Coach’s new Hong Kong Depository Receipts

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.


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.

Coach is starting off fiscal 2011 with a bang

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.

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

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:



–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…





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:


–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.


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.


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.

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