increasing prices.  the UK and Continental Europe were equally good. There was no trend to monthly sales.  Most business is done with local residents, but foreign tourist sales are beginning to increase as a percentage of the total.

Japan

Sales comparisons were increasingly favorable as the quarter progressed, with comps turning positive in October.  Relatively flat sales in yen were a product of decreased units and higher prices.

overall

Strength was in the higher end.  Silver was good only in Europe and Asia Pacific.

The company continues to rehire staff laid off during the recession.

It will accelerate new store openings in 2011.

TIF has bought $72.8 million of its own stock, year to date, at an average price around $43.  It has $329 million left to spend under the current board authorization, but will probably not spend the full amount this quarter (which says the company doesn’t see the stock at $60+ as a screaming buy).

The company will probably raise prices again early next fiscal year, to offset higher raw materials prices.  Platinum and silver are the most important, with gold not so key.  Labor costs are also under good control.

my thoughts

I should start by saying that I was struck when I wrote about TIF’s second quarter that it was as cheap as I’d ever seen it.  So I ended up buying some in September.

TIF seems to me to be in an unusually advantageous position.

–It appeals to Europeans trading down and to aspirational buyers in emerging Asian economies.

–Although its main market, the US, is mature, TIF is a dominant force.  The company benefits from consolidation of the industry, as well.  And recession has accelerated the withdrawal of mom and pop jewelers from the market.  I regard the introduction of leather as an important telltale that TIF thinks it needs new ways to spur growth domestically.  If there’s any slowdown in the growth pace, I think it will be here.

–For investors worried about weak domestic growth and 10% unemployment as investment (not social) issues, TIF offers non-US exposure plus a domestic focus that is far away from the areas of greatest concern.

For me, today, the main issue with TIF is price.  Let’s say TIF earns $2.85 this year and $3.40 (a stretch, I think) in 2011.  And let’s say it deserves a 20x multiple.  That would mean the stock could trade as high as $68 a share next spring.  A 10% gain is nothing to sneeze at, but I think there must be better values around.  As an owner, however, I have absolutely no reason to want to sell.


Coach is starting off fiscal 2011 with a bang

October 27, 2010 By in China, Current Market Thoughts, earnings conference calls, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , Leave a comment

COH reported earnings results for the first fiscal quarter of 2011 (the company’s fiscal year ends in June) before the market opened in New York yesterday morning.  The news was strong enough to push the stock up by about 12% that day.

the results

Sales for the quarter were $912 million, up 20% year on year.  Earnings per share were $.63, up 43% vs. the comparable period in fiscal 2010.  This was far ahead of the analysts’ consensus for the quarter, which was $.55.  Wall Street expects the company to earn about $2.75 for the full fiscal year, although I would imagine that number is even now being revised up.

Two “unusual” factors helped performance a bit.  The weak US currency turned sales in Japan from a 3% gain in ¥ ( impressive itself, in a market that’s shrinking) to a 14% increase in $.  Also, US department stores are restocking in anticipation of a better holiday season, so their orders were very strong.  Still, the COH figures were very good.

why I think COH may be an interesting stock Continue reading →

The future of luxury goods: the Bain study (II)

October 26, 2010 By in China, Constructing a Portfolio, Current Market Thoughts, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Portfolio management, Retail, Stock ideas, Strategy Tags: , , , , , , , , , Leave a comment

This is the second of two posts on the latest Bain report on luxury goods.  Here’s a link to the first.

the recent past

If you were to characterize the dominant consumer of luxury goods over the past thirty years, the description would be:

–older

–female

–European or Japanese.

In all likelihood, she would have done the bulk of her spending in a department store.

That’s starting to change.

For a long time, Japan was considered the holy grail of luxury retailing.  A much larger segment of the population there than elsewhere was interested in luxury goods.  Customers wanted the highest quality (read: most expensive).  They purchased often and were relatively insensitive to price.  In fact, luxury retailers routinely set their Japanese retail prices 40% above the European level.

For some years, however, the Japanese luxury star has been waning.  Why?  The market may finally be saturated.  Twenty years of weak economic performance may have robbed consumers of the means to afford luxury goods.  Younger Japanese are clearly not interested in emulating their elders in this–or in much of anything else, for that matter.  In any event, Japanese luxury retailers, whose business was stagnating beforehand, were especially hard hit during the recession.  Business hasn’t been recovering, nor is it expected to.

Europe, although it declined less than the US in 2009, has been a laggard in recovery during 2010.  Damage from toxic financial instruments, questions about the stability of the EU and collective decision among countries to take the path of fiscal austerity as the road to recovery.

In the US, in contrast, the rebound has been surprisingly strong.

China‘s luxury goods consumption grew by 20% during the recession and has accelerated to what Bain estimates to be a 30% advance in 2010.

the new face of luxury…

…is:

–younger

–male

–Chinese.

He is more likely to shop in a brand-owned shop at home, or in Macau or Hong Kong.  That way he is assured the merchandise isn’t counterfeit.  He is, I think, more apt to travel to Europe than the US because the States makes it hard for him to get a visa.  But he’ll do luxury shopping while on vacation, since the prices are much lower.

elements of growth

outlet stores

Long a staple in the US, outlet stores have been expanding rapidly in Europe in recent years.  They’re just about to hit Asian shores as well.  Outlets sell three types of merchandise:

–overstocks,

–seconds and

–products made specifically to be sold in outlets, typically a lower standard of quality than the branded goods sold in front-line company shops or in department stores.

Bain estimates that outlet sales will be up by €2.2 billion ($3.1 billion) vs. 2008 results, at €8.2 billion ($11.5 billion), or just under 5% of total luxury sales.

online

Bain estimates that luxury sales on the internet are growing at about 20% a year.  The consultancy thinks online revenues will total €4.2 billion ($5.9 billion) in 2010, and will comprise about 2.5% of all luxury goods sales.

That’s €1.2 billion ($1.7 billion) ahead of the 2008 level.  The largest part of the increase from two years ago (€700 million) comes from off-price business done on “private sale” websites.  These sites–like Gilt Groupe, RueLaLa or Buy VIP–now account for 30% of online revenues, up from nothing three years ago.

company-owned stores

Distribution of global luxury goods is gradually shifting from indirect to company-owned stores.  Branded retail stores will likely account for 27% of total sales this year, up from 23% just two years ago–a result of increasing new store openings and same store sales growth that’s much faster than the department store channel’s.  At the very least, the luxury goods manufacturers are picking up the wholesale to retail markup–less their costs, of course.  And it’s possible that the larger number of sales locations is expanding the overall market, as well.

China

Bain puts China’s luxury goods purchases at €9.2 billion ($12.9 billion) for this year.  That’s €3.3 billion ($4.6 billion) more than in 2008.  Add €8.3 billion ($11.6 billion) from the combination of Hong Kong, Taiwan and Macau, and “Greater China” accounts for €17.5 billion in luxury sales.  That would be good for third place among individual countries, just a tad below Japan, whose luxury goods sales are projected to be unchanged at €18 billion ($25.2 billion) this year.

investment implications Continue reading →

Global luxury goods market: the ninth annual Bain study, October 2010

October 25, 2010 By in China, emerging markets, Hong Kong, Industry Analysis, Luxury goods, Retail Tags: , , , 1 Comment

Note:  You can also get my analysis of the 10th Bain Luxury Goods Worldwide Market Study from October 2011.

I’m going to write about this topic in two posts.  Today’s will cover the present structure of the luxury goods market and the effect of the Great Recession on it.  Tomorrow’s will look at growth prospects for the industry, changes occurring to its structure and investment conclusions.

The industry data come from the 9th annual Bain and Company Luxury Goods Worldwide Market Study, directed by the partner who heads Bain’s fashion and luxury practice, Claudia D’Arpizio.  The results were presented at the Fondazione Altagamma conference in Milan earlier this month (thanks to Bain for sending me a copy of the presentation). You can find a summary on the Bain website.

structure of the market

size

The global luxury market peaked in 2007 at a sales value of €170 billion ($238 billion) in 2007.  Revenues fell during the recession (an unusual occurrence) by about 8%.  Bain predicts that the industry will bounce back to around the former peak this year and exceed it by a few percentage points in 2011.

participants

Bain counts 232 brands in the luxury goods market.  The top 6% of the brands average €1.8 billion ($2.5 billion) each in sales and together control 10% of the market.  The bottom 38% average €300 million each and control only 15% of the market.  It seems to me this segment, which has suffered more than bigger brands from the recession, is ripe for consolidation.

distribution

In 2008, 78% of the industry’s sales were made through third parties, notably department stores.  The remaining 22% went through company-owned stores.  Bain thinks that this year 27% of sales will flow through the direct channel, with indirect shrinking to 73%.  The percentage of direct sales will likely continue to increase, for two reasons:  luxury brands continue to open new stores, and company-owned stores tend to exhibit much stronger sales growth than luxury counters in department stores do.

Outlet stores make up about 5% of sales.  On-line comprises somewhat over 2% of the industry.

geography

Sales of luxury goods take place approximately as follows:

Europe     37%

Americas     30%

Asia Pacific (ex Japan)     17%

Japan     11%

Rest of the world     5%

One caveat about location:  Purchases by foreign tourists is a significant factor in this industry.  This is partly because of fluctuation in exchange rates and differences in import and other taxes.  But it is also partly the result of manufacturers’ decisions to price the same item as much as 40% higher in Japan and China as in Europe.

The top cities for luxury goods in the world?  They rank as follows:

New York City     €9 billion ($12.6 billion) in 2009

Paris     €6.0 billion ($8.4 billion)

London     €4.5 billion ($6.3 billion)

Bain estimates that Hong Kong will account for €4.4 billion ($6.2 billion) in sales for 2010, possibly edging it ahead of London in the rankings.  Actually, given that nearby Macau will likely chip in €700 million ($980 million) in sales of luxury goods this year, the two SARs together doubtless already surpass London and likely move ahead of Paris as well within the next year.

Greater China (that is, the mainland plus Taiwan, Hong Kong and Macau) will generate  €17.5 billion ($24.5 billion) in luxury goods sales in 2010 according to Bain, making it larger than any single country market, save the US.

gender

Currently, 62% of purchases are for women, 38% for men.  The numbers are influenced by two factors:  there is a long-term trend of increasing sales to men, counteracted by the much higher cyclicality of the watches and formal wear that men typically buy.

product categories

Apparel     27%

Accessories     24%

Perfume and cosmetics     24%

Hard luxury (jewelry and watches)     19%

Art de la table     4%

luxury in the Great Recession

Bain says the downturn just ended marks the first ever decline in luxury goods sales.

The industry’s customers can be divided into the truly wealthy, for whom luxury goods are everyday items, and a much larger group of what the industry calls “aspirational” buyers, for whom the products also act as badges of wealth, taste and status.  As one might expect, the second group of buyers is much more cyclical than the first.

In addition, in any downturn the indirect distribution channel cuts its new orders back to below the (reduced) level of sales as it tries to shrink its inventories.  This adds to the sales decline for manufacturers.

As one would expect, hard luxury was especially hard hit.  This is due, mostly because of the high price points in this segment, but also to the less-affluent and mostly male composition of the buyers.

Why is gender an issue?  Men’s items tend to be higher-priced and to be purchased less frequently.  As a result, it’s easier to postpone their purchase.  Also, it appears (to me, anyway) that women tend to control the purse strings in most households around the world.  They tend to continue to allocate funds for their own purchases, although they may move down market or buy less frequently, but to zero out their husbands’ allocations.

Surprisingly, and contrary to the Wall Street cliché, cosmetics suffered in this downturn as well. In fact, Bain calls them the “first thing to cut!”  In particular, sales of anti-aging products fell for the first time, as customers turned to non-luxury offerings.

The turn came in the December quarter of 2009, when year on year sales stopped declining.

That’s it for today.  Tomorrow:  the recovery in 2010, growth prospects and investment implications.