Stop, look, listen-Time to take a breather - French Chamber of ...

Consumer Brands & Retail 

Global luxury goods – Equity 

March 2012 

Stop, look, listen 

Time to take a breather 

We expect trends to slow from the historically high level of 2011, but with 20% average EPS 

growth for 2012e, luxury stocks remain attractive from a fundamental perspective. 

The caveat is that apart from Tiffany (-1%), luxury stocks have gained 16-43% since January 2012, 

leaving leaving less to go for across the sector. 

In this report, we downgrade Richemont, Dior and Tod's to Neutral from OW, Hermès to 

Underweight from N, initiate coverage on Ferragamo at Overweight (V), and upgrade Luxottica 

to Neutral from UW. Our Overweight stocks (4 out of 15 under coverage) are Hengdeli, 

Ferragamo, Swatch and PPR. 

By Antoine Belge, Erwan Rambourg, Sophie Dargnies 

Disclosures and Disclaimer This report must be read with the disclosures and analyst 

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it


Global luxury goods 

March 2012 

abc 

Summary 

Our caution on luxury stocks is linked to the sector’s strong run 

rather than fears about fundamentals (we forecast 20% average 

EPS growth for 2012e). Although the FTSE Eurofirst 300 has barely 

recovered its January 2010 level, the luxury goods sector has 

gained 60% in two years 

In terms of fundamentals, we are not concerned about the three main themes that the bears seem to be 

focusing on: 

1 China: Yes, China still is weighing on sentiment but we continue to believe this is a "red herring"; 

2 Capex/opex/inventory levels have increased: this seems to be an accident waiting to happen for 

some, but is a sign of confidence for us 

3 M&A, with cash piling up, is seen as a risk to some investment cases, but we think that apart 

perhaps from LVMH, this should not be true. 

Although we think other consumer sub-sectors could suffer from macro threats (especially in Europe), strong 

barriers to entry and tourism flows should support the luxury goods industry. We forecast 20% average EPS 

growth for 2012e for our coverage (vs the Bloomberg consensus of 16%), driven by 10% average organic 

sales growth, favourable FX for the French, Italian and Swiss players, and modest operating leverage. 

Key data - Luxury Goods ratings and target prices 

Stock 

_______ Rating ________ 

Current 

share price __ Target price ___ 

Potential 

return _________ PE (x)___________ 

Implied 2013e 

PE (x) 

RIC New Old Currency (01/03/2012) New Old 2011e 2012e 2013e (based on 

target price) 

Hengdeli 3389.HK Overweight (V) unchanged HKD 3.42 4.75 4.20 38.9% 16.4 13.9 11.7 16.3 

Ferrragamo SFER.MI Overweight (V) initiation EUR 14.36 18.00 na 25.3% 28.0 21.3 15.2 19.0 

The Swatch Group UHR.VX Overweight unchanged CHF 408.90 500.00 465.00 22.3% 17.4 14.6 13.1 16.0 

PPR PRTP.PA Overweight unchanged EUR 128.60 150.00 142.00 16.6% 15.4 12.4 10.5 12.3 

Richemont* CFR.VX Neutral Overweight CHF 55.75 62.00 66.00 11.2% 21.2 16.6 14.6 16.2 

Burberry* BRBY.L Neutral unchanged GBP (p) 1,446.00 1,600.00 1,325.00 10.7% 24.6 20.5 17.8 19.7 

Christian Dior DIOR.PA Neutral Overweight EUR 118.25 130.00 122.00 9.9% 15.6 13.1 11.7 12.8 

Hugo Boss BOSGP.DE Neutral unchanged EUR 81.48 87.00 82.00 6.8% 19.8 16.5 14.5 15.5 

Luxottica LUX.MI Neutral Underweight EUR 26.89 28.50 19.50 6.0% 24.7 19.9 17.3 18.4 

Prada 1913.HK Neutral (V) unchanged HKD 43.80 48.00 39.00 9.6% 23.5 18.2 15.6 17.1 

LVMH LVMH.PA Neutral unchanged EUR 128.80 135.00 127.00 4.8% 20.7 17.8 15.9 16.7 

Coach* COH.N Neutral unchanged USD 76.74 80.00 59.00 4.2% 23.7 20.0 17.6 18.3 

Tod's TOD.MI Neutral Overweight EUR 77.80 81.00 80.00 4.1% 18.2 16.8 15.5 16.1 

Tiffany TIF.N Neutral unchanged USD 66.53 69.00 69.00 3.7% 18.2 17.8 15.2 15.7 

Hermès HRMS.PA Underweight Neutral EUR 283.55 272.00 240.00 -4.1% 50.8 42.9 38.3 36.7 

Average 20.5 17.1 14.7 16.4 

*Based on calendar data, **Averages do not include Hermès. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. 

Source: Company data, HSBC estimates 

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March 2012 

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In this report, we downgrade Richemont, Christian Dior and Tod's to Neutral from Overweight, Hermès 

to Underweight from Neutral, initiate coverage on Ferragamo at Overweight (V), and upgrade Luxottica 

to Neutral from Underweight. Our Overweight stocks (4 out of 15 under coverage) are Hengdeli, 

Ferragamo, Swatch and PPR. We change our target prices for all our stocks (except Tiffany). 

Luxury goods calendar of events 

Company Type of event Date 

Burberry FY March 2012 sales 17-Apr-12 

Burberry FY March 2012 results 23-May-12 

Coach Q3 2012 results 23-Apr-12 

Hengdeli FY 2011 results 20-Mar-12 

Hermès FY 2011 results 22-Mar-12 

Hermès Q1 2012 sales 03-May-12 

Hugo Boss FY 2011 results 14-Mar-12 

Hugo Boss Q1 2012 results 26-Apr-12 

Luxottica Q1 2012 results 07-May-12 

LVMH Q1 2012 sales Mid April 12 

PPR Q1 2012 sales 26-Apr-12 

Prada FY 2011 results 29-Mar-12 

Richemont FY March 2012 results 16-May-12 

Salvatore Ferragamo FY 2011 results 15-Mar-12 

Salvatore Ferragamo Q1 2012 results 14-May-12 

Tiffany FY 2011 results 20-Mar-12 

Tiffany Q1 2012 results 21-May-12 

Tod’s FY 2011 results 13-Mar-12 

Tod’s Q1 2012 results 10-May-12 

FHS Data February 2012 period 22-Mar-12 

FHS Data March 2012/Q1 2012 period 24-Apr-12 

FHS Data April 2012 period 24-May-12 

FHS Data May period 21-Jun-12 

Source: Company data 

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March 2012 

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Contents 

Time to take a breather 5 

Initiation of coverage 13 

Ferragamo 14 

Investment cases 25 

Burberry 26 

Christian Dior 30 

Coach 34 

Hengdeli Holdings Ltd 38 

Hermès 42 

Hugo Boss 46 

Luxottica 50 

LVMH 54 

PPR 58 

Prada 62 

Richemont 66 

Swatch 70 

Tiffany 74 

Tod’s 78 

Disclosure appendix 85 

Disclaimer 88 

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March 2012 

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Summary of HSBC sales estimate changes and comparison with Bloomberg consensus 

____________ 2012e Sales _____________ 

_____________2013e Sales ______________ 

_____ HSBC ______ HSBC vs ______HSBC ______ HSBC vs 

(m) Curr. New Old Chg. Cons. consensus New Old Chg. Cons. consensus 

Burberry* GBP 2,080 1,940 7% 2,105 -1% 2,327 2,116 10% 2,387 -3% 

Christian Dior EUR 28,245 26,280 7% 26,966 5% 30,504 28,275 8% 28,879 6% 

Coach** USD 5,400 4,800 12% 5,394 0% 6,000 5,200 15% 5,973 0% 

Ferragamo*** EUR 1,170 nm nm 1,107 6% 1,300 nm nm 1,238 5% 

Hengdeli CNY 13,400 13,300 1% 13,281 1% 15,700 15,750 0% 15,754 0% 

Hermès EUR 3,300 3,082 7% 3,200 3% 3,628 3,456 5% 3,505 4% 

Hugo Boss EUR 2,300 2,219 4% 2,220 4% 2,500 2,422 3% 2,422 3% 

Luxottica EUR 7,084 6,432 10% 6,893 3% 7,689 6,803 13% 7,438 3% 

LVMH EUR 27,125 26,400 3% 26,423 3% 29,300 28,420 3% 28,569 3% 

PPR EUR 13,525 13,330 1% 13,220 2% 14,410 14,200 1% 14,087 2% 

Prada EUR 3,096 2,893 7% 3,028 2% 3,451 3,267 6% 3,535 -2% 

Richemont* EUR 9,325 9,400 -1% 9,367 0% 10,000 10,350 -3% 10,300 -3% 

The Swatch Group CHF 7,700 7,250 6% 7,480 3% 8,350 7,750 8% 8,128 3% 

Tiffany USD 3,760 3,760 0% 3,915 -4% 4,120 4,120 0% 4,282 -4% 

Tod's EUR 953 936 2% 949 0% 1,020 1,005 1% 1,020 0% 

* FY March n+1; ** FY June n+1; *** Initiated in this report Source: HSBC estimates, Bloomberg consensus 

Summary of HSBC EBIT estimate changes and comparison with Bloomberg consensus 

____________ 2012e EBIT _____________ 

_____________ 2013e EBIT ______________ 



Burberry* GBP 440 410 7% 427 3% 502 459 9% 489 3% 

Christian Dior EUR 6,167 5,683 9% 5,706 8% 6,807 6,297 8% 6,297 8% 

Coach** USD 1,780 1,480 20% 1,783 0% 2,000 1,600 25% 1,999 0% 

Ferragamo*** EUR 200 nm nm 182 10% 235 nm nm 216 9% 

Hengdeli CNY 1,472 1,482 -1% 1,470 0% 1,735 1,802 -4% 1,816 -4% 

Hermès EUR 1,023 915 12% 959 7% 1,143 1,050 9% 1,047 9% 

Hugo Boss EUR 466 424 10% 432 8% 524 482 9% 485 8% 

Luxottica EUR 990 885 12% 963 3% 1,120 970 15% 1,067 5% 

LVMH EUR 6,055 5,950 2% 5,890 3% 6,680 6,575 2% 6,458 3% 

PPR EUR 1,880 1,835 2% 1,788 5% 2,160 2,100 3% 2,010 7% 

Prada EUR 836 712 17% 737 13% 970 819 18% 904 7% 

Richemont* EUR 1,985 2,073 -4% 2,017 -2% 2,175 2,354 -8% 2,224 -2% 

The Swatch Group CHF 1,900 1,840 3% 1,812 5% 2,115 2,020 5% 2,022 5% 

Tiffany USD 748 748 0% 813 -8% 855 855 0% 894 -4% 

Tod's EUR 208 203 2% 204 2% 225 222 1% 225 0% 

* FY March n+1; ** FY June n+1; *** Initiated in this report Source: HSBC estimates, Bloomberg consensus 

Summary of HSBC EPS estimate changes and comparison with Bloomberg consensus 

____________ 2012e EPS _____________ _____________ 2013e EPS_______________ 



Burberry* GBP 73.17 68.23 7% 71.24 3% 84.17 77.12 9% 80.25 5% 

Christian Dior EUR 9.01 8.11 11% 8.10 11% 10.13 9.25 10% 9.16 11% 

Coach** USD 4.10 3.32 24% 4.09 0% 4.64 3.61 28% 4.80 -3% 

Ferragamo*** EUR 0.67 nm nm 0.56 20% 0.95 nm nm 0.76 24% 

Hengdeli CNY 0.20 0.20 0% 0.20 0% 0.24 0.25 -5% 0.25 -5% 

Hermès EUR 6.62 5.90 12% 5.97 11% 7.41 6.79 9% 6.68 11% 

Hugo Boss EUR 4.94 4.35 14% 4.56 8% 5.62 5.00 12% 5.13 10% 

Luxottica EUR 1.35 1.21 12% 1.20 13% 1.55 1.35 15% 1.36 14% 

LVMH EUR 7.22 7.26 -1% 7.07 2% 8.08 8.18 -1% 7.95 2% 

PPR EUR 10.33 9.76 6% 9.28 11% 12.20 11.47 6% 10.86 12% 

Prada EUR 0.23 0.20 17% 0.20 17% 0.27 0.23 18% 0.26 5% 

Richemont* EUR 2.95 3.08 -4% 2.91 1% 3.24 3.50 -7% 3.25 0% 

The Swatch Group CHF 27.95 26.86 4% 26.55 5% 31.21 29.55 6% 29.61 5% 

Tiffany USD 3.74 3.74 0% 3.92 -5% 4.39 4.39 0% 4.56 -4% 

Tod's EUR 4.63 4.54 2% 4.57 1% 5.03 4.99 1% 5.15 -2% 

* FY March n+1; ** FY June n+1; *** Initiated in this report **** HSBC EPS for PPR include discontinued business ***** HSBC EPS for Luxottica is before trade-mark amortisation Source: HSBC estimates, Bloomberg consensus 

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March 2012 

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Time to take a breather 

2012-13e organic sales growth rates to slow to 10% from the 

historically high level of 2011 (20%), but to remain above the 

7-8% long-term industry average 

High-end luxury more at risk, in our view (this is a potential risk 

for Richemont) 

The sector should deliver 20% average EPS growth in 2012e; 

after a c20% run in two months, we believe there is less to go for 

with most luxury stocks 

2012-13e sales growth to be 

above-average, in our view 

2011 a historically high level 

The luxury goods stocks in our universe posted 

organic sales growth of 20% in 2011 – an 

historically high level. Only 1999 and 2000 saw 

similar growth rates. 

Growth rates in Asia ex-Japan remained strong 

(35%), the US (24%) and Europe (12%) benefited 

from polarisation between high- and low-end 

goods, and tourism flows, and Japan (4%) 

stabilised despite the earthquake last March. 

Some signs of slowdown were witnessed in 

Q4 2011, but the organic sales growth average 

remained at a strong 16%. 

Our 2012 (10%) and 2013 (9%) 

organic growth forecasts still imply 

above-average rise 

For 2012, we expect a slowdown rather than a 

collapse in sales growth, as we take the view that 

Asian consumption, both local and travel-related, 

could put a floor under growth. We forecast the 

sector’s average organic sales growth rate to slow 

to 10% in 2012e and 9% in 2013e from the 

historically high level of 2011 (c20%), but to 

remain above the 7-8% long-term industry average. 

On top of this, FX effects should be favourable for 

European companies (apart from Burberry due to 

the stronger GBP), adding on average c3% sales 

growth (based on current spot rates). 

Asia ex-Japan should start ‘normalising’ 

For Asia ex-Japan, we expect growth to slow from 

c35% in 2011 to 20% in 2012; in other words, we 

do not foresee a collapse, rather the start of a 

‘normalisation’ now that the base is bigger. 

Given HSBC economists’ expectation of 

continued robust growth in China in 2012 (8.6% 

GDP forecast), we believe the addressable market 

(ie people who can afford luxury goods) will grow 

at a slower pace, but that penetration of this 

addressable market (ie the number of people 

actually buying) will continue to increase thanks to 

the expansion in distribution. Indeed, first-time 

buyers still account for c65% of sales of luxury 

brands in China (which should account for c30% 

of Asia ex-Japan sales in 2012e). 

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March 2012 

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Sales growth at constant forex and perimeter 

% FY98a FY99a FY00a FY01a FY02a FY03a FY04a FY05a FY06a FY07a FY08a FY09a FY10a Q111a Q211a Q311a Q411e FY11e FY12e FY13e 

Hermès 6 15 14 8 6 8 12 7 8 11 9 4 19 21 22 18 14 18 13 10 

LVMH -9 10 8 4 4 4 11 11 12 13 7 -3 14 14 15 15 12 14 9 8 

o/w Louis Vuitton 2 25 20 12 7 14 13 12 11 14 12 7 15 12 14 17 15 15 8 8 

Richemont** 8 14 13 0 0 0 13 17 16 16 2 -5 19 13 35 37 24 27 5 7 

Swatch Group 9 7 12 1 1 1 6 8 12 17 4 -8 22 23 25 21 19 22 12 8 

Burberry** na na 40 14 12 15 10 3 15 19 7 1 15 10 24 26 21 21 13 12 

Gucci brand 7 14 24 1 -8 4 13 18 17 11 4 -1 11 20 23 21 12 19 9 8 

Hengdeli na na na na na na na na na na 20 7 39 na 46* na 30* 37 19 17 

Prada na na na na na na na na na na na -6 24 na 24* na 29* 27 16 12 

Tod's na na 15 27 13 8 15 20 14 17 9 0 9 16 17 14 8 14 5 7 

Luxottica na na na na 3 -2 11 11 14 10 -1 -4 7 9 10 10 11 10 10 9 

Tiffany na na 13 0 4 14 8 9 11 13 -4 -5 12 16 24 17 6 15 4 10 

Coach*** na na 12 21 32 37 29 26 29 20 -1 9 15 15 11 15 15 15 12 11 

Hugo Boss na na na na na na 13 12 14 12 6 -8 5 19 29 16 17 19 10 9 

Ferragamo na na na na na na na na na na na -10 17 26 34 19 20 24 14 11 

*half-year **year ending March n+1 ***year ending June n+1 

Source : Company data, HSBC estimates 

Luxury goods: contribution of each geographic region to organic sales growth 

2007a 2008a 2009a 2010a 2011a 2012e 2013e 

Geographic breakdown 

Europe 42% 42% 39% 36% 34% 33% 31% 

Japan 12% 12% 11% 9% 8% 8% 7% 

US 20% 19% 18% 18% 18% 17% 16% 

China 3% 5% 6% 8% 10% 12% 13% 

Rest of Asia & other 22% 23% 25% 28% 29% 31% 32% 

Total 100% 100% 100% 100% 100% 100% 100% 

Organic sales growth rate 

Europe 13% 5% -7% 9% 12% 5% 4% 

Japan 6% -9% -15% -4% 4% 2% 1% 

US 16% 2% -14% 14% 24% 4% 6% 

China 40% 45% 30% 45% 47% 33% 25% 

Rest of Asia & other 22% 13% 8% 23% 27% 16% 12% 

Total 15% 6% -4% 15% 20% 10% 9% 

Contribution to growth 

Europe 5.1% 1.9% -2.8% 3.1% 4.4% 1.6% 1.3% 

Japan 0.9% -1.1% -1.8% -0.5% 0.4% 0.2% 0.1% 

US 3.5% 0.3% -2.7% 2.4% 4.3% 0.7% 1.0% 

China 1.2% 1.5% 1.4% 3.4% 3.6% 3.2% 2.9% 

Rest of Asia & other 4.7% 2.9% 1.8% 6.4% 7.8% 4.7% 3.7% 

Total 15% 6% -4% 15% 20% 10% 9% 


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March 2012 

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Less pessimistic on the US than before 

In the US, we believe the psychological aspect of 

the ‘feel-good factor’ influences purchasing 

patterns more than the financial aspect. 

So far, there has not been any psychological shock 

equivalent to the collapse of Lehman in September 

2008, which explains why trends in luxury 

consumption in the US have continued to 

outperform overall consumer trends. However, we 

expect that high-end consumers are likely to prove 

less psychologically resilient in 2012 than in 2011 

unless economic conditions improve. The 

magnitude of the slowdown we forecast in the US 

(4% organic growth in 2012 after a 24% increase in 

2011) is less severe than we expected back in 

October 2011 (-5%) when we thought that the 

August 2011 market slump would take a heavier toll 

on luxury goods demand. We expect this slowdown 

to be more pronounced in Q2 and Q3 2012. 

Europe: cautious on local demand, still 

confident that tourist demand will hold up 

Europe is the only region where some luxury 

companies were already reporting slowing trends 

in Q3 2011. In 2012, we think the fragile debt 

situation and weaker GDP performance are likely 

to take a more severe toll on local consumption. 

However, we expect some protection to come from 

tourism inflows (notably from Asia), which could 

account for between 35% and 60% of sales, 

depending on the company. We are factoring in 

5% organic sales growth for our coverage in 

Europe for 2012 (vs 12% in 2011), implying a mid 

single-digit decline in sales for local consumers 

and a mid-teens increase in tourist-related sales. 

Japan: stabilisation to hold up 

In spite of the March 2011 disaster, Japanese 

trends were slightly positive for most players in 

our coverage last year. We expect this 

stabilisation to continue in 2012 (2% average 

organic growth vs 4% in 2011). 

High-end luxury more at risk, 

in our view 

Note that we have become cautious on high-end 

luxury consumption (notably for watches), which 

we believe will be more vulnerable to changes in 

the psychological aspect of the ‘feel-good factor’ 

(as was the case in the 2008-2009 downturn). 

Swatch recently mentioned it had witnessed lower 

growth rates for the higher-end of its portfolio in 

mainland China, but we believe the company most 

at risk is Richemont (48% of sales in watches, 

c80% high-end), which is the main reason behind 

our rating downgrade to Neutral from Overweight. 

Exposure to high-end watches: Richemont vs Swatch (2011) 

as a % of total sales Richemont Swatch 

High-end watches* 39% 30% 

Mid & low-end watches 9% 44% 

Other businesses 51% 26% 

Total 100% 100% 

* Includes: 

For Richemont: specialist watchmakers excl. Baume & Mercier, 80% of Cartier watch sales 

For Swatch: Breguet, Blancpain, Glasshütte, Léon Hatot, Jacquet Droz, 50% of Omega sales 

Source: HSBC estimates 

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March 2012 

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Luxury Goods companies - 2011 geographical sales breakdown 

Europe Americas Japan Asia & others Mainland China HK + Taiwan + Macau Rest of Asia & Others 

Hermès 37% 16% 17% 30% 7% 13% 10% 

Richemont* 35% 14% 10% 41% 12% 17% 12% 

LVMH 33% 22% 8% 37% 10% 9% 18% 

of which Louis Vuitton 25% 19% 16% 40% 11% 13% 16% 

PPR 32% 19% 12% 36% 7% 7% 22% 

of which Gucci Brand 25% 21% 14% 40% 12% 11% 17% 

Burberry* 34% 25% 4% 37% 10% 9% 18% 

Tod's 70% 7% 4% 19% 5% 7% 7% 

The Swatch Group 34% 8% 2% 56% 19% 19% 18% 

Luxottica 23% 61% 2% 14% 2% 1% 11% 

Ferragamo 24% 27% 13% 36% 10% 10% 16% 

Hugo Boss 60% 22% 2% 16% 9% 2% 5% 

European average 38% 22% 7% 32% 9% 9% 14% 

Coach** 1% 72% 17% 10% 3% 3% 4% 

Tiffany*** 11% 49% 17% 22% 5% 8% 9% 

Hengdeli 0% 0% 0% 100% 69% 31% 0% 

Prada*** 37% 14% 10% 39% 11% 11% 17% 

Total average 31% 25% 8% 35% 12% 11% 12% 

Note: this average including PPR (rather than the Gucci Group) *FY March 12 **FY June 12 ***FY Jan 2012 

Source: company data, HSBC estimates 

Sales by nationality of consumer (2011) 

Louis Vuitton brand Gucci Group Burberry* Richemont Swatch Prada 

Western Europe 10% 14% 10% 10% 13% 14% 

East Europe 4% 3% 4% 4% 3% 3% 

Middle East 7% 5% 6% 10% 9% 4% 

Japan 19% 15% 24% 12% 4% 13% 

Asia ex Japan 43% 44% 35% 52% 63% 52% 

North America 14% 17% 18% 9% 4% 12% 

Latam 4% 3% 3% 4% 3% 2% 

Total 100% 100% 100% 100% 100% 100% 

*For Burberry, figures are based on sales at retail equivalent 

Source: companies, HSBC estimate 

EBIT margin evolution by group 1995a-2013e 

% FY95a FY96a FY97a FY98a FY99a FY00a FY01a FY02a FY03a FY04a FY05a FY06a FY07a FY08a FY09a FY10a FY11e FY12e FY13e 

Hermès 17.9 18.0 20.6 20.7 20.7 25.0 25.0 25.8 27.1 26.8 26.9 26.5 25.5 25.5 24.2 27.8 30.4 31.0 31.5 

Luxottica na na na na na 17.1 16.7 18.9 15.3 15.1 14.1 16.2 16.8 14.4 11.4 12.3 13.0 14.0 14.6 

Tiffany*** na 11.9 13.7 13.7 18.1 20.0 19.3 18.7 17.8 13.4 16.0 15.7 14.5 16.5 16.3 19.8 20.8 19.9 20.8 

Burberry* na na na na 8.2 16.1 18.1 19.7 21.1 22.5 20.8 21.8 20.7 15.0 17.2 20.1 20.7 21.2 21.6 

Tod's na na na na na 14.1 17.6 17.7 11.8 15.9 17.9 19.8 19.3 17.8 17.7 20.3 21.5 21.8 22.0 

LVMH 24.5 22.6 17.3 17.1 18.1 16.9 12.8 15.8 18.2 19.0 19.7 20.7 21.6 21.1 19.7 21.3 22.2 22.3 22.8 

Gucci brand 24.2 27.2 24.3 23.0 24.4 27.0 30.5 28.9 27.9 26.6 26.9 29.1 29.7 28.3 27.3 28.7 30.2 31.0 31.8 

Hugo Boss na na na na na na na na na 11.6 12.4 12.3 13.5 11.3 10.1 15.3 19.4 20.3 21.0 

Ferragamo na na na na na na na na na na na na 11.3 9.2 5.9 11.1 15.7 17.1 18.1 

Swatch Group 10.3 9.6 13.4 13.5 14.1 16.0 15.4 15.6 14.9 16.6 17.1 20.2 21.9 21.2 17.6 23.5 23.9 24.7 25.3 

Richemont* 16.5 16.6 16.1 16.9 18.3 19.3 13.3 9.6 9.1 13.2 16.6 18.6 20.9 17.9 16.0 19.7 21.5 21.3 21.8 

Coach** na na na na 10.4 16.9 18.6 25.6 33.6 33.5 35.1 38.0 37.1 31.0 31.9 31.4 32.3 33.0 33.3 

Hengdeli na na na na na na na 2.9 7.2 11.0 14.5 13.1 12.6 9.9 9.8 10.0 11.1 11.0 11.1 

Prada*** na na na na na na na na na na na 7.4 42.6 11.6 12.0 20.2 25.1 27.0 28.1 

Average 18.7 17.7 17.6 17.5 16.5 18.8 18.7 19.6 19.7 19.5 20.3 21.7 21.1 19.1 17.9 20.9 22.6 23.1 23.7 

*year ending March n+1 **year ending June n+1 *** year ending January n+1 


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March 2012 

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Cost of doing business and 

M&A fears: two bear 

arguments we don’t agree with 

On top of China fears, there are two other bears 

arguments that we do not agree with: we see the 

rise in capex/opex/inventory as a sign of 

confidence rather than a threat, and we believe 

M&A fears are overstated for would-be predators, 

apart perhaps from LVMH. 

We see the rise in 

capex/opex/inventory as a sign of 

confidence rather than a threat 

On 24 June 2011, we wrote a report titled A topline 

rather than a leverage story, in which we 

cautioned investors that the theoretical operating 

leverage of the above-average top-line growth we 

were forecasting for 2011 might not be reflected 

in EBIT margins as companies seemed willing to 

reinvest for the long term. 

Indeed, looking at the companies that have 

already reported 2011 margins, the historically 

high top-line growth did not translate into 

spectacular EBIT margin expansion apart 

from Hugo Boss. 

Operating leverage of luxury companies* 

Sales grth (%) EBIT grth (%) EBIT marg. evol. (bps) 

LVMH 16% 22% 98 

PPR luxury division 23% 34% 214 

The Swatch Group 11% 12% 35 

Luxottica 7% 13% 70 

Hugo Boss 19% 51% 412 

*Those that have already reported 2011 earnings 


A bearish reaction to these announcements would 

be to assume that the cost of doing business in the 

luxury industry is rising. We disagree since we 

believe the current strong trends enjoyed by the 

luxury industry are driven by genuine demand 

from consumers rather than by a marketing push 

led by brands. In all markets except Japan, 

demand exceeded supply in spite of the significant 

price increases (c10% on average) in 2011. This 

means that luxury companies could easily, in our 

view, generate much higher EBIT margin over 

2011-2014 by investing less, and this without 

damaging their top-line growth during the period. 

However, as has often been the case in previous 

bull phases of the luxury industry, when this has 

translated into above-average top-line growth, 

luxury companies (most of which are familycontrolled) 

are monitoring their earnings 

growth rates rather than the pace of the 

EBIT margin expansion. 

Luxury companies: ranking by 2012e operating leverage 

Reported sales growth EBIT growth Operating leverage (x) EBIT margin gain (bp) EPS growth 

Luxottica 14% 23% 1.6 100 24% 

PPR 11% 17% 1.6 80 24% 

Ferragamo 19% 29% 1.6 138 31% 

Prada*** 19% 28% 1.5 189 29% 

Hugo Boss 12% 17% 1.4 86 20% 

The Swatch Group 14% 18% 1.3 81 19% 

Tod's 7% 8% 1.2 28 8% 

Burberry* 13% 16% 1.2 48 18% 

Coach** 13% 15% 1.2 67 15% 

Hermès 16% 18% 1.1 60 19% 

Christian Dior 15% 15% 1.1 15 19% 

LVMH 15% 15% 1.0 8 16% 

Hengdeli 19% 18% 1.0 -8 19% 

Richemont* 9% 8% 0.9 -20 23% 

Tiffany*** 3% -1% -0.3 -86 2% 

Average 14% 17% 1.2 52 20% 

*year ending March n+1 **year ending June n+1 *** year ending January n+1 


9



March 2012 

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We thus anticipate operating leverage (EBIT 

growth divided by sales growth) of 1.2x on 

average in 2012e. This would not prevent EBIT 

and EPS from rising by 17% and 20% on average, 

respectively, as per our estimates. 

Nevertheless, we continue to believe that 

investors should put higher valuation multiples on 

consumer goods companies whose earnings 

growth is driven by a strong top line rather than 

cost savings. 

Apart from Tiffany, Richemont and Hengdeli, we 

expect all the luxury companies we cover to post 

higher margins in 2012e compared to 2011. 

M&A fears overstated (apart maybe 

from LVMH) 

Use of cash recurring theme 

Cash is piling up as a result of robust earnings 

growth and continued low capital intensity. 

Returning cash to shareholders is unlikely to 

resolve the excess cash issue as buy-back 

programmes are limited since most luxury 

companies have a narrow free float. 

We thus believe that recurring M&A speculation 

in the press relating to the few companies with an 

almost 100% free float (Burberry, Tiffany, Coach) 

or the smaller-sized players (Tod’s, Ferragamo) is 

unlikely to go away. 

Following LVMH’s bid for Bulgari on 7 March 

2011, should we expect a new M&A phase in the 

sector after a decade of inaction? Probably not, as 

in our view: 

Potential acquirers are not the ones deciding 

the timing of acquisitions. Indeed, controlling 

shareholders have limited incentive to sell 

(unless there are succession or management 

issues) as they generate enough cash flow to 

finance their development, and often enjoy 

managing the company. 

Synergies are limited, and can by no means 

be a significant factor driving an acquisition 

Targets which are available, sizeable and of 

potential interest are scarce. Most recent deals 

have involved small-sized companies (sales of 

less than EUR200m), which had limited interest 

for the listed companies under our coverage. 

Bulgari and Hermès may weigh on LVMH 

For LVMH, the M&A theme may weigh, not so 

much in terms of future deals, rather because of 

the integration of Bulgari (acquired in 2011) and 

the future of the 22.4% stake in Hermès. 

In three years, Bulgari may be looked upon as a 

fantastic addition if LVMH manages to make the 

brand a threat to Cartier, as it once was. In the 

meantime, we think the new management team 

will have to review strategy (eg distribution, 

product) very thoroughly to put the brand back on 

the high-end consumer’s radar. This, together 

with the fact that Bulgari has historically been 

more vulnerable than peers to economic 

downturns (the brand is not considered a reference 

in watches by retailers and consumers), is likely to 

weigh on profitability short term. On the Hermès 

investment, while the interest of buying shares on 

a (very) long-term patrimonial view is clear (we 

can’t think of a brand in the space with higher 

differentiation and barriers to entry), on any 

shorter term view, returns on that investment are 

likely to be limited. 

Luxottica the only M&A winner 

Luxottica is, in our view, the only M&A winner. 

On top of adding new licensing deals such as 

Coach or Armani (which can be considered the 

equivalent of an acquisition at zero cost), 

Luxottica has built a strong track record of 

creating value via acquisitions. Although the days 

of transforming deals like Oakley in 2007 are 

probably behind us, smaller deals like Tecnol in 

Brazil or the acquisition of retail chains in 

emerging markets are still successful add-ons. 

10



March 2012 

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After 25% run in two months, 

main issue for luxury is lack of 

significant upside 

The caveat is that, apart from Tiffany (-1%), the 

luxury stocks we cover have gained 16-43% since 

January 2012, outperforming regional indices. 

We are not too concerned about absolute 

valuations, because the sector’s average 12-month 

rolling PE of c16x remains below the c17-18x 

historical average, or by relative valuation (which 

has been high for quite a while now without 

preventing luxury stocks from outperforming). 

Our word of caution relates to the sector’s strong 

run rather than fears about fundamentals (we 

forecast 20% average EPS growth for 2012e). 

Although the FTSE Eurofirst 300 has barely 

recovered its January 2010 level, the luxury goods 

sector has gained 60% in two years. 

This leaves less room for possible short-term 

disappointments (bearing in mind that the basis of 

comparison is especially high for Q2 and Q3). 

In October 2011, we saw potential returns of at least 

25% based on our target prices for our Overweights. 

We now see more modest returns for our four 

Overweights (out of 15 stocks): Hendgdeli (38.9%), 

Ferragamo (25.3%), Swatch (22.3%) and PPR 

(16.6%). Note: Potential return equals the 

percentage difference between the current share 

price and the target price, including the forecast 

dividend yield when indicated. 

Luxury goods sector performance vs FTSE Eurofirst 300 

280 

240 

200 

160 

120 

80 

40 

J an-02 Jan-04 Jan-06 J an-08 Jan-10 Jan-12 

Lux ury Goods Index 

Source: Thomson Reuters Datastream 

FT SE 300 Pric e Index 

Luxury goods sector absolute 12m forward PE 

25.0 

20.0 

15.0 

10.0 

5.0 

0.0 

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 


Average PE Luxury stocks 

Luxury goods sector 12m forward PE relative to FTSE 

Eurofirst 300 index 

1.90 

1.70 

1.50 

1.30 

1.10 

0.90 

0.70 

0.50 

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 

Average PE Luxury rel FTSE Eurofirst300 index 


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March 2012 

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Share price performances – Luxury goods 

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Q1 11 Q2 11 Q3 11 Q4 11 FY11 Q1 12TD* 

LVMH -35 -14 47 -2 33 7 3 -42 64 57 -9 11 -20 10 -11 18 

Hermes 15 -24 17 -4 44 35 -9 16 -7 68 -1 32 11 2 47 23 

Richemont -29 -16 15 27 52 24 10 -74 71 58 -3 4 -26 15 -14 18 

The Swatch Group -26 -23 29 12 17 37 27 -57 80 59 -3 4 -29 15 -17 18 

Christian Dior -32 -7 50 4 50 8 11 -55 78 49 -7 9 -22 8 -14 29 

Burberry nm -2 63 10 5 54 -12 -61 170 88 4 24 -19 1 6 22 

Tod's 6 -34 13 1 63 7 -22 -37 72 42 13 11 -31 -1 -15 23 

PPR -37 -52 9 -4 29 19 -3 -58 81 41 -9 13 -21 14 -7 16 

Luxottica 20 -32 9 9 43 9 -7 -42 42 26 1 -4 -13 13 -5 24 

Hugo Boss 90 -58 59 54 21 31 0 -58 70 130 4 19 -14 -6 1 43 

Ferragamo** nm nm nm nm nm nm nm nm nm nm 0 14 -3 2 13 41 

Average excluding Hermès -5 -26 33 12 35 22 1 -54 81 61 -1 11 -20 7 -6 25 

Eurotop 300 -18 -32 12 9 22 16 2 -45 26 7 0 -1 -17 8 -11 9 

Prada** nm nm nm nm nm nm nm nm nm nm nm 19 -30 5 -12 31 

Hengdeli nm nm nm nm nm 220 37 -73 268 57 -11 0 -34 -7 -46 39 

Hang Seng Index -24 -18 35 13 5 34 39 -48 52 5 2 -5 -21 5 -20 16 

Tiffany -1 -24 89 -29 20 2 17 -42 61 45 -1 28 -23 11 8 -1 

Coach 36 69 129 49 18 29 -29 -32 76 52 -6 23 -19 19 11 25 

S&P 500 -13 -23 26 9 3 14 4 -38 23 13 5 0 -14 11 0 9 

*Share prices at 1 March 2012 ** Prada's IPO on 23 June 2011, Ferragamo's IPO on the 18 June 2011 


12



March 2012 

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Initiation of coverage 

Ferragamo 

13



March 2012 

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Ferragamo 

The strongest earnings growth profile in our universe after Prada, 

driven by improvement in sub-par EBIT margin 

Valuation (15.2x 2013e PE) in line with peers despite higher 

earnings growth prospects in 2014e and beyond 

Initiate with Overweight (V) rating and target price of EUR18 

A margin catch-up story 

Investment summary 

The Ferragamo investment case is relatively 

simple: this is a margin catch-up story for a 

medium-sized mono brand (EUR1bn in sales in 

2011). Indeed, in spite of attractive products and 

geographic and distribution mixes, Ferragamo's 

EBIT margins lag those of 'soft' luxury peers 

(companies primarily involved in leather goods, 

apparel and shoes). Even if Ferragamo meets our 

2011 EBIT margin forecast of 15.7% when it 

reports on 15 March, this level of margin will 

remain well below peers (28.5% on average). 

We are confident that Ferragamo can narrow the 

gap with peers and register a 330bp EBIT margin 

enhancement over 2011-2014e (vs c200bp for 

peers) to reach 19% in 2014. 

We believe the analysis of the 330bp 2011-2014e 

EBIT margin improvement must be broken down 

in two parts: 

The improvement common to most luxury 

players, driven by geographic mix (faster than 

average growth in Asia where margins are 

higher) and distribution mix (faster than 

average growth of retail) 

The improvement specific to Ferragamo, 

driven by better execution. In 2011 there was 

evidence of the ongoing changes at the 

company: the EBIT margin gained 550bp in 

9M11 and we forecast a 460bp gain to 15.7% 

over the FY11 (consensus is at 15.4%). 

We initiate coverage of Ferragamo with an 

Overweight (V) rating. We like the ‘self-help’ 

aspects of the fundamentals. In addition, based 

on our 2013 estimates, which are 9% above 

consensus at the EBIT level, Ferragamo is 

trading at 15.2x 2013e PE, in line with European 

peers excluding Hermès, in spite of superior 

earnings growth prospects in 2014e (EPS up 17%) 

and beyond. The 18 June 2011 IPO price was 

EUR9 per share, and since then the shares have 

risen 60% to EUR14.36 (as of 1 March 2012). In 

2012 y-t-d alone, the stock is up 41%. We believe 

this strong share price performance merely 

reflects what Ferragamo has been able to deliver 

in 2011, but still fails to reflect its catch-up 

potential, in our view. 

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March 2012 

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Attractive mixes already 

Strong Asian and US exposure 

Compared to peers, Ferragamo already has a high 

exposure to Asia (36% vs 31%), where profitability 

is above average for most players. In terms of 

geographic exposure, the main difference is 

Ferragamo’s lower exposure to Europe (and to 

Europe ex-Italy in particular, which only accounted 

for 15% of sales in 2011), which is compensated by 

a higher exposure to the Americas. 

We consider that Ferragamo’s growth rates in 

Asia should not differ materially from peers since 

the brand was one of the pioneers in the region 

(notably entering mainland China in 1994). The 

main specific growth opportunity for us lies in 

Western Europe ex-Italy, where the brand 

awareness is high but the brand image is 

somewhat dusty (Ferragamo customers are on 

average much older in Western Europe than in 

Asia ex-Japan and the Americas). We believe 

current initiatives aimed at improving the in-store 

experience should enable Ferragamo to improve 

its brand image amongst Western European 

customers (especially younger ones) and to 

capitalise on its already strong image with 

emerging customers when they travel to Europe. 

We believe that Ferragamo can also continue to 

register above-average growth rates in the US, 

where it enjoys a high-end ‘red carpet’ image (cf 

the Oscars ceremony) and benefits from Latam 

tourist-related sales (we believe Ferragamo is 

ahead of European competitors in terms of brand 

awareness and desirability with Latam luxury 

consumers, since the brand entered the region at 

an earlier stage). 

Limited exposure to apparel, but below par 

profitability in retailing shoes and leather goods 

Ferragamo’s product mix already compares 

relatively well with the peer group average, with 

notably a lower exposure to apparel (10% of 

sales), traditionally the least profitable product 

category for luxury players. Having said that, its 

exposure to the most profitable category – leather 

goods – is below the peer average (31% vs 53%) 

and its exposure to shoes (43% of sales) is the 

second largest in the industry behind Tod’s Group. 

Ferragamo vs peers FY11 

Ferragamo 

Average 

peer group 

Gucci 

brand 

Prada 

brand 

Tod's 

Group 

Hermès 

LV 

brand 

Bottega 

Veneta 

Burberry* 

Sales FY 2011 (EURm) 987 2,556 3,143 2,014 894 2,841 6,482 683 1,838 

Sales by product 

Footwear 43% 18% 13% 24% 72% 5% 3% 5% 5% 

Leather goods 31% 53% 56% 55% 16% 47% 85% 84% 25% 

Apparel 10% 19% 12% 20% 11% 27% 7% 7% 47% 

Other 15% 10% 19% 1% 0% 20% 5% 4% 23% 

Sales by region 

Europe 24% 38% 28% 40% 71% 37% 30% 27% 31% 

Americas 27% 16% 21% 14% 7% 16% 19% 16% 18% 

Japan 13% 15% 12% 10% 8% 17% 16% 20% 24% 

Asia-Pacific 36% 31% 39% 36% 14% 30% 35% 37% 27% 

Sales by distribution 

Wholesale 32% 23% 25% 23% 47% 19% 5% 22% 22% 

Retail 67% 75% 70% 77% 53% 81% 95% 75% 72% 

Licences & others 2% 2% 5% 0% 0% 0% 0% 3% 5% 

EBIT margin 2010 11.1% 26.1% 28.4% 22.3% 20.3% 27.8% 42.8% 25.5% 15.6% 

EBIT margin 2011e 15.7% 28.5% 30.2% 27.0% 21.5% 30.4% 43.9% 30.0% 16.8% 

EBIT margin 2012e 17.1% 29.3% 31.0% 28.9% 21.8% 31.0% 44.0% 31.0% 17.6% 

EBIT margin 2013e 18.1% 30.0% 31.8% 30.0% 22.0% 31.5% 44.2% 32.0% 18.4% 

EBIT margin 2014e 19.0% 30.5% 32.5% 30.5% 22.5% 31.8% 44.4% 32.8% 18.9% 

EBIT margin gain 2011-2014e (bp) 331 196 237 350 102 136 55 283 211 

*Burberry: in GPB, geographic breakdown based on sales at retail equivalent and EBIT margin excludes Licence 


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March 2012 

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Shoes is not an easy category in term of 

profitability due to the need for different sizes for 

each SKU. Even for Tod’s Group, which we 

believe is achieving the highest profitability in 

shoes among the peer group, we estimate the 

EBIT margin was c19% in 2010 (vs 20.3% for the 

group as a whole). The higher level of 

sophistication of Ferragamo’s shoes is a cost 

constraint, notably the fact that it is one of the 

very few brands offering different widths for each 

whole and half size (4 for women’s and 3 for 

men’s), unless the brand is able to charge a 

premium for it. We believe this is the case when 

shoes are sold at full price, but far less so when 

they are on sale at 50%, which brings us to the 

issue of markdowns level. 

Ferragamo’s issues of lower profitability by 

product line and lower profitability in its retail 

store network are linked. In the luxury industry, 

EBIT margins in retail are usually 15-20 

percentage points higher than EBIT margins in 

wholesale, but Ferragamo – which already 

generates 67% of its sales in retail – does not 

seem to benefit from that yet. 

Ferragamo – store network 

Own Third party Total stores 

2007a 252 251 503 

2008a 273 278 551 

2009a 299 268 567 

2010a 312 266 578 

2011e 323 270 593 

2012e 338 280 618 

2013e 353 290 643 

2014e 368 300 668 


In our view, the key way to improve store 

productivity will be to reduce the average level of 

markdowns. This data is not disclosed by 

Ferragamo, but we believe it remains high 

compared to peers – even after two years of 

improvement in 2010 and 2011. 

We believe achieving a higher share of sales at 

full price will require: 

A higher share of permanent (‘evergreen’) 

products, notably in handbags and shoes, or at 

least iconic styles that can be adapted from 

one season to another 

More high margin entry-level products 

(notably more small leather goods) 

Increased cross-selling opportunities through 

greater coherence between collections guided 

by a single design direction since June 2010 

Increased product continuity and availability 

in stores via a stock replenishment 

programme aimed at automatically managing 

the procurement and distribution of products. 

Better in-store merchandising 

Increasing the average size of stores – which 

is well below that of peers – in order to better 

display the brand’s full range of products. 

Some of these requirements will be implemented 

through the roll-out of the next phases of project 

‘Marlin” initiated three years ago, which also 

aims to increase supply-chain efficiencies. 

We believe the management team is fully aware 

of these requirements. Some investors argue that 

more positive changes should have already been 

visible since Michele Norsa (CEO) and Ernesto 

Greco (CFO) joined Ferragamo in 2006 and 2007 

respectively. The 2008-2009 crisis – which hurt 

Ferragamo earnings much more than the peer 

group – was probably part of the explanation for 

the delay. Looking at it from a positive 

standpoint, this delay implies there is potential 

for improvement. 

2011 provided strong evidence of the ongoing 

changes at Ferragamo: we forecast a significant 

increase (460bp) in EBIT margin in 2011. In 

2012-2014, Ferragamo should benefit from the 

drivers common to the overall luxury industry 

(notably the Asian growth story outlined in 

16



March 2012 

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several of our reports: China Red Bull, dated 

10 January 2010 and Around the world, dated 

13 October 2011). The specific elements 

described above will require consistently strong 

management execution. 

Shareholders’ structure 

As outlined on page 10 of this report, cash is piling 

up on the balance sheet of larger groups, which 

leads to smaller players being regularly put in play 

in the press. With six separate family groups 

involved in the shareholding of the company and 

25 members of the third generation in total, 

Ferragamo could in theory be seen as a potential 

M&A target. However, less than 12 months after 

the IPO, we do not believe a disposal of the 

family’s controlling stake is on the agenda (even 

though the 180-day lock-up period has now ended). 

Ferragamo – shareholding structure as of 1 March 2012 

Peter Woo 

6% 

Ferragamo 

Free Float 

Finanziaria 

25% 

58% 

Individual 

Family members 

11% 


Earnings, valuation and risks 

2011 results due 15 March 2012 

2011 sales were disclosed on 26 January 2012. 

They increased 26% to EUR987m, a 24% organic 

increase, boosted by a 2% FX impact. In Q4 2011 

alone, organic sales growth was 20%. 

Performances in Asia (22%) and Latam (37%) 

were strong, but growth rates in Europe (35%) 

and the US (21%) were even more remarkable in 

light of the macro-economic background. Japan 

remained sluggish (-8%). 

It is worth noting that 2011 was an atypical year 

in terms of sales growth by distribution network. 

Although retail outpaced wholesale in 2008-2010, 

this was the opposite in 2011 (organic sales 

growth was 38% in wholesale vs 19% in retail). 

This was a result of: 

Stellar growth in EM markets where 

Ferragamo is selling via the wholesale channel 

The late cyclicality of the wholesale 

channel, which took longer to recover from 

the 2009 slump 

Advanced deliveries in Q4 2011 ahead of 

Chinese New Year, which occurred 12 days 

earlier this year than in 2011. 

In 2012 and beyond, management expects the 

retail/wholesale balance to remain broadly stable. 

On 15 March, we expect Ferragamo to report a 

79% increase in EBIT to EUR155m, a 460bp 

improvement to a 15.7% margin, driven by: 

A 130bp gross margin enhancement to 64.3% 

driven by positive geographic mix and a 

lower level of markdowns. 

A 230bp decline in the SG&A ratio (in spite 

of a EUR5m IPO charge penalising the ratio 

by 50bp), mostly coming from leverage on 

the fixed portion of sales and distribution 

costs (marketing & communication costs 

should have increased in line with sales). 

2011-2014e EBIT growth CAGR of 21% 

Our 2012-2014 forecasts call for organic sales 

growth of 14%, 11% and 10%, respectively and 

330bp EBIT margin gains over the period (the EBIT 

margin reaching 19% in 2014). The improvement in 

store profitability should, in our view, translate into 

a 150bp gross margin enhancement and 180bp 

SG&A leverage over the period. 

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March 2012 

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Franchise buy-back opportunities 

Like many of its luxury peers in the past, 

Ferragamo plans to buy back some of its thirdparty 

operated stores (TPOP) over the medium 

term, as well as some of its minority interests. 

Ferragamo agreed to purchase on 1 January 2013 

25% of its China distribution JV with Imaginex 

for EUR41m, thereby increasing its ownership 

from 50% to 75%. The value of this future 

purchase obligation was recorded on the group’s 

net financial position for EUR39m. Note that 

Ferragamo has an option to buy the remaining 

25% in 2018. This JV manages c28 stores out of 

the 60 Ferragamo mono-brands stores in mainland 

China, and operates as a wholesaler. The 

remaining c32 stores are classified in wholesale 

(c11 airport locations and c21 stores operated by 

third parties). 

Ferragamo has a call option to buy in December 

2012 the other 50% of its distribution JV with Li 

& Fung (0494.HK, HKD17.84, Overweight (V) 

rating) for Korea, Singapore, Malaysia and 

Thailand at book value plus the price of the 

building of the Seoul store. Our forecasts assume 

that Ferragamo will exercise its option for a total 

of EUR30m. 

As a consequence of these buy-backs, we 

forecast the share of minorities of total net profit 

to drop from 20% in 2011 and 2012 to 5% in 2013 

and beyond. 

Initiating at Overweight (V) – target price 

EUR18 

Like all the other stocks under our coverage in 

luxury goods, we value Ferragamo based on a 

DCF. Our assumptions are detailed on page 23. 

We use a specific beta of 1.00 and a sector beta of 

1.20, as with other stocks under our coverage. 

Under our research model, for stocks with a 

volatility indicator, the Neutral band is 10 

percentage points above and below the hurdle rate 

for Europe ex-UK stocks of 9.0%. Our target 

price of EUR18 provides a potential return of 

25.3%, above the Neutral band of our model; 

therefore, we are initiating coverage of Ferragamo 

with an Overweight (V) rating. Potential return 

equals the percentage difference between the 

current share price and the target price, including 

the forecast dividend yield when indicated. Note 

that all stocks with less than 12 months of trading 

history are considered volatile by HSBC. 

Risks 

Risks include those common to most luxury stocks, 

ie macro-economic conditions and the USD/EUR 

rate. Company-specific downside risks include 

failure to execute initiatives aiming at increasing 

store sales productivity and a placement of shares 

from Ferragamo family members. 

These buy-backs explain why we forecast EPS 

will grow much faster than EBIT in 2013 

(40% vs 17%). 

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March 2012 

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Ferragamo – P&L 

(EURm) 2007a 2008a 2009a 2010a 9M 2011a Q4 2011e 2011e 2012e 2013e 2014e 

Revenues 687.4 690.8 619.6 781.6 701.3 285.2 986.5 1,170.0 1,300.0 1,435.0 

COGS 260.6 271.9 256.1 289.4 252.4 99.8 352.2 411.9 451.1 490.8 

% of sales 37.9% 39.4% 41.3% 37.0% 36.0% 35.0% 35.7% 35.2% 34.7% 34.2% 

Gross profit 426.8 419.0 363.5 492.2 448.9 185.4 634.3 758.2 848.9 944.2 

Gross margin 62.1% 60.6% 58.7% 63.0% 64.0% 65.0% 64.3% 64.8% 65.3% 65.8% 

Operating expenses -349.4 -355.2 -327.1 -405.8 -335.8 -143.5 -479.4 -558.2 -613.9 -671.3 

% of sales -50.8% -51.4% -52.8% -51.9% -47.9% -50.3% -48.6% -47.7% -47.2% -46.8% 

Operating profit (EBIT) 77.4 63.8 36.5 86.4 113.1 41.9 155.0 200.0 235.0 273.0 

EBIT margin 11.3% 9.2% 5.9% 11.1% 16.1% 14.7% 15.7% 17.1% 18.1% 19.0% 

EBITDA 100.0 86.0 61.9 113.1 132.4 48.9 181.3 228.9 266.8 308.0 

EBITDA margin 14.5% 12.4% 10.0% 14.5% 18.9% 17.1% 18.4% 19.6% 20.5% 21.5% 

Net financial result -9.7 -0.4 -2.1 2.4 -3.8 1.0 -2.8 0.0 1.0 2.0 

Associates 0.3 0.8 0.4 0.5 0.6 

Profit before tax 67.9 64.2 34.8 89.3 110.0 42.9 152.2 200.0 236.0 275.0 

Income tax expense 20.8 25.3 49.5 28.5 31.6 12.4 44.1 58.0 68.4 79.7 

Effective tax rate 30.6% 39.5% 142.1% 31.9% 28.8% 29.0% 29.0% 29.0% 29.0% 29.0% 

Net profit for the period 47.1 38.9 -14.7 60.8 78.3 30.4 108.1 142.0 167.5 195.2 

o/w group 38.5 29.8 -20.9 48.9 62.7 24.3 86.4 113.6 159.2 185.5 

o/w minority interests* 8.7 9.1 6.2 11.9 15.6 6.1 21.6 28.4 8.4 9.8 

Diluted EPS (EUR) 0.22 0.22 -0.12 0.29 0.37 0.14 0.51 0.67 0.95 1.10 

Y-o-y change 

Net sales na 1% -10% 26% 28% 23% 26% 19% 11% 10% 

Operating expenses na 2% -8% 24% 18% 19% 18% 16% 10% 9% 

EBIT na -18% -43% 137% 93% 50% 79% 29% 17% 16% 

PBT na -5% -46% 157% 84% 45% 70% 31% 18% 17% 

Net income na -23% -170% -334% 78% 80% 77% 31% 40% 17% 

* As from 2013, we forecast share of minority interest to 5% from 20% of net profit 


19



March 2012 

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Ferragamo - Split of sales 

(EURm) 2007a 2008a 2009a 2010a 9M 2011a Q4 2011e 2011e 2012e 2013e 2014e 

By region 

Europe 168 178 151 182 181 58 238 267 288 305 

North America 177 160 136 174 154 67 221 256 274 287 

Japan 134 124 111 127 92 36 128 140 143 146 

Asia-Pacific 176 202 194 268 249 109 358 457 535 626 

Central and South America 23 26 28 31 27 14 41 50 60 70 

Total 678 691 620 782 701 285 987 1,170 1,300 1,435 

Europe 25% 26% 24% 23% 26% 20% 24% 23% 22% 21% 

North America 26% 23% 22% 22% 22% 24% 22% 22% 21% 20% 

Japan 20% 18% 18% 16% 13% 13% 13% 12% 11% 10% 

Asia-Pacific 26% 29% 31% 34% 35% 38% 36% 39% 41% 44% 

Central and South America 3% 4% 4% 4% 4% 5% 4% 4% 5% 5% 

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 

By distribution network 

Wholesale na 237 185 224 228 85 313 367 404 440 

Retail na 436 420 543 462 196 658 786 879 976 

Licenses and services na 11 7 7 6 2 8 9 10 11 

Property leases na 7 8 8 6 2 7 8 8 8 

Total na 691 620 782 701 285 987 1,170 1,300 1,435 

Wholesale na 34% 30% 29% 33% 30% 32% 31% 31% 31% 

Retail na 63% 68% 69% 66% 69% 67% 67% 68% 68% 

Licenses and services na 2% 1% 1% 1% 1% 1% 1% 1% 1% 

Property leases na 1% 1% 1% 1% 1% 1% 1% 1% 1% 

Total na 100% 100% 100% 100% 100% 100% 100% 100% 100% 

By product category 

Footwear na 252 241 319 302 121 423 496 544 593 

Leather goods na 223 196 244 216 93 309 378 431 487 

Apparel na 83 77 90 72 31 103 115 122 129 

Accessories na 68 58 67 53 26 78 96 109 123 

Perfumes na 46 35 46 47 11 58 69 77 84 

Licenses and services na 11 7 7 6 2 8 9 10 11 

Property leases na 7 8 8 6 2 7 8 8 8 

Total na 691 620 782 701 285 987 1,170 1,300 1,435 

Footwear na 37% 39% 41% 43% 42% 43% 42% 42% 41% 

Leather goods na 32% 32% 31% 31% 33% 31% 32% 33% 34% 

Apparel na 12% 12% 12% 10% 11% 10% 10% 9% 9% 

Accessories na 10% 9% 9% 8% 9% 8% 8% 8% 9% 

Perfumes na 7% 6% 6% 7% 4% 6% 6% 6% 6% 

Licenses and services na 2% 1% 1% 1% 1% 1% 1% 1% 1% 

Property leases na 1% 1% 1% 1% 1% 1% 1% 1% 1% 

Total na 100% 100% 100% 100% 100% 100% 100% 100% 100% 


20



March 2012 

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Ferragamo - Balance sheet 

Year ending December (EURm) 2007a 2008a 2009a 2010a 2011e 2012e 2013e 2014e 

Property, plant and equipment 105 112 106 108 160 205 222 240 

Investment property 8 8 7 8 8 8 8 8 

Intangible assets with a finite useful life 12 14 14 15 15 15 15 15 

Investments in associated and jointly controlled companies 1 1 1 1 1 1 1 1 

Other non current assets 8 7 5 5 5 5 5 5 

Other financial assets 4 7 6 7 7 7 7 7 

Deferred tax assets 38 51 55 62 62 62 62 62 

Total non-current assets 175 200 194 205 258 303 319 337 

Inventories 148 192 162 183 231 274 304 336 

as a % of sales 21.5% 27.8% 26.2% 23.4% 23.4% 23.4% 23.4% 23.4% 

Trade receivables 62 66 57 75 106 123 138 152 


Tax receivables 7 11 5 6 6 6 6 6 

Other current assets 26 28 33 23 23 23 23 23 

Other current financial assets 0 3 1 1 1 1 1 1 

Cash and cash equivalents 65 78 77 133 107 107 157 207 

Total current assets 309 380 336 421 474 535 630 725 

Total assets 484 580 531 626 731 837 949 1062 

Total shareholders' equity 178 196 193 240 309 391 483 578 

Provisions for risks and charges 12 23 4 5 5 5 5 5 

Employee benefit liabilities 9 10 9 9 9 9 9 9 

Other non-current liabilities 22 27 41 34 34 34 34 34 

Non current financial liabilities 0 0 0 0 0 0 

Deferred tax liabilities 7 6 6 6 6 6 6 6 

Total non current liabilities 49 66 61 54 54 54 54 54 

Trade payables 100 94 77 104 140 164 183 202 


Interest-bearing loans & borrowings 118 165 158 151 151 151 151 151 

Provisions for risks and charges - current portion 0 

Tax payables 10 9 17 27 27 27 27 27 

Other current liabilities 27 49 24 49 49 49 49 49 

Other current financial liabilities 1 0 1 1 1 1 1 1 

Total current liabilities 257 318 277 332 368 392 412 430 

Total liabilities 306 384 337 386 422 446 466 484 

Total liabilities and shareholders’ equity 484 580 531 626 731 837 949 1062 


21



March 2012 

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Cash flow statement 

Year ending Dec (EURm) 2007a 2008a 2009a 2010a 2011e 2012e 2013e 2014e 

EBIT 77.4 63.8 36.5 86.4 155.0 200.0 235.0 273.0 

Depreciation & amortisation 22.6 22.2 25.4 26.7 26.3 28.9 31.8 35.0 

Provision/Other 12.8 17.1 6.2 0.4 0.0 0.0 0.0 0.0 

Working capital change -29.6 -54.4 11.4 11.8 -41.8 -37.1 -25.6 -27.1 

Operational cash flow 83.2 48.6 79.4 125.4 139.5 191.8 241.2 280.9 

Interest paid -9.7 -0.4 -2.1 2.4 -2.8 0.0 1.0 2.0 

Interest received 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Taxation paid -20.8 -25.3 -49.5 -28.5 -44.1 -58.0 -68.4 -79.7 

HSBC cash flow 52.7 22.9 27.8 99.3 92.6 133.9 173.8 203.2 

Dividends paid -18.8 -8.0 -3.1 -25.9 -39.5 -59.6 -75.4 -100.3 

Capital expenditure -21.7 -28.1 -20.9 -21.8 -40.0 -44.0 -48.4 -53.2 

Fixed assets divested 0.6 2.8 0.2 0.3 0.0 0.0 0.0 0.0 

Acquisitions 0.0 0.1 0.0 0.0 -39.0 -30.0 0.0 0.0 

Shares issued 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

Own shares purchased 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

TOTAL cash flow 12.8 -10.4 4.0 51.9 -26.0 0.2 50.0 49.6 

Translation differences & other -66.7 -19.7 0.3 10.5 -0.6 0.0 0.0 0.0 

Change in net cash (debt) -53.9 -30.1 4.3 62.4 -26.6 0.2 50.0 49.6 


22

2 

5 

. 

3 



March 2012 

abc 

Financials & valuation: Salvatore Ferragamo 

Overweight (V) 

Financial statements 

Year to 12/2010a 12/2011e 12/2012e 12/2013e 

DCF analysis 

HSBC assumptions 

DCF, comprising 

Profit & loss summary (EURm) 

Revenue 782 987 1,170 1,300 

EBITDA 113 181 229 267 

Depreciation & amortisation -27 -26 -29 -32 

Operating profit/EBIT 86 155 200 235 

Net interest 2 -3 0 1 

PBT 89 152 200 236 

HSBC PBT 89 152 200 236 

Taxation -29 -44 -58 -68 

Net profit 48 86 114 159 

HSBC net profit 48 86 114 159 

Cash flow summary (EURm) 

Cash flow from operations 99 93 134 174 

Capex -22 -40 -44 -48 

Cash flow from investment -21 -79 -74 -48 

Dividends -26 -40 -60 -75 

Change in net debt -62 27 0 -50 

FCF equity 77 53 90 125 

Balance sheet summary (EURm) 

Intangible fixed assets 90 90 90 90 

Tangible fixed assets 115 168 213 229 

Current assets 420 472 533 629 

Cash & others 133 107 107 157 

Total assets 626 731 837 949 

Operating liabilities 224 260 284 304 

Gross debt 150 150 150 150 

Net debt 17 44 44 -6 

Shareholders funds 193 309 391 483 

Invested capital 268 363 445 487 

Ratio, growth and per share analysis 


Y-o-y % change 

Revenue 26.1 26.2 18.6 11.1 

EBITDA 82.7 60.2 26.3 16.5 

Operating profit 137.0 79.3 29.1 17.5 

PBT 156.6 70.4 31.4 18.0 

HSBC EPS 78.3 31.4 40.1 

Ratios (%) 

Revenue/IC (x) 2.8 3.1 2.9 2.8 

ROIC 21.4 34.9 35.2 35.8 

ROE 28.5 34.4 32.4 36.4 

ROA 12.1 17.4 18.1 18.8 

EBITDA margin 14.5 18.4 19.6 20.5 

Operating profit margin 11.1 15.7 17.1 18.1 

EBITDA/net interest (x) 65.2 

Net debt/equity 7.2 14.2 11.2 -1.3 

Net debt/EBITDA (x) 0.2 0.2 0.2 0.0 

CF from operations/net debt 571.9 210.6 306.0 

Per share data (EUR) 

EPS Rep (fully diluted) 0.29 0.51 0.67 0.95 

HSBC EPS (fully diluted) 0.29 0.51 0.67 0.95 

DPS 0.14 0.25 0.32 0.45 

Book value 1.15 1.83 2.32 2.87 

Risk free rate (%) 3.00 EBIT growth 2011-21e CAGR (%) 13.7 

Equity Premium (%) 6.00 EBIT growth 2021-41e CAGR (%) 4.0 

Sector beta 1.20 Fading period 2041-47e 

Specific beta 1.00 WACC (%) 10.09 

Sensitivity and valuation range 

Cost of capital vs fade period 4 years 8 years 12 years 

9.1% 20.3 20.8 21.2 

9.6% 18.9 19.3 19.7 

10.1% 17.6 18.0 18.3 

10.6% 16.5 16.8 17.1 

11.1% 15.5 15.7 16.0 

Valuation data 


EV/sales 3.2 2.5 2.1 1.9 

EV/EBITDA 21.9 13.6 10.8 9.0 

EV/IC 9.3 6.8 5.5 5.0 

PE* 49.9 28.0 21.3 15.2 

P/Book value 12.5 7.8 6.2 5.0 

FCF yield (%) 3.1 2.2 3.7 5.2 

Dividend yield (%) 1.0 1.7 2.2 3.1 

Note: * = Based on HSBC EPS (fully diluted) 

Issuer information 

Share price (EUR) 14.36 Target price (EUR) 18.00 

Reuters (Equity) SFER.MI Bloomberg (Equity) SFER IM 

Market cap (USDm) 3,224 Market cap (EURm) 2,418 

Free float (%) 25 Enterprise value (EURm) 2462 

Country Italy Sector Textiles, Apparel & Luxury 

Goods 

Analysts Sophie Dargnies Contact 331 5652 4348 

Antoine Belge Contact 331 5652 4347 

Erwan Rambourg Contact 852 2996 6572 

Price relative 

19 

17 

15 

13 

11 

9 

7 

Jun-11 

Salvatore Ferragam 

Source: HSBC 

Note: price at close of 01 Mar 2012 

Dec-11 

Rel to BCI ALL-SHARE INDEX 

19 

17 

15 

13 

11 

9 

7 

23



March 2012 

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This page has been left blank intentionally 

24



March 2012 

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Investment cases 

Burberry 

Christian Dior 

Coach 

Hengdeli Holdings Ltd 

Hermès 

Hugo Boss 

Luxottica 

LVMH 

PPR 

Prada 

Richemont 

Swatch 

Tiffany 

Tod's 

25



March 2012 

abc 

Burberry 

Organic sales growth story intact, but GBP strength and continued 

investments may weigh 

Valuation (17% premium to European peers) not compelling, in our view 

Remain Neutral; increase target price to 1,600p (from 1,325p) on higher 

earnings estimates 

Neutral mostly on valuation 

Solid Q3 (Oct-Dec) trading statement 

Burberry reported 21% organic sales growth in 

Q3, which was one of the best organic sales 

growth rates in our universe. Retail outperformed 

wholesale (23% underlying vs 15%) as the brand 

continues to rationalise its wholesale distribution, 

notably in the US. The same store sales growth 

rate (13%) was only slightly below the H1 

performance (16%). 

Top line to be strong but hampered 

by GBP 

13% organic growth in FY March 13e (vs 10% 

for peers on average) 

We believe the group may offer top-line 

expansion at the high end of the range for the 

industry (13% organically in FY March 2013e vs 

10% for peers) thanks especially to China. 

We have been positively surprised by the speed at 

which China was integrated and started to benefit 

from accelerated expansion, better management, 

training, merchandising, planning, refurbishment 

and store locations. Burberry reported that 

comparable store sales in China were up by c30% 

in 9M 2011. The target is to add c10 stores pa to 

reach 100 by 2015e (vs 60 stores today) in 

mainland China. 

EUR/GBP down 3% in FY March 2013e 

Burberry is likely to suffer from GBP strength 

(lower sales translation, profits from subsidiaries 

and yen-related licences, lower tourism traffic in 

London stores). We forecast no impact from FX 

for Burberry whereas French, Italian and Swiss 

luxury goods companies will benefit from the 

EUR weakness and should see a positive 3% FX 

impact on sales on average in FY March 2013e. 

18% EPS growth in FY13e (vs 20% 

on average for our universe) but not a 

compelling valuation, in our view 

Continued investments may weigh on EBIT 

margin increase 

However, in a context of weaker growth in 

Europe and in the US, different investments in 

customer service, planning, supply chain, digital 

warehousing and investments on China, Japan 

non-apparel JVs, Brazil and India, etc may weigh 

on the EBIT margin. Therefore we believe 

Burberry’s EBIT margin potential expansion may 

be limited in the next three years. 

We nonetheless continue to argue Burberry may 

have an interesting profitability story in the longer 

term. Unlike most other luxury brands, the brand 

generates lower profitability in retail than in 

wholesale. In 2009, management mentioned an 

26



March 2012 

abc 

EBIT margin differential of more than 500bp 

between the two distribution channels, which we 

believe could be narrowed thanks to improved store 

productivity. This should be driven by a better 

product mix (outperformance of non-apparel), 

lower markdowns (fewer leftovers) and stronger 

sales of bestsellers (more frequent replenishments 

as a result of improved supply chain and systems). 

Burberry is trading at a 17% premium to 

European peers 

After a pretty good 2011 compared to peers (up 

6% vs a 6% fall overall for our European luxury 

universe excluding Hermès), the shares are up 

22% year-to-date. The stock is currently trading at 

20.6x 2012e and 17.9x 2013e calendar PE (17% 

premium on 2013e to European peers). But with 

lower EPS growth compared to peers (18% vs 

20% on average in 2012e), we believe this 

valuation is not compelling. 

We continue to believe that Burberry’s story is good 

(the five strategic themes – leveraging the franchise, 

intensifying non-apparel development, accelerating 

retail-led growth, investing in under-penetrated 

markets, operational excellence – have been rolled 

out successfully), and the way it is presented to the 

market is also very compelling: having ambitious 

managers leading a 100% free float company helps. 


Company guidance for FY March 2012 includes: 

Retail space (average) increase of 13-14% in 

H2. We factor in 24% retail sales growth at 

constant FX with 11% comps in H2 

Wholesale revenue to be up mid-single digits 

at constant FX in H2, negatively impacted 

over the short term by further rationalisation 

in Europe and US distribution. We factor in 

9% at constant FX 

Licence revenues over the full year should be 

up by a mid single-digit percentage at constant 

FX, and by c10% on a reported basis. We factor 

in 8% at constant FX. 

We have increased our FY March 2012e EBIT 

estimate by 4% thanks to a stronger-than-expected 

holiday season, and have increased our FY March 

2013e-14e EBIT estimates by 7% and 9%, 

respectively, on the back of our higher US and to a 

lesser extent Europe sales forecasts. For 2012e, 

2013e and 2014e, we forecast organic sales growth 

of 22% (18% previously), 13% (9% previously) and 

12%, respectively. In terms of EBIT margins, we 

expect 20.7% (vs 20.6% previously), 21.2% (vs 

21.1% previously) and 21.6%, respectively for FY 

March 2012-14e. 

We increase our DCF-based target price to 1,600p 

from 1,325p on the back of our earnings estimate 

increases (see above) and changes to the RFR 

(3.0% from 3.5%), ERP (4.5% from 3.5%) and 

WACC (8.40% vs 8.30%). The assumptions used 

to generate our target price are detailed on page 

29. Under our research model the Neutral band for 

UK stocks is 5 percentage points above and below 

the hurdle rate of 7.5%. Our 1,600p target price 

provides a 10.7% potential return, which is within 

the Neutral range; therefore we reiterate our 

Neutral rating. Potential return equals the 




The main downside risks to our rating include a 

failure to expand the customer base, and despite 

the retail roll-out, that the company fails to shift 

sales towards more non-apparel. In addition, as 

the brand has attracted outside talent in recent 

years, there is a risk that this talent may prove 

difficult to retain. Risks to the upside include a 

potential takeover bid (Burberry remains a 100% 

free float company), and the possibility that 

market share gains translate into much greater 

sales growth than we have factored in. 

27



March 2012 

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Burberry P&L 

YE March (GBPm) 2007a % 2008a % 2009a % 2010a % 2011a % 2012e % 2013e % 2014e % 

Sales 850 14 995 17 1,202 21 1,280 7 1,501 17 1,838 22 2,080 13 2,327 12 

Gross profit 521 17 618 18 666 8 804 21 1,010 26 1,267 25 1,438 14 1,609 12 

Gross profit margin 61.3% 62.1% 55.4% 62.8% 67.3% 68.9% 69.1% 69.2% 

Operating expenses 364 25 416 14 485 17 584 20 709 21 887 25 998 13 1,108 11 

As a % of sales 42.8% 41.8% 40.4% 45.6% 47.2% 48.2% 48.0% 47.6% 

Adjusted EBIT 185 206 11 181 -12 220 22 301 37 380 26 440 16 502 14 

EBIT margin 21.8% 20.7% 15.0% 17.2% 20.1% 20.7% 21.2% 21.6% 

Reported EBIT 157 2 202 28 -10 -105 171 -1,828 302 77 380 26 440 16 502 14 

EBIT margin 18.5% 20.3% -0.8% 13.4% 20.1% 20.7% 21.2% 21.6% 

Pre-tax profit 156 0 196 25 -16 -108 166 -1,131 296 78 378 28 445 18 512 15 

Reported net profit 110 4 135 23 -6 -104 81 -1,456 208 156 276 33 325 18 374 15 

Clean net profit 110 4 140 27 132 -6 155 17 217 40 276 27 325 18 374 15 

EPS (clean diluted) (p) 24.7 11 31.6 28 30.2 -5 35.1 16 48.8 39 62.2 27 73.2 18 84.2 15 


Burberry sales and EBIT by network and geography 

YE March (GBPm) 2007a Yoy (%) 2008a Yoy (%) 2009a Yoy (%) 2010a Yoy (%) 2011a Yoy (%) 2012e Yoy (%) 2013e Yoy (%) 2014e Yoy (%) 

Retail sales 410 29 484 18 630 30 749 19 962 29 1256 30 1448 15 1651 14 

Wholesale sales 354 3 426 20 489 15 434 -11 441 2 474 8 519 10 561 8 

License Sales 86 6 85 -2 83 -3 97 18 98 1 109 10 113 4 115 2 

Total sales 850 14 995 17 1,202 21 1,280 7 1,501 17 1,838 22 2,080 13 2,327 12 

Retail & Wholesale EBIT 112 31 136 21 110 -19 138 25 220 59 290 32 346 19 406 17 

Retail & Wholesale EBIT margin 14.6% 14.9% 9.8% 11.6% 15.6% 16.8% 17.6% 18.4% 

License EBIT 73 6 71 -4 71 0 82 16 82 -1 90 11 94 4 96 2 

License EBIT margin 85.2% 83.3% 85.6% 84.3% 82.9% 83.0% 83.0% 83.1% 


Burberry sales by geography 

YE March (GBPm) 2007a Yoy (%) 2008a Yoy (%) 2009a Yoy (%) 2010a Yoy (%) 2011a Yoy (%) 2012e Yoy (%) 2013e Yoy (%) 2014e Yoy (%) 

Europe 382 17 453 19 524 16 515 -2 475 8 557 17 598 7 643 7 

North America 197 10 235 19 305 30 321 5 387 33 428 11 453 6 473 4 

Asia Pacific 168 16 189 13 240 27 283 18 457 124 634 39 797 26 964 21 

Rest of the world 19 33 79 50 50 64 28 85 72 110 30 119 8 131 10 

Licensing 86 85 -2 83 -3 97 18 98 12 109 10 113 4 115 2 

Total sales 850 31 995 17 1,202 21 1,280 7 1,501 44 1,839 22 2,080 13 2,327 12 


28

1 

0 

. 

7 



March 2012 

abc 

Financials & valuation: Burberry Group 



Profit & loss summary (GBPm) 

Revenue 1,501 1,838 2,080 2,327 

EBITDA 365 452 521 591 



Net interest -6 -2 5 10 

PBT 296 378 445 512 

HSBC PBT 296 378 445 512 

Taxation -83 -102 -120 -138 



Cash flow summary (GBPm) 


Capex -108 -180 -160 -130 


Dividends -69 -85 -108 -127 

Change in net debt -36 -64 -126 -195 

FCF equity 148 149 234 322 

Balance sheet summary (GBPm) 



Current assets 847 973 1,142 1,376 

Cash & others 466 530 656 851 

Total assets 1,364 1,598 1,847 2,122 


Gross debt 168 168 168 168 

Net debt -298 -362 -487 -682 

Shareholders funds 714 905 1,121 1,368 





Revenue 17.3 22.4 13.2 11.9 

EBITDA 63.3 23.9 15.2 13.4 


PBT 78.2 28.0 17.6 15.0 

HSBC EPS 39.2 27.4 17.6 15.0 

Ratios (%) 

Revenue/IC (x) 5.0 4.7 4.2 4.1 

ROIC 72.4 71.1 64.3 64.2 

ROE 33.8 34.1 32.1 30.0 

ROA 17.0 18.7 18.9 18.8 

EBITDA margin 24.3 24.6 25.0 25.4 


EBITDA/net interest (x) 57.0 301.3 

Net debt/equity -40.6 -39.1 -42.7 -49.1 

Net debt/EBITDA (x) -0.8 -0.8 -0.9 -1.2 

CF from operations/net debt 

Per share data (GBPp) 



DPS 19.53 24.89 29.27 33.67 

NAV 163.90 207.84 257.59 314.18 

DCF analysis 



Neutral 

Risk-free rate (%) 3.00 EBIT growth 2011-21e CAGR (%) 8.6 

Equity premium (%) 4.50 EBIT growth 2021-41e CAGR (%) 4.0 

Sector beta 1.20 Fade period 2041-47e 


Sensitivity and valuation range (GBP/share) 


7.4% 17.84 18.32 18.69 

7.9% 16.69 17.09 17.44 

8.4% 15.66 16.00 16.31 

8.9% 14.73 15.02 15.29 

9.4% 13.89 14.13 14.38 



EV/sales 4.0 3.2 2.8 2.4 

EV/EBITDA 16.3 13.0 11.1 9.4 

EV/IC 18.2 13.0 10.6 9.3 

PE* 29.6 23.2 19.8 17.2 

P/NAV 8.8 7.0 5.6 4.6 

FCF yield (%) 2.4 2.4 3.7 5.2 




Share price (GBPp) 1,446 Target price (GBPp) 1,600 

Reuters (Equity) BRBY.L Bloomberg (Equity) BRBY LN 

Market cap (USDm) 10,124 Market cap (GBPm) 6,344 

Free float (%) 100 Enterprise value (GBPm) 5,885 

Country United Kingdom Sector Textiles, Apparel & Luxury 

Goods 

Analysts Sophie Dargnies Contact 33 1 5652 4348 

Antoine Belge Contact 33 1 5652 4347 



1689 

1489 

1289 

1089 

889 

689 

489 

489 

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 

Burberry Group Rel to FTSE ALL-SHARE 

Source: HSBC 


1689 

1489 

1289 

1089 

889 

689 

29



March 2012 

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Christian Dior 

Dior’s discount to our estimated restated net asset value (RNAV) 

is now 24%, a level we consider close to fair value (by historical 

standards) 

Increasing target price to EUR130 from EUR122 on the back of 

the increase in our LVMH target price to EUR135 (from EUR127) 

Downgrading Dior to Neutral (from Overweight) as the potential 

return is limited (9.9% based on our target price) 

Downgrading to Neutral 

(from Overweight) 

24% discount to RNAV 

Christian Dior is the main holding company for 

LVMH, controlling 40.9% of the shares and c57% 

of the voting rights. Besides its stake in LVMH 

(92% of assets), Dior’s only operational entity is 

the Dior Couture brand (7%). Christian Dior’s 

holding in LVMH has changed slightly since the 

dilution linked to the Bulgari deal last year. After 

this deal, Christian Dior held a 40.9% stake (vs 

42.4% previously) and c57% of voting rights 

(c58%, previously). 

Since the beginning of 2012, Dior shares have 

gained 29% vs 18% for LVMH shares. Dior’s 

discount to our estimated restated net asset value 

(RNAV) is thus now 24% (vs 32% on 5 October 

2011). There is nothing surprising here as 

conglomerate/holding discounts to RNAV tends to 

fall during bull market phases and vice versa. As 

evidenced by the chart on the next page, the discount 

to RNAV has moved within a 6%-34% range 

(average 20%) since 2005. Note that higher levels of 

discounts were witnessed in the 1995-2005 period, 

but we would discard them from the analysis since 

the LVMH control structure was much more 

complicated and moreover the French tax regime 

back then (taxation on capital gains) implied a higher 

discount for most French conglomerates. 

We remain Neutral on LVMH with a new 

EUR135 target price – see our detailed LVMH 

investment case on page 57. As we base our sumof-the-parts 

target price for Dior on LVMH 

reaching our new target price of EUR135 (vs 

EUR127 previously) and a Dior-targeted discount 

to RNAV of 20%, our new Dior target price is 

EUR130 (vs EUR122, previously) – see our 

detailed assumptions on page 33. 

Under our research model, for stocks without a 



for Europe ex-UK stocks of 9.0%. Our target price 

of EUR130 provides a potential return of 9.9%, 

within the Neutral band of our model; therefore, 

we are downgrading our rating on Christian Dior 

stock to Neutral from Overweight. Potential return 



the forecast dividend yield when indicated. 

30



March 2012 

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Strong performance for Dior Couture 

in 2011, recovery to continue in 2012 

Dior Couture registered stellar growth (22% 

organic sales growth in 2011 vs 10% in 2010) 

with retail (c82% in 2011) up 28%. Wholesale 

continued to underperform but Dior’s target is to 

reduce its wholesale footprint (representing 14% 

of sales in 2010 from 19% in 2009). 

FY 2011 EBIT margin strongly improved and 

gained 430bp to 8.5% thanks to (i) a higher 

operating leverage; (ii) a better mix; and (iii) a 

higher share of products being sold at full price. 

Dior Couture's own stores sales by region, 2010 

Europe and 

Middle East 

50% 


Americas 

10% 

Asia 

40% 

For 2012e, we forecast 9% organic sales growth 

and a 150bp EBIT margin improvement to 10% 

on the back of a higher proportion of its own 

stores sales, higher gross margin and better 

SG&A leverage (including improved store 

productivity). For 2013e, we forecast 7.5% 

organic sales growth and a 50bp EBIT margin 

improvement to 10.5%. 

We consider the value of the Dior Couture brand 

to be a limited driver, as it is too marginal (only 

7% of Dior’s RNAV today) relative to Dior’s 

40.9% stake in LVMH (92% of RNAV). 

Risks 

The main downside/(upside) risk to our rating on 

Dior would be a negative/(positive) development 

in LVMH’s share price. Another risk would be a 

change in the market’s view of the discount to 

apply to holding companies (positive or negative). 

Since Dior’s IPO in 1995, there has been press 

speculation about a potential streamlining of the 

current LVMH control structure. In theory, 

expectations or announcements about such a 

simplification (eg an LVMH/Dior merger or a 

Dior minority buy-out) – provided it benefited 

Dior’s minority shareholders – should trigger a 

sharp narrowing in the company’s discount to 

RNAV. We think this could be a potential upside 

catalyst for Dior. 

Dior discount to our estimated net asset value 

0% 

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 

-10% 

-20% 

-30% 

-40% 

-50% 

-60% 

Source: Thomson Reuters Datastream, using share price close at 1 March 2012 

31



March 2012 

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Dior Couture sales & EBIT evolution 

EURm 

1993a 1994a 1995a 1996a 1997a 1998a 1999a 2000a 2001a 2002a 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012e 2013e 2014e 

Sales 124 137 157 187 200 200 220 296 350 492 523 595 663 731 787 765 717 826 1,000 1,120 1,204 1,295 

EBIT 19 22 24 24 11 -1 9 14 -5 33 40 50 53 56 74 9 13 35 85 112 126 142 

EBIT margin 15.3 16.1 15.1 13.1 5.6 -0.3 3.9 4.7 -1.5 6.7 7.7 8.4 8.0 7.7 9.4 1.2 1.8 4.2 8.5 10.0 10.5 11.0 

y-o-y change (%) 

Sales 10 15 19 7 0 10 35 18 41 6 14 11 10 8 -3 -6 15 21 12 8 8 

EBIT 16 8 3 -54 nm nm 64 nm nm 21 25 6 6 32 -88 44 nm 143 32 13 13 


Dior restated net asset value 

EURm % stake Restated NAV Method % of RNAV 

LVMH 40.89% 26,767 Share price EUR128.80 91.3% 

Dior Couture 100.00% 2,120 2x 2012e sales 7.2% 

Property 100.00% 108 90,000m2 at EUR12,000/m2 0.4% 

Treasury stocks 1.54% 332 Share price EUR118.25 1.1% 

Restated NAV 29,327 100% 

Parent company debt -1,178 

RNAV (EURm) 28,149 

RNAV per share (EUR) 154.90 

Share price (EUR) 118.25 

Discount (%) -24% 


Dior target price calculation based on HSBC's LVMH target price 

EURm % stake Restated NAV Method % of RNAV 

LVMH 40.89% 28,056 HSBC target price EUR135 92% 

Dior Couture 100.00% 2,120 2x 2012e sales 7% 

Property 100.00% 108 90,000m2 at EUR12,000/m2 0% 

Treasury stocks 1.54% 332 Share price EUR118.25 1% 

Restated NAV 30,615 100% 



Targeted discount to RNAV (%) -20% 

HSBC Dior target price (EUR per share) 130 


32

9 

. 

9 



March 2012 

abc 

Financials & valuation: Christian Dior 




Revenue 21,123 24,659 28,245 30,504 

EBITDA 5,175 6,270 6,982 7,670 


Operating profit/EBIT 4,338 5,348 6,167 6,807 

Net interest 566 -283 -199 -125 

PBT 4,745 4,962 5,876 6,592 

HSBC PBT 4,745 4,962 5,876 6,592 

Taxation -1,476 -1,466 -1,818 -2,039 

Net profit 1,261 1,356 1,608 1,808 

HSBC net profit 1,261 1,356 1,608 1,809 


Cash flow from operations 4,512 3,987 4,302 5,090 

Capex -1,002 -1,749 -1,400 -1,500 

Cash flow from investment -2,876 -6,309 -1,400 -1,500 

Dividends -362 -416 -479 -551 

Change in net debt -356 1,988 -1,239 -1,755 

FCF equity 3,510 2,238 2,902 3,590 


Intangible fixed assets 17,432 21,740 21,740 21,740 

Tangible fixed assets 7,060 8,344 8,927 9,560 

Current assets 11,551 13,626 15,214 16,212 

Cash & others 2,408 2,426 2,426 2,426 

Total assets 41,197 51,109 53,477 55,307 

Operating liabilities 5,407 6,648 7,574 8,155 

Gross debt 6,846 8,852 7,613 5,858 

Net debt 4,438 6,426 5,187 3,432 

Shareholders funds 7,703 12,956 15,229 17,774 

Invested capital 28,228 34,636 35,881 36,931 




Revenue 19.0 16.7 14.5 8.0 

EBITDA 22.7 21.2 11.4 9.9 


PBT 71.4 4.6 18.4 12.2 

HSBC EPS 81.4 7.5 18.6 12.5 

Ratios (%) 

Revenue/IC (x) 0.8 0.8 0.8 0.8 

ROIC 10.8 12.0 12.1 12.9 

ROE 18.1 13.1 11.4 11.0 

ROA 7.5 8.0 8.0 8.5 

EBITDA margin 24.5 25.4 24.7 25.1 


EBITDA/net interest (x) 22.2 35.1 61.6 

Net debt/equity 22.7 25.8 18.8 11.2 


CF from operations/net debt 101.7 62.0 82.9 148.3 




DPS 2.11 2.43 2.79 3.21 

NAV 43.15 72.57 85.30 99.56 

Dior restated net asset value (target price) 

EURm 

Neutral 

RNAV 

LVMH (40.89% stake) @ EUR135 per share 28,056 

Dior Couture (2x 2012e sales) 2,120 

Property (90,000m2 at EUR12,000/m2) 108 

Treasury stocks 332 

Restated NAV 30,615 



Target discount (%) -20% 

Target price Dior (EUR per share) 130 



Reuters (Equity) DIOR.PA Bloomberg (Equity) CDI FP 


Free float (%) 29 Enterprise value (EURm) 58,125 

Country France Sector Textiles, Apparel & Luxury 

Goods 





126 

116 

106 

96 

86 

76 

66 

66 

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 

Christian Dior Rel to SBF-120 

Source: HSBC 


126 

116 

106 

96 

86 

76 

33



March 2012 

abc 

Coach 

Opportunity in Men’s a strong company specific, in our view 

Valuation not compelling (13% premium to European peers) after 

25% share price increase y-t-d 

Remain Neutral, increase target price to USD80 (from USD59) on 

higher estimates 

Opportunity in Men’s a strong 

company specific 

Less cautious view on Coach US 

In September last year, we took a cautious view 

on the US affluent consumer and forecast a 

marked slowdown in Coach’s North American 

comps (2.2% in FY12e and 4.3% in FY13e). After 

two quarters of stronger-than-expected comps 

(9.2% in Q1 ended September 2011 and 8.8% in 

Q2 ended December 2011), we now forecast a 

more modest rate of slowdown: 6% for H2 ending 

June 2012 and 4.5% in FY13e. We believe 

Coach’s ‘affordable luxury’ positioning (more 

than 80% of products sold are priced below 

USD400) places the brand in a sweet spot and, 

unlike Tiffany, it is not facing the heavy 

discounting of local brands. 

Moreover, we now factor in a much higher 

contribution from new stores. The company 

intends to increase its North American square 

footage by 10-11% in FY12e, driven by Men’s. In 

total, 40 stores should be opened this year in 

North America (about 15 full price and 25 

factory), of which about half is dedicated Men’s 

locations. Coach is on track to double again the 

size of its Men’s business to over USD400m 

globally in FY12e (ie c8% of total sales) and 

USD1bn in the next three to five years (c15% of 

total sales). 

We believe Men’s opportunity: 

offsets the traditional bear issue regarding 

Coach’s maturity in North America (Coach 

already has 350 full-price and 157 factory 

stores there), with the prospect of openings of 

dedicated stores, shop-in-shops and dualgender 

locations; 

allows productivity gains in existing stores 

via expanded assortments (concept store 

within existing stores); 

provides an opportunity to address the 

sluggishness of the Japanese market, 

allowing for 15 net store openings in FY12, 

the vast majority of them Men’s stores 

(currently, most of Coach’s distribution in 

Japan is within department stores in the 

Women’s handbag floor); 

will contribute to the China story due to the 

strong prospects for dual-gender stores in a 

country where Men’s accounts for a bit more 

than half of sales of the leather and 

accessories segment. 

34



March 2012 

abc 

International distribution (% of FY June 11 sales) 

Japan 

China 

17% 

6% 

North 

American 

Stores 

62% 


Other Intl 

5% 

US Department 

stores 

6% 

NA Internet 

4% 

Asia ex-Japan small, but growing fast 

Looking at growth rates in Asia over the past 

three years, consumers there clearly love Coach. 

The brand’s “New York” positioning is unique in 

China, the accessible luxury positioning will 

recruit many aspirational consumers, in our view, 

and the potential for store openings in the 1m+ 

population cities seems almost limitless (the brand 

plans to add c60% space in FY12). 

In FY June 2011, Coach exceeded its guidance for 

revenues in Greater China (USD185m vs 

USD100m in FY 2010), which had been raised 

during the year. The company is targeting to reach 

more than USD300m by FY12 and USD500m by 

FY14, ie a c10% market share vs 6% today). At the 

end of Q2, Coach had 65 stores in the mainland (of 

which 28 dual-gender locations) in 28 cities, 12 in 

HK and 3 in Macau. Coach’s unaided awareness in 

China is now 16% (vs 8% last year). 

Other Asian markets also look promising, notably 

Singapore where Coach has just acquired 

operations from its distributor (Malaysia should 

follow). Vietnam, Brazil and Kuwait will be new 

markets in FY June 2012. 


On 24 January, Coach reported an 18 % EPS 

increase for Q2 ended December 2011, driven by 

a 15% sales increase and a 10bp EBIT margin 

improvement to 36% (the reported margin was 

34.6% due to a USD20m pre-tax one-off 

contribution to the Coach foundation, offsetting a 

USD12m one-off tax gain at the EPS level). 

We have increased our FY2012e and 2013e EPS 

2014e EPS estimates by 8% and 11% on the back 

of higher North American comps (we now 

forecast 8% in FY12e and 4.5% in FY13e). 

We forecast flat gross margin over the next three 

years, with counter-sourcing helping to offset 

input cost inflation in China. All incremental 

production needs will be sourced outside China 

(Vietnam/India), leading China to account for 

c75% of total production in FY12e (vs 86% in 

FY11 and 93% in FY10). 

We raise our DCF-based target price to USD80 

(from USD59) on the back of our abovementioned 

earnings estimate increases as well as 

our higher medium-term assumptions for Asia in 

general and for the US Men’s business. The 

assumptions used to generate our DCF-derived 

target price are detailed on page 37, with a revised 

RFR of 3.0% vs 3.5%, ERP of 4.5% vs 3.5% and 

a WACC of 8.52% vs 8.33% previously. Under 

our research model, for US stocks without a 



for US stocks of 7.0%. Our new target price 

implies a 4.2% potential return, which is within 

the Neutral band of our model, therefore we 

maintain our Neutral rating. Potential return 




Coach shares are up 25% y-t-d. On our updated 

figures, the stock is trading at a 20.0x calendar 

2012e and 17.6x 2013e PE, a 13% premium to 

European luxury stocks. 

Upside risks to our Coach rating include strongerthan-expected 

sales growth in North America and 

greater SG&A leverage than factored into our 

estimates. Downside risks to our rating include the 

brand’s different positioning in its two channels 

(full-price retail and outlets), which could pose a 

threat to its image, potential disruption from noncore 

projects (Reed Krakoff) and lack of success in 

entering the European market. 

35



March 2012 

abc 

Coach simplified P&L 

USDm FY06/07a FY07/08e FY08/09 FY09/10a Q111a Q211a Q311a Q411a FY10/11a Q112a Q212a FY11/12e FY12/13e FY12/13e 

Net sales 2,612 3,181 3,230 3,608 912 1,264 951 1,032 4,159 1,050 1,449 4,800 5,400 6,000 

Cost of sales 589 774 908 974 236 349 259 291 1,135 286 403 1,311 1,474 1,637 

Gross profit 2,023 2,407 2,323 2,634 676 915 692 740 3,024 765 1,045 3,489 3,926 4,363 

Gross margin 77.4% 75.7% 71.9% 73.0% 74.2% 72.4% 72.8% 71.8% 72.7% 72.8% 72.2% 72.7% 72.7% 72.7% 

Selling, G&A 1,030 1,228 1,322 1,484 391 462 438 428 1,719 443 544 1,939 2,146 2,363 

SG&A as % of sales 39.4% 38.6% 40.9% 41.1% 42.8% 36.5% 46.1% 41.5% 41.3% 42.1% 37.6% 40.4% 39.7% 39.4% 

Operating income 993 1,179 1,000 1,150 286 453 254 312 1,305 322 501 1,550 1,780 2,000 

Operating margin 38.0% 37.1% 31.0% 31.9% 31.3% 35.9% 26.7% 30.2% 31.4% 30.7% 34.6% 32.3% 33.0% 33.3% 

Interest income 41.3 37.1 3.2 1.8 -0.6 -0.9 -0.8 -1.4 -3.7 -1.4 -1.8 0.0 20.0 35.0 

PBT 1,035 1,216 1,003 1,152 285 452 253 311 1,301 321 499 1,550 1,800 2,035 

Income taxes 398 474 381 417 96 149 67 108 420 106 152 501 594 672 

Tax rate 38.5% 39.0% 38.0% 36.2% 33.7% 32.9% 26.5% 34.8% 32.3% 32.9% 30.4% 32.3% 33.0% 33.0% 

Minority interest 

Net income 637 742 622 735 189 303 186 202 881 215 347 1,049 1,206 1,363 

Net EPS common (diluted) (USD) 1.69 2.06 1.91 2.33 0.63 1.00 0.62 0.68 2.92 0.73 1.18 3.56 4.10 4.64 

Weighted avg com share 377.4 360.3 325.6 315.8 301.3 304.7 301.6 298.7 301.6 296.1 295.5 294.9 294.0 294.0 

outst. (diluted) (m) 

Net sales 28% 22% 2% 12% 20% 19% 14% 9% 15% 15% 15% 15% 13% 11% 

Cost of sales 30% 31% 17% 7% 11% 19% 20% 15% 17% 21% 15% 16% 12% 11% 

Gross profit 28% 19% -4% 13% 23% 19% 12% 6% 15% 13% 14% 15% 13% 11% 

Operating expenses 19% 19% 8% 12% 19% 18% 19% 7% 16% 13% 18% 13% 11% 10% 

Income before tax & 

39% 19% -15% 15% 28% 19% 2% 5% 13% 13% 10% 19% 15% 12% 

minority interest 

Diluted EPS 41% 22% -7% 22% 43% 33% 23% 9% 25% 16% 18% 22% 15% 13% 

North America retail comps 22% 10% -7% 4% 9% 13% 10% 10% 11% 9% 9% 8% 5% 5% 

Direct-to-consumer 2,102 2,544 2,727 3,156 776 1,096 832 919 3,622 910 1,283 4,261 4,829 5,394 

Indirect 511 637 504 452 136 168 119 113 537 140 166 539 571 606 

Total sales 2,612 3,181 3,231 3,608 912 1,264 951 1,032 4,159 1,050 1,449 4,800 5,400 6,000 


36

4 

. 

2 



March 2012 

abc 

Financials & valuation: Coach 



Profit & loss summary (USDm) 

Revenue 4,159 4,800 5,400 6,000 

EBITDA 1,430 1,688 1,934 2,170 



Net interest -4 0 20 35 

PBT 1,301 1,550 1,800 2,035 

HSBC PBT 1,301 1,550 1,800 2,035 

Taxation -420 -501 -594 -672 

Net profit 881 1,049 1,206 1,363 

HSBC net profit 881 1,049 1,206 1,363 

Cash flow summary (USDm) 


Capex -148 -200 -224 -246 


Dividends -178 -284 -311 -343 


FCF equity 796 911 1,074 1,228 

Balance sheet summary (USDm) 




Cash & others 702 1,065 1,923 2,904 

Total assets 2,635 3,156 4,163 5,296 

Operating liabilities 998 1,019 1,035 1,051 

Gross debt 23 23 23 23 

Net debt -679 -1,042 -1,899 -2,881 


Invested capital 749 887 1,020 1,155 




Revenue 15.3 15.4 12.5 11.1 

EBITDA 12.0 18.0 14.6 12.2 


PBT 13.0 19.1 16.1 13.1 

HSBC EPS 25.5 21.8 15.3 13.1 

Ratios (%) 

Revenue/IC (x) 5.8 5.9 5.7 5.5 

ROIC 122.4 128.3 125.1 123.2 

ROE 56.5 56.3 46.2 37.2 

ROA 34.5 36.2 33.0 28.8 

EBITDA margin 34.4 35.2 35.8 36.2 






Per share data (USD) 



DPS 0.90 0.99 1.09 1.20 

NAV 5.49 7.37 10.85 14.76 

DCF analysis 



Neutral 





Sensitivity and valuation range (USD/share) 


7.5% 88.5 90.8 92.7 

8.0% 83.2 85.1 86.8 

8.5% 78.3 80.0 81.5 

9.0% 74.0 75.4 76.7 

9.5% 70.0 71.2 72.3 



EV/sales 5.1 4.4 3.7 3.2 

EV/EBITDA 15.0 12.5 10.4 8.9 

EV/IC 28.6 23.7 19.8 16.6 

PE* 26.3 21.6 18.7 16.5 

P/NAV 14.0 10.4 7.1 5.2 

FCF yield (%) 3.6 4.1 4.9 5.6 




Share price (USD) 76.74 Target price (USD) 80.00 

Reuters (Equity) COH.N Bloomberg (Equity) COH US 

Market cap (USDm) 22,083 Market cap (USDm) 22,083 

Free float (%) 100 Enterprise value (USDm) 21,042 

Country United States Sector Textiles, Apparel & Luxury 

Goods 

Analysts Erwan Rambourg Contact 852 2996 6572 


Sophie Dargnies Contact 33 1 5652 4347 


79 

69 

59 

49 

39 

29 

29 

mars-10 sept-10 mars-11 sept-11 mars-12 

Coach Rel to S&P 500 

Source: HSBC 


79 

69 

59 

49 

39 

37



March 2012 

abc 


Despite the recent rebound, we see further scope for the shares and 

no need for the company to go to the market to finance its growth 

Chairman’s use of shares as collateral for a loan and the Ming Fung 

deal have taken Hengdeli off investors’ radar screen 

Still compelling, increase target price to HKD4.75 (HKD4.20 

previously) on DCF roll-over and slightly higher estimates; remain 


Fundamentals still strong 

Why buy after stock rises 50%? 

Mean reversion 

What is more important: that the stock has risen 

50% since early January or that it had more than 

halved the year before? We are not trying to play 

“chicken or egg” here but our view is that Hengdeli 

is only starting to recover from an unfair de-rating, 

partly linked to micro issues (Chairman’s loan, 

Ming Fung venture, impression the company 

needed the market to finance its growth; see our 

previous reports on Hengdeli for details), partly 

linked to macro issues (a hard landing scenario for 

China was the story last autumn). 

We note that while global stocks in the watch space 

(Richemont, Swatch) are not that far from their 

historical highs, Hengdeli is still c40% below the 

HKD5.07 high reached in November 2010. 

The market has considered it fair that Asia-driven 

watch retailers should trade at a discount to the global 

hard luxury companies they distribute for (after all, a 

high barrier-to-entry brand should trade at a premium 

to a retailer) but the chart on the right may also point 

to an exaggerated de-rating of the former. 

Hengdeli/Emperor vs Swatch/Richemont 

30% 

5% 

-20% '05 '06 '07 '08 '09 '10 '11 

-45% 

-70% 

Prem/Disc 

Average 

Avg=-27.1% 

Source: Thomson Reuters Datastream, I/B/E/S estimates for Emperor, HSBC estimates 

Market still waiting for trends to collapse; we 

still think it will not happen 

Swiss watch exports for January 2012 showed 

no signs of a slowdown for Hong Kong and 

China while the rest of the world (ex-US), 

logically, is slowing. 

Hengdeli has a c50% market share in China so 

this data is very relevant and shows the post- 

Chinese New Year orders were strong. Exports 

were up a third in HK and China in January 2012 

(but up "only" 16% globally). 

What does this tell us? This was the first set of 

figures post Chinese New Year and they show that 

inventory overload fears were probably overdone 

and that sell-in and sell-through figures are now 

probably well aligned. The first two months of 

38



March 2012 

abc 

trading should undoubtedly prove to be higher than 

our 18% sales growth projected for this year. 

Our biggest fear for the brands at Richemont and 

Swatch in the past few months was the theoretical 

risk that retailers would load up stock in anticipation 

of a strong Chinese New Year and then de-stock if 

they realised they had too much. We believe this has 

remained theoretical and that the Chinese New Year 

“hurdle” was successfully passed. 

“Cheap and cheerful” vs “high and dry” 

could be the next debate 

This part is common to the investment cases of 

Hengdeli, Richemont and the Swatch Group and 

concerns all three. As explained, we believe trends 

in China will slow but not see a steep step down and 

the recent Swiss watch exports data point to very 

decent orders that will support February/March 

sales. We think, however, that price points will 

matter more this year than last, with higher-end 

products probably seeing sales slow more than the 

average of the watch space. There are several 

reasons we think this will be the case: 

We estimate that up to two-thirds of consumers 

purchasing luxury products in China are new to 

the brands they buy (ie not “repeat purchasers”) 

and are taking the view that the proportion of 

clients “new to a brand” is greater at the lower 

price points (Rado, Mido, Longines, Tissot) 

than for Omega and above type of price points. 

We believe consumers able to afford higher 

price points are more “travelled” and exposed to 

negative headline news weighing on sentiment 

and will take the view that they can postpone a 

EUR10k purchase, waiting for a better 

psychological environment. 

We are convinced that corporate gift giving (or 

Guanxi) drives high-end purchases more than it 

drives sales of the likes of Rado, Longines, 

Tissot, etc and if real estate deals are scarce and 

government officials change at year-end, we 

see gifting slowing, at least temporarily. 

Our estimate for Greater China is that sales growth 

for Omega and above price points will be in the high 

single digits/low double digits only while lowerpriced 

brands could still grow comfortably in the 

high 20s, if not more on the back of middle-class 

expansion and higher wages. We think Hengdeli is a 

good proxy for the space in Greater China and we 

see it increasing total sales in 2012e by 19% (vs 37% 

in 2011e), or 20% at retail (vs 36%), with mainland 

China up 26% (vs 38%) and Hong Kong up 10% 

only (vs 32%). Note there is a correlation between 

regional exposure and price points (the mainland is 

far more volume-driven than Hong Kong). 


The next catalyst is the full-year 2011 results on 20 

March. We would keep riding the positive wave 

ahead of the release. As a low-teen PE stock for 

2012 delivering high-teen EPS growth on our 

estimates, this is still reasonable, in our view. We are 

no longer higher than consensus, but it is a question 

of the market starting to consider whether consensus 

is realistic (if not low).We have not touched our 

sales forecast for 2011e and have only increased our 

2012e estimates by 5% on 2011e EBIT, and 

decreased by 1% for 2012e EBIT as we have 

increased wholesale growth since wholesale sales 

are very much driven by entry-level brands. We 

believe the results should show good inventory 

management (ie 180 days or less), cash generation 

(addressing market fears that this company may be a 

cash burner rather than a cash generator) and 

continued strong trends. 

Valuation 

We increase our DCF-based target price to 

HKD4.75 (from HKD4.20) after rolling over our 

DCF basis by a year (now starting 2012). Our key 

assumption changes are a RFR of 3.0% vs 3.5%, 

ERP of 7.0% vs 6.5% and a WACC of 10.50% vs 

10.28% (see table on page 41). Under our research 

model, for stocks with a volatility indicator, the 

Neutral band is 10 ppts above and below the hurdle 

rate for Chinese stocks of 10%. Our HKD4.75 

target price implies a 39% potential return, which is 

above the Neutral band; therefore, we reiterate our 

39



March 2012 

abc 

Overweight (V) rating on Hengdeli stock. Potential 

return equals the percentage difference between the 



Hengdeli remains the highest potential return 

stock in our coverage. At the current price, and on 

our EPS estimates, Hengdeli is trading at 13.9x 

2012e and 11.7x 2013e earnings. On our target 

price, the stock would be trading at 19.3x 2012e 

earnings for 19% EPS growth. 

Risks 

Downside risks to our thesis include execution 

risk in managing the store expansion plans, 

higher-than-expected rent and staff cost inflation, 

and any macro threat in China affecting watch 

sales (or making investors think that watch sales 

are at risk). M&A activity (eg buyout of retail 

stores, further investment in Ming Fung) could 

well be negatively viewed by the market as well. 

Hengdeli - P&L statement 

Year to Dec (RMBm) 2009a H1 2010a H2 2010a 2010a H1 2011a H2 2011e 2011e 2012e 2013e 

Total number of stores 270 302 350 350 380 400 400 440 480 

PRC retail (RMBm) 2,722 1,774 1,996 3,770 2,596 2,621 5,217 6,574 7,974 

- No. of stores 224 252 286 286 311 326 326 362 400 

Same-store sales growth 12% 34% 32% 33% 38% 22% 30% 13% 15% 

% change y-o-y 17% 40% 37% 38% 46% 31% 38% 26% 21% 

HK retail (RMBm) 1,705 1,046 1,366 2,412 1,449 1,734 3,183 3,506 3,927 


Same-store sales growth -37% 38% 34.4% 9% 21% 7% 9% 

% change y-o-y 20% 45% 33% 41% 39% 27% 32% 10% 12% 

Taiwan retail (RMBm) 8 68 125 193 103 155 258 305 345 


Same-store sales growth 42% 25% 15% 12% 

% change y-o-y 51% 24% 34% 18% 13% 

Retailing (RMBm) 4,428 2,888 3,487 6,375 4,148 4,510 8,658 10,385 12,245 

y-o-y 44% 41% 44% 44% 29% 36% 20% 18% 

Same-store sales growth 36% 18% 26% 11% 13% 

Wholesale (RMBm) 1,330 751 910 1,661 1,156 1,203 2,359 2,735 3,125 

y-o-y -19% 10% 40% 25% 54% 31% 42% 16% 14% 

Others 134 75.6 104 180 104 130 234 281 331 

After-sales (RMBm) -6% 22% 45% 34% 37% 25% 30% 20% 18% 

Sales (RMBm) 5,892 3,715 4,501 8,216 5,407 5,843 11,250 13,400 15,700 

y-o-y 6.8% 37.8% 40.8% 39.4% 45.6% 29.8% 36.9% 19.1% 17.2% 

Gross profit (RMBm) 1,401 915 1,134 2,049 1,392 1,540 2,932 3,536 4,184 

GP margin 23.8% 24.6% 25.2% 24.9% 25.7% 26.4% 26.1% 26.4% 26.7% 

bp change -35.4 -0.8 213.2 115.6 112.9 114.9 112.3 32.4 26.4 

EBIT 578 387 432 819 643 601 1,245 1,472 1,735 

y-o-y 6.2% 28.2% - 41.6% 66.3% 39.2% 52.0% 18.3% 17.9% 

EBIT margin 9.8% 10.4% 9.6% 10.0% 11.9% 10.3% 11.1% 11.0% 11.1% 

Pre-tax profit 513 425 391 816 647 567 1,214 1,441 1,709 

y-o-y -14.0% 45.7% 76.1% 58.9% 52.4% 44.9% 48.8% 18.8% 18.6% 

Tax -128 -95 -103 -198 -147 -151 -297 -360 -427 

Eff tax rate (excl CB loss) 24.9% 22.4% 26.4% 24.3% 22.7% 26.6% 24.5% 25.0% 25.0% 

Minorities -21 -25 -39 -63 -52 -33 -85 -101 -120 

Net profit/(loss) - report 364 305 249 554 448 383 831 980 1,162 

y-o-y -16.8% 39.3% 71.1% 52.0% 46.8% 54.1% 50.1% 17.9% 18.6% 

Net margin 6.2% 8.2% 5.5% 6.7% 8.3% 6.6% 7.4% 7.3% 7.4% 


40

3 

8 

. 

9 



March 2012 

abc 

Financials & valuation: Hengdeli Holdings Ltd 




DCF analysis 



Profit & loss summary (CNYm) 

Revenue 8,216 11,250 13,400 15,700 

EBITDA 872 1,320 1,562 1,840 


Operating profit/EBIT 819 1,245 1,472 1,735 

Net interest -37 -2 5 10 

PBT 816 1,214 1,441 1,709 

HSBC PBT 816 1,214 1,441 1,709 

Taxation -198 -297 -360 -427 

Net profit 554 831 980 1,162 

HSBC net profit 554 831 980 1,162 

Cash flow summary (CNYm) 

Cash flow from operations -216 195 488 824 

Capex -350 -170 -149 -148 


Dividends -110 -166 -249 -294 

Change in net debt -15 1 -61 -317 

FCF equity -846 14 384 695 

Balance sheet summary (CNYm) 


Tangible fixed assets 905 1,075 1,012 1,162 


Cash & others 3,410 3,627 3,688 4,005 

Total assets 8,938 10,509 11,428 12,739 


Gross debt 3,403 3,621 3,621 3,621 

Net debt -7 -6 -67 -384 






Revenue 39.3 36.9 19.1 17.2 

EBITDA 40.2 51.3 18.3 17.8 


PBT 58.9 48.8 18.8 18.6 

HSBC EPS 26.5 43.2 17.9 18.6 

Ratios (%) 

Revenue/IC (x) 2.2 2.3 2.4 2.5 

ROIC 16.6 19.4 19.9 21.1 

ROE 15.4 17.9 18.3 18.9 

ROA 9.4 9.9 10.2 10.9 

EBITDA margin 10.6 11.7 11.7 11.7 




Net debt/EBITDA (x) 0.0 0.0 0.0 -0.2 


Per share data (CNY) 



DPS 0.04 0.06 0.07 0.08 

NAV 1.03 1.13 1.30 1.50 


Equity Premium (%) 7.0 EBIT growth 19-39e CAGR (%) 3.0 



Key forecast drivers 


Total number of stores 350 400 440 480 

PRC retail sales growth (%) 38 38 26 21 

HK retail sales growth (%) 41 32 10 12 

Retail turnover growth (%) 44 36 20 18 

Wholesales revenue growth (%) 25 42 16 14 

Total sales growth (%) 39 37 19 17 



EV/sales 1.5 1.1 0.9 0.8 

EV/EBITDA 14.3 9.5 8.1 6.7 

EV/IC 2.8 2.4 2.2 1.9 

PE* 23.4 16.4 13.9 11.7 

P/NAV 2.7 2.5 2.1 1.9 

FCF yield (%) -6.8 0.1 3.0 5.4 




Share price (HKD) 3.42 Target price (HKD) 4.75 

Reuters (Equity) 3389.HK Bloomberg (Equity) 3389 HK 

Market cap (USDm) 1,939 Market cap (HKDm) 15,042 

Free float (%) 15 Enterprise value (CNYm) 12,572 

Country China Sector Distributors 





5.5 

5 

4.5 

4 

3.5 

3 

2.5 

2 

1.5 

1 

Jun-11 


Source: HSBC 


Dec-11 

Rel to SSE COMPOSITE INDEX 

5.5 

5 

4.5 

4 

3.5 

3 

2.5 

2 

1.5 

1 

41



March 2012 

abc 

Hermès 

Hermès should remain one of the fastest-growing companies in 

terms of top line, but not in line in terms of EPS growth 

New capital structure should limit speculation 

Downgrading to Underweight (from Neutral) and increasing 

target price to EUR272 (from EUR240) on the back of earnings 

estimate increases 

Downgrade to Underweight 

New capital structure may limit 

speculation 

At end-2011, LVMH owned 22.4% of Hermès 

International. 

On 3 December 2011, the Hermès family created a 

private holding company in France, named H51. H51 

has 50.2% of total Hermès International share capital 

and has preferential rights on 12.3% of total share 

capital directly owned by family group members. 

Only 20 people from the family who owned c10% of 

the stock decided not to be part of this holding 

company or to be subject to preferential rights. 

With this new structure (which limits the sale of 

shares outside the Hermès family) and with the 

limited free float (c5.5% in our view), we think any 

further press speculation about it is less likely (the last 

example was on 9 June 2011, when the Daily Mail 

speculated that ‘LVMH was preparing a 350 euros-ashare 

offer for Hermès’). 

Top line should be one of the best-inclass 

thanks to distinctive positioning 

Hermès posted a 14% organic sales growth in Q4 (vs 

18% in Q3). Growth in Hermès' own stores (c80-82% 

of sales, +16%) continued to outperform growth in 

wholesale (c18-20% of sales, c6%) in Q4, which was 

impacted by delivery delays and the acquisition of 

four concessions (two in Japan and two in Russia). 

The Q4 sales trend was at the low end of the range in 

terms of sales trends compared to our luxury coverage 

but we believe one of the main reason was the lack of 

products in stores (due to capacity constraints). 

Management said that sales in January 2012 grew at 

the same pace as Q4. Although we expect lower sales 

growth in Europe and in the US in 2012, we believe 

Hermès should record one of the highest sales growth 

rates in our luxury coverage thanks to its distinctive 

positioning. Indeed, even in 2009, the group 

registered only one quarter of negative sales trends: 

organic sales growth in Q1 2009 was down 5% (due 

to third-party distribution destocking) but own-stores 

sales growth was still positive (6%). We forecast 

13% organic sales growth in 2012e. 

42



March 2012 

abc 


Hermès will report full earnings on 22 March 

2012. On the back of the strong 2011 sales, 

Hermès gave more accurate 2011 EBIT margin 

guidance. Management now expects to have an 

operating margin exceeding 30% vs ‘over the 

record-high achieved in 2010 (27.8%)’, 

previously. We forecast a 30.4% EBIT margin for 

2011 (vs 29% previously). 

Our 2012 EPS growth forecast is for a 19% 

increase year-on-year but we believe several 

luxury players will achieve 20%+. 

At the same time, Hermès’ shares have risen 23% 

since the beginning of 2012 after a 47% run in 

2011 (vs an 11% decline on average for peers). 

The stock is now trading at 42.9x 2012e and 38.3x 

2013e PE, ie a 152% premium to peers. 

Hermes' share price performance since January 2010 

300 

280 

260 

240 

220 

200 

180 

160 

140 

120 

100 

80 

Jan-10 May -10 Sep-10 Jan-11 May -11 Sep-11 Jan-12 


For 2012e, management guided towards 10% 

organic sales growth (with c10% in Europe, above 

10% in Americas and Asia and 0%+ in Japan), 

and underlined that operating leverage and the FX 

impact should not be as positive at the EBIT 

margin level for 2012 compared to 2011. 

We increase our 2012-13e EBIT estimates by 

7% and 9%, respectively, due to the higher Q4 

2011 sales and higher 2011 EBIT margin 

guidance. For 2012e and 2013e, we forecast 

organic sales growth of 13% (12% previously) 

and 10% (12% previously), respectively, and 

EBIT margin of 31% (vs 29.7% previously) and 

31.5% (vs 30.4% previously). 

Since March 2009, we have believed Hermès 

should trade structurally at a premium to its 

DCF value (and as a result we continue to apply 

a 25% premium). For many years, Hermès’ stock 

has been supported by the limited free float, 

takeover speculation in the press and the potential 

for short squeezes. 

On our fundamental DCF valuation, we now 

value Hermès at EUR217.60 (vs EUR192) on the 

back of our earnings estimate increases and a 

change to our WACC (5.16% vs 5.30%) with 

these revisions: RFR of 3.0% vs 3.5%, ERP of 

6.0% vs 5.0%. Applying a 25% premium to this 

fundamental valuation, we derive a new EUR272 

target price (up from EUR240). A full breakdown 

of our DCF assumptions is provided in the 

financials and valuation on page 45. 

Under our research model, for Europe ex-UK 

stocks without a volatility indicator, the Neutral 

band is 5 percentage points above and below the 

hurdle rate for Europe ex-UK stocks of 9.0%. As 

our target price implies a -4.1% potential return, 

we downgrade to Underweight (from Neutral). 

Potential return equals the percentage difference 

between the current share price and the target 

price, including the forecast dividend yield 

when indicated. 

Upside risks include the current thin free float 

(c5.5%) being further reduced by share purchases 

by LVMH on the market or a buy-back by 

Hermès to cover employees’ grant shares. 

43



March 2012 

abc 

Hermès FY results and forecasts 

EURm 2004a YoY 2005a 

(%) 

YoY 2006a 

(%) 

YoY 2007a 

(%) 

YoY 2008a 

(%) 

YoY 2009a 

(%) 

YoY 2010a 

(%) 

YoY 2011e 

(%) 

YoY 2012e 

(%) 

YoY 2013e 

(%) 

Sales 1,332 8 1,427 7 1,515 6 1,625 7 1,765 9 1,914 8 2,401 25 2,841 18 3,300 16 3,628 10 

Gross profit 868 8 929 7 990 7 1,055 7 1,140 8 1,213 6 1,586 31 1,942 22 2,262 16 2,494 10 

Gross margin (%) 65.2% 65.1% 65.4% 64.9% 64.6% 63.3% 66.1% 68.4% 68.6% 68.8% 

Communication 71 27 76 7 90 18 93 3 98 5 91 -7 126 38 150 19 175 17 180 3 

as a % of sales 5.3% 5.3% 5.9% 5.7% 5.5% 4.8% 5.2% 5.3% 5.3% 5.0% 

Other operating costs 440 6 469 7 499 6 547 10 593 8 658 11 792 20 928 17 1,064 15 1,171 10 

EBIT 357 7 384 7 401 5 415 3 449 8 463 3 668 44 864 29 1,023 18 1,143 12 

EBIT margin 26.8 26.9 26.5 25.5 25.5 24.2 27.8 30.4 31.0 31.5 

Financial income 8 4 0 12 18 -13 -13 26 22 27 

Pre-tax profit 344 1 388 13 409 6 438 7 455 4 444 -3 653 47 880 35 1045 19 1170 12 

Net profit 214 -1 247 16 268 9 288 7 290 1 289 0 422 46 589 40 699 19 783 12 

HSBC EPS (EUR) 2.07 3 2.26 10 2.50 11 2.71 8 2.76 2 2.74 -0.5 4.00 46 5.58 40 6.62 19 7.41 12 


YoY 

(%) 

Hermès sales by geographic and product category 


(%) 

YoY 2006a 

(%) 

YoY 2007a 

(%) 

YoY 2008a 

(%) 

YoY 2009a 

(%) 

YoY 2010a 

(%) 

YoY 2011e 

(%) 

YoY 2012e 

(%) 

YoY 2013e 

(%) 

By product 

Silk 150 6% 163 9% 174 6% 193 11% 208 8% 227 9% 284 25% 347 22% 410 18% 453 10% 

Handbags & Travel 529 13% 568 7% 664 17% 675 2% 763 13% 936 23% 1,205 29% 1,348 12% 1,579 17% 1,753 11% 

RTW & accessories 273 2% 294 8% 294 0% 315 7% 337 7% 360 7% 445 24% 576 29% 681 18% 749 10% 

Other activities 134 12% 141 6% 77 -45% 86 11% 80 -6% 78 -2% 87 11% 109 25% 122 12% 132 8% 

Perfume 65 20% 73 13% 101 38% 119 18% 125 5% 117 -6% 138 17% 159 16% 171 7% 183 7% 

Watches 100 0% 104 4% 110 6% 105 -5% 95 -10% 87 -8% 113 30% 139 23% 157 13% 170 8% 

Tableware 35 3% 37 6% 45 21% 51 14% 48 -6% 38 -20% 44 14% 51 17% 56 9% 58 5% 

Other products 47 -2% 48 1% 52 8% 82 60% 109 33% 71 -35% 86 21% 113 31% 124 9% 130 5% 

Total 1,332 1,427 1,515 1,625 1765 1,914 2,401 2,841 3,300 3,628 

By geographic 

France 256 3% 269 5% 290 8% 327 13% 359 10% 370 3% 437 18% 495 13% 554 12% 610 10% 

Europe 222 9% 243 9% 280 15% 346 24% 382 10% 385 1% 463 20% 560 21% 623 11% 679 9% 

Total Europe 479 6% 512 7% 570 11% 673 18% 741 10% 756 2% 901 19% 1,055 17% 1,177 12% 1,289 9% 

Japan 398 7% 415 4% 410 -1% 382 -7% 393 3% 408 4% 453 11% 472 4% 512 9% 517 1% 

Asia 217 14% 245 13% 261 6% 282 8% 321 14% 423 32% 631 49% 808 28% 1,020 26% 1,173 15% 

Total Asia 616 9% 660 7% 671 2% 664 -1% 713 7% 831 16% 1,084 30% 1,280 18% 1,532 20% 1,690 10% 

America 197 11% 216 10% 232 8% 246 6% 265 8% 294 11% 385 31% 464 21% 545 17% 599 10% 

Rest of the world 41 8% 39 -4% 42 8% 43 1% 46 7% 34 -25% 31 -8% 43 37% 46 8% 50 8% 

Total 1,332 1427 1515 1,625 1,765 1,914 2,401 2,841 3,300 3,628 


YoY 

(%) 

44

- 

4 

. 

1 



March 2012 

abc 

Financials & valuation: Hermès 

Underweight 



DCF analysis 




Revenue 2,401 2,841 3,300 3,628 

EBITDA 790 993 1,160 1,289 


Operating profit/EBIT 668 864 1,023 1,143 


PBT 653 880 1,045 1,170 

HSBC PBT 653 880 1,045 1,170 

Taxation -221 -280 -334 -374 





Capex -138 -210 -250 -280 


Dividends -119 -120 -221 -262 


FCF equity 477 476 569 634 



Tangible fixed assets 774 855 968 1,101 


Cash & others 844 1,191 1,539 1,911 

Total assets 2,918 3,427 3,935 4,485 


Gross debt 44 44 44 44 

Net debt -828 -1,185 -1,534 -1,905 


Invested capital 909 1,042 1,184 1,346 




Revenue 25.4 18.3 16.1 9.9 

EBITDA 42.4 25.7 16.9 11.1 


PBT 47.1 34.9 18.7 12.0 

HSBC EPS 45.7 39.5 18.6 12.0 

Ratios (%) 





Sensitivity and valuation range (DCF) to which we then add a 25% premium to 

derive our target price (EUR272 per share) 


4.8% 222.5 233.3 242.7 

5.0% 215.2 225.2 234.4 

5.2% 208.3 217.6 226.5 

5.4% 201.7 210.4 219.0 

5.6% 195.4 203.6 211.8 



EV/sales 11.9 10.0 8.5 7.6 

EV/EBITDA 36.3 28.5 24.1 21.4 

EV/IC 31.5 27.1 23.6 20.5 

PE* 70.9 50.8 42.9 38.3 

P/NAV 14.1 11.6 9.8 8.4 

FCF yield (%) 1.6 1.6 1.9 2.2 





Reuters (Equity) HRMS.PA Bloomberg (Equity) RMS FP 




Goods 

Analysts Antoine Belge Contact 33 1 5652 4347 




Revenue/IC (x) 2.6 2.9 3.0 2.9 

ROIC 47.5 60.3 62.5 61.4 

ROE 21.4 24.7 24.4 23.3 

ROA 16.1 18.9 19.3 18.9 

EBITDA margin 32.9 34.9 35.2 35.5 







348 

328 

308 

288 

268 

248 

228 

208 

188 

168 

Jun-11 

Hermes 

Rel to SBF-120 

Dec-11 

348 

328 

308 

288 

268 

248 

228 

208 

188 

168 



DPS 1.50 2.09 2.48 2.78 

NAV 20.09 24.47 28.94 33.80 

Source: HSBC 


45



March 2012 

abc 

Hugo Boss 

HB has enjoyed the strongest consensus earnings revision 

‘momentum’ of the luxury sector over the last two years … 

… and has been rewarded by the strongest re-rating since 

Burberry in 2009-2010 

Remain Neutral, raise target price to EUR87 (from EUR82) on our 


The best ‘momentum’ story in 

the sector, but well rewarded 

Consensus earnings up 148% in last two years … 

Since the beginning of 2010, Hugo Boss (HB) has 

been the best momentum story in the sector. 

According to Thomson Reuters Datastream, sellside 

consensus estimates for 2012 are now 148% 

higher than two years ago (end of February 2010). 

On 8 November 2011, the company significantly 

raised its FY15 guidance given on 12 April 2010. 

HB now expects 2015 sales of EUR3bn (vs 

EUR2.5bn previously) and 2015 EBITDA of 

EUR750m (vs EUR500m previously). This 

implies a 2010-15e (five-year) CAGR of 12% in 

sales and 16% in EBITDA. 

Hugo Boss: a significant re-rating vs LVMH* 

EUR per share Hugo Boss LVMH 

Consensus 2012 EPS 2 years ago 1.84 5.46 

Consensus 2012 EPS today 4.56 7.07 

Earnings revision 148% 29% 

Share price 2 years ago 24.01 79.00 

Share price today 81.48 128.80 

Share price movement 239% 63% 

PE n+1 (2 year ago, ie 2011) 12.1 16.3 

PE n+1 (today, ie 2013) 15.9 16.2 

HB discount to LVMH (2 years ago) -26% 

HB discount to LVMH (today) -2% 

*Based on data as of 1 March Source: Thomson Reuters Datastream 

… rewarded by 239% increase in share price 

This performance has been rewarded by a 239% 

increase in the share price over the last two years, 

implying a significant re-rating of HB, both in 

absolute and relative terms. Based on consensus 

estimates, HB is now trading broadly in line with 

LVMH (the best proxy for the luxury goods 

sector, in our view) compared to a 26% discount 

two years ago. 

Short-term catalysts may now be lacking 

Since the beginning of 2012, HB has been the best 

share price performer in our universe, with a 43% 

rise. We believe part of this share price strength 

was a recovery effect from the weakness that 

followed a 14 November 2011 placement by 

controlling shareholder Permira (cut its holding 

from 55% to 42% of preference shares; its holding 

in the ordinary shares was unchanged at 88%). 

HB shares also benefited from stronger-thanexpected 

2011 results as well as anticipation of 

strong 2012 guidance. Further short-term catalysts 

may thus be lacking. HB will provide precise 

2012 guidance on 14 March 2012, but its CEO 

has already stated that he was "confident despite 

the uncertain economic environment, the group 

will take another big step towards its 2015 goals". 

46



March 2012 

abc 

We believe investors have already taken on board 

that 2012 guidance will at least be in line with the 

annual average of the remaining years of the 

2010-2015 plan, which call for EBITDA of 

EUR750m in 2015. Given that the 2011 EBITDA 

figure was EUR469m, we believe the 2012 

guidance implies a c12% increase in EBITDA to 

cEUR525m. 

Still a very good fundamental story 

We expect the main drivers of the 2011-15e growth 

to be: 

The over-proportionate growth in retail sales 

(which should reach at least 55% of sales in 

2015 vs 40% in 2010), including a mid singledigit 

average comps increase, 50 store openings 

per annum and some franchise buy-backs and 

conversion of corners into shop-in-shops. 

The over-proportionate growth in sales in 

Asia (and to a lesser extent US sales), which 

should account for 21% of sales in 2015e vs 

13% in 2010. 

Better efficiencies (notably thanks to the 

"DRIVE" programme): supply chain, logistics, 

customer service, improved coverage of the 

different segments of clothing and sportswear 

through five distinctive brands. 

The over-proportionate growth in womenswear and 

accessories anticipated by management should be a 

less significant driver, in our view. 


On 9 February, HB reported preliminary results for 

2011. EBITDA rose 34% to EUR469m (vs 25-30% 

guidance and 30% consensus), implying a 270bp 

EBITDA improvement to 22.8% (driven mostly by a 

200bp GM increase to 61.4%). 

The 17% organic growth achieved in Q4 (19% over 

2011) was impressive for a group still generating 

c60% of its sales in Europe. Organic growth in Q4 

was in double digits in all regions, with the US and 

Asia above 20%. Europe was up by double digits as 

well with the UK and Germany doing particularly 

well (Spain was the only really weak spot). 

Performance within retail (c44% of sales in 2011 

and c55-60% in Q4) was a stand-out, driving the 

GM higher by 240bp in Q4 (together with selective 

price increases, a low level of markdowns and the 

benefits of the DRIVE project). The GM 

performance is a positive surprise after a 40bp 

decline in Q3. In Q4 alone (which is usually a lower 

quarter in terms of profits), EBITDA grew 26% to 

EUR97m, a 120bp EBITDA margin expansion. 

Our 2012 and 2013 forecasts are for organic sales 

growth of 10% and 9% and EBIT margin gains of 

90bp and 70bp. Our 2015 EBITDA estimate is 

EUR738m, 2% below the company’s EUR750m 

guidance (not because we are not confident that the 

company cannot meet its guidance, rather that our 

DCF methodology treats 2015 as a ‘medium-term’ 

rather than a ‘specific’ year). 

We raise our 2012-2014 EPS estimates by 8% on 

the back of better-than-expected 2011 results and 

higher sales forecasts for Europe, and therefore 

increase our DCF-based target price for Hugo 

Boss to EUR87 from EUR82. The assumptions 

used in our DCF-derived target price are detailed 

on page 49, with these revisions: RFR of 3.0% vs 

3.5%, ERP of 6.0% vs 5.0%, specific beta of 1.0 

vs 1.1 and a WACC of 10.02% vs 8.8%. Under 

our research model, for stocks without a volatility 

indicator, the Neutral band is 5 percentage points 

above and below the hurdle rate for Europe ex- 

UK stocks of 9.0%. Our target price provides a 

potential return of 6.8%, within the Neutral band 

of our model; therefore, we are reiterating our 

Neutral rating. Potential return equals the 




Upside specific risks include continued outperformance 

on 2015 targets. Downside 

theoretical risks include consumers’ confusion 

between the group’s five brands. 

47



March 2012 

abc 

Hugo Boss - profit & loss 

(EURm) 2006a 2007a 2008a 2009a 2010a 2011e 2012e 2013e 2014e 

Sales 1,495.5 1,632.0 1,686.1 1,561.9 1,729.4 2,058.6 2,300.0 2,500.0 2,700.0 

% y-o-y 14.2% 9.1% 3.3% -7.4% 10.7% 19.0% 11.7% 8.7% 8.0% 

Gross profit 854.5 946.4 1,010.6 850.1 1,027.1 1,264.0 1,421.4 1,555.0 1,690.2 

gross profit margin 57.1% 58.0% 59.9% 54.4% 59.4% 61.4% 61.8% 62.2% 62.6% 

Total SG&A -621.1 -658.7 -723.0 -691.7 -762.6 -864.2 -955.1 -1,031.0 -1,106.8 

% y-o-y 17.9% 6.1% 9.8% - 10.3% 13.3% 10.5% 7.9% 7.4% 

Ratio (in %) -41.5% -40.4% -42.9% -44.3% -44.1% -42.0% -41.5% -41.2% -41.0% 

Adjusted EBITDA 233.4 287.7 287.6 270.2 349.0 469.0 541.1 604.7 670.5 

Y-o-y 13.9% 23.3% -0.0% -6.0% 29.1% 34.4% 15.4% 11.8% 10.9% 

Adjusted EBITDA margin (in %) 15.6% 17.6% 17.1% 17.3% 20.2% 22.8% 23.5% 24.2% 24.8% 

One-off adj. EBITDA to EBITDA 0.0 0.0 -36.0 -42.7 -13.6 0.0 0.0 0.0 0.0 

EBITDA 233.4 287.7 251.6 227.5 335.4 469.0 541.1 604.7 670.5 

EBITDA margin (%) 15.6% 17.6% 14.9% 14.6% 19.4% 22.8% 23.5% 24.2% 24.8% 

Amortisation & depreciation -49.1 -67.5 -60.9 -69.1 -70.9 -69.2 -74.7 -80.7 -87.2 

EBIT 184.4 220.2 190.7 158.4 264.5 399.8 466.3 524.0 583.3 

% y-o-y 13.2% 19.4% -13.4% -16.9% 67.0% 51.1% 16.7% 12.4% 11.3% 

EBIT margin (%) 12.3% 13.5% 11.3% 10.1% 15.3% 19.4% 20.3% 21.0% 21.6% 

Net financial result -4.5 -7.9 -41.7 -21.8 -14.8 -16.6 -7.0 -2.0 3.0 

EBT 179.9 212.3 149.0 136.6 249.7 383.2 459.3 522.0 586.3 

Income tax expenses -51.2 -58.3 -36.4 -32.7 -59.9 -92.0 -110.3 -125.3 -140.8 

Tax rate (%) -28.5% -27.5% -24.4% -23.9% -24.0% -24.0% -24.0% -24.0% -24.0% 

Net profit 128.7 154.0 112.6 104.0 189.8 291.2 349.0 396.7 445.6 

Minorities 0.0 -0.1 -0.1 -0.1 -3.3 -7.1 -8.1 -9.1 -10.1 

Net profit after minorities 128.6 153.9 112.5 103.9 186.4 284.1 340.9 387.6 435.5 

EPS preferred (EUR) 1.86 2.24 1.63 1.51 2.70 4.12 4.94 5.62 6.31 

% y-o-y 20.1% 20.4% -27.2% -7.4% 79.0% 52.5% 20.0% 13.7% 12.4% 

Number of shares (m) 69.1 68.7 69.0 68.8 69.0 69.0 69.0 69.0 69.0 

Sources: Company data, HSBC estimates 

Hugo Boss - split of sales 

(EURm) 2006a 2007a 2008a 2009a 2010a 2011e 2012e 2013e 2014e 

By region 

Europe 1,029 1,124 1,170 1,041 1,073 1,244 1,318 1,384 1,440 

America 274 299 307 312 381 454 523 572 618 

Asia 150 161 162 165 230 311 406 487 582 

Licences 43 49 47 44 45 50 53 57 61 

Total 1,496 1,632 1,686 1,562 1,729 2,059 2,300 2,500 2,700 

Europe 69% 69% 69% 67% 62% 60% 57% 55% 53% 

America 18% 18% 18% 20% 22% 22% 23% 23% 23% 

Asia 10% 10% 10% 11% 13% 15% 18% 19% 22% 

Licences 3% 3% 3% 3% 3% 2% 2% 2% 2% 

Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 

By distribution network 

Wholesale na na 1,183 1,008 993 1,094 1,165 1,206 1,248 

Retail na na 456 510 691 914 1,081 1,237 1,390 

Licences na na 47 44 45 50 53 57 61 

Total na na 1,686 1,562 1,729 2,059 2,300 2,500 2,700 

Wholesale na na 70% 65% 57% 53% 51% 48% 46% 

Retail na na 27% 33% 40% 44% 47% 49% 51% 

Licences na na 3% 3% 3% 2% 2% 2% 2% 

Total na na 100% 100% 100% 100% 100% 100% 100% 

Sources: Company data, HSBC estimates 

48

6 

. 

8 



March 2012 

abc 

Financials & valuation: Hugo Boss 

Neutral 



DCF analysis 




Revenue 1,729 2,059 2,300 2,500 

EBITDA 335 469 541 605 



Net interest -15 -17 -7 -2 

PBT 250 383 459 522 

HSBC PBT 250 383 459 522 

Taxation -60 -92 -110 -125 





Capex -56 -90 -120 -120 


Dividends -67 -140 -199 -239 


FCF equity 196 186 253 316 




Current assets 903 1,053 1,189 1,325 

Cash & others 296 343 417 500 

Total assets 1,355 1,526 1,707 1,882 


Gross debt 533 533 533 533 

Net debt 200 149 75 -8 


Invested capital 725 831 927 1,008 




Revenue 10.7 19.0 11.7 8.7 

EBITDA 47.4 39.8 15.4 11.8 


PBT 82.8 53.4 19.9 13.6 

HSBC EPS 79.0 52.5 20.0 13.7 

Ratios (%) 

Revenue/IC (x) 2.5 2.6 2.6 2.6 

ROIC 28.8 39.0 40.3 41.1 

ROE 68.3 67.7 59.8 53.5 

ROA 15.7 20.2 21.6 22.1 

EBITDA margin 19.4 22.8 23.5 24.2 


EBITDA/net interest (x) 22.7 28.3 77.3 302.4 







DPS 2.03 2.88 3.46 3.93 

Book value 4.98 7.18 9.36 11.65 





Sensitivity and valuation range (EUR/share) 


9.1% 97 100 101 

9.6% 91 93 95 

10.1% 85 87 88 

10.6% 80 82 83 

11.1% 75 77 78 



EV/sales 3.3 2.7 2.4 2.2 

EV/EBITDA 16.8 11.9 10.2 9.0 

EV/IC 7.8 6.7 5.9 5.4 

PE* 30.2 19.8 16.5 14.5 

P/Book value 16.4 11.4 8.7 7.0 

FCF yield (%) 3.6 3.4 4.6 5.8 





Reuters (Equity) BOSG_p.DE Bloomberg (Equity) BOS3 GR 



Country Germany Sector Textiles, Apparel & Luxury 

Goods 





100 

90 

80 

70 

60 

50 

Jun-11 

Hugo Boss 

Source: HSBC 


Rel to DAX-100 

Dec-11 

100 

90 

80 

70 

60 

50 

49



March 2012 

abc 

Luxottica 

Self-help (Coach and Armani licences, M&A, Retail margin recovery) 

and best-in-class operating leverage 

Luxottica’s EPS growth underperformed peers in 2011, but this 

should no longer be the case in 2012e and 2013e 

Upgrade to Neutral (from UW), increase DCF target price to 

EUR28.50 (from EUR19.50) on higher estimates and DCF roll-over 

Self-help and best-in-class 

operating leverage 

Our scenario was too pessimistic 

In the light of the August 2011 market turmoil, we 

feared that Luxottica’s North America business 

(c60% of sales) would be under pressure. This 

was based on an analysis of what happened in 

2007, when Luxottica proved to be early-cyclical. 

This scenario proved to be too pessimistic, with 

Luxottica’s North America sales in both 

Wholesale and Retail improving sequentially. 

Yet Luxottica’s EPS growth underperformed 

peers in 2011 

Even though our scenario was too pessimistic, 

Luxottica nevertheless ended 2011 with EPS 

growth of 10%, which is likely to have been the 

weakest in our universe. At 15%, the EBIT 

growth rate achieved by the Wholesale division 

(40% of the total) was not too dissimilar to peers, 

but the Retail division’s results were hampered by 

unfavourable FX movements, difficulties 

experienced in Australia and investments in EM. 

A lot of self-help in 2012 and 2013 

We like Luxottica because it should benefit from a lot 

of self-help in 2012 and 2013. 

The Coach licence, which we estimate will 

contribute EUR40m in sales in year 1, started to 

impact the business in January 2012 and the first 

two months have been ‘well above expectations’ 

according to management. 

As from 2013, the Armani licence (won from 

competitor Safilo) will generate EUR150m in sales in 

year 1 with the potential, in our view, to reach 

EUR200m in year 3. 

New licences create significant value: not only can 

they be considered the equivalent of an acquisition at 

zero cost, but they also add to the size of the 

Wholesale division (leveraging existing fixed 

distribution costs and reinforcing Luxottica’s position 

as the supplier of choice for eyewear retailers). Before 

adding Coach and Armani to its portfolio, Luxottica 

was already by far the leader in eyewear licensing 

with a global market share of more than 40%. We 

now estimate that share at more than 50%. Luxottica 

also owns Ray-Ban and Oakley, the two star ‘house’ 

brands of the industry. 

In 2012 and 2013, Luxottica should start to 

benefit from recent acquisitions (Tecnol in the 

wholesale division and EM eyewear chains in the 

retail division), and made it clear that other 

acquisitions will follow. Although we have 

50



March 2012 

abc 

always viewed M&A in the luxury industry with 

some caution, Luxottica has developed a strong 

track record on creating value via acquisitions. 

In 2012 the Retail EBIT will benefit from the very 

favourable 2011 basis of comparison. Last year, it 

declined 30bp to 11.6%, but would have been 

13.9% at constant FX excluding one-offs (notably 

due to the Australian business). Even assuming 

continued investments in EM, we forecast a 140bp 

improvement to 13% in 2012 based on current FX 

(EUR/USD=1.32) and the confirmation of 

improving trends in Australia/New Zealand 

(optical comps up 9.9% in Q4 2011). 

2012 EPS growth forecast of 24% in spite of 

less favourable geographic mix 

In spite of a less favourable geographic mix than 

peers (even after 27% growth in 2011, EM only 

accounted for a little more than 10% of sales in 

2011 vs more than 40% for peers), we forecast EPS 

growth rates of 24% in 2012 and 15% in 2013. 

Punchy yet realistic 2012 guidance 

On 28 February, Luxottica gave punchy 2012 

guidance, but it was realistic in our view: 30% 

sales growth in EM, 5-7% retail comps and 15% 

wholesale growth in North America, 4-6% 

wholesale growth in Western Europe. All in all, 

we estimate these regional trends should translate 

into 9-10% top-line growth. In addition, 

Luxottica’s leverage ‘rule of thumb’ of c2x (ie 

EBIT growth/sales growth), which was met in 

2011, was reiterated for 2012. 


We forecast worldwide Retail comps of 5% for 

2012e (vs 5.5% in 2011), to which we add a 2.5% 

contribution from new stores, a 4.1% contribution 

from acquisitions and a 4.2% FX impact, leading 

to 16% reported sales growth in 2012. 

We forecast Wholesale sales to slow from 11.2% 

at constant FX to 8.6% in 2012 (including Coach 

and Tecnol). For this division, which has 

historically shown a high operating leverage, we 

forecast another 80bp EBIT margin enhancement 

in 2012 (as in 2011) to a hefty 22.3%. 

At the group level, Luxottica sales and EBIT 

should thus grow at respectively 14% and 23% in 

2012, ie an operating leverage of 1.6x, amongst 

the best-in-class with Ferragamo, PPR and Prada. 

We have raised our 2012-13 EPS estimates by 

12% and 15% (we used to have a very pessimistic 

US scenario and we have now integrated Armani 

licence revenues). 

We increase our DCF-based target price to 

EUR28.50 from EUR19.50 on the back of our 

higher estimates, roll forward our DCF by one 

year to 2012 and use higher mid-term assumptions 

following the addition of the Armani licence. The 

assumptions used in our target price are detailed 

on page 53 (RFR now 3.0% vs 3.5%, ERP 6.0% 

vs 5.0%, sector beta 1.1 vs 1.2, specific beta 0.90 

vs 0.95). Under our research model, for stocks 

without a volatility indicator, the Neutral band is 

5ppts above and below the hurdle rate for Europe 

ex-UK stocks of 9.0%. Our EUR28.50 target price 

implies a 6% potential return; as this is within the 

Neutral band of our model, we upgrade Luxottica 

to Neutral from Underweight. Potential return 




Luxottica is trading at 19.9x 2012e and 17.3x 

2013e PE (note that our EPS exclude trademark 

amortisation), implying a 6% premium to peers, 

broadly in line with the historical level. 

Upside risks to our rating include a better-thanexpected 

resilience of the group’s North American 

business, a faster-than-expected development in EM, 

a USD/EUR strengthening, value-enhancing 

acquisitions and new license deals. Downside risks 

include poor execution in integrating new deals and 

non-renewal of licence contracts. 

51



March 2012 

abc 

Luxottica P&L summary 

EURm 2005a 2006a 2007a 2008a** 2009e 2010a 2011a 2012e 2013e 2014e 06 vs 

05 

07 vs 

06 

08 vs 

07 

09 vs 

08 

10 evs 11e vs 

09 10e 

12e vs 13e vs 

11e 12e 

Wholesale 1,311 1,715 1,993 2,092 1,955 2,236 2,456 2,720 3,042 3,255 31% 16% 5% -7% 14% 10% 11% 12% 7% 

Retail 3,062 3,294 3,234 3,109 3,139 3,562 3,766 4,363 4,647 4,949 8% -2% -4% 1% 13% 6% 16% 6% 6% 

Inter-Segments -238 -333 -348 40% 4% -100% 

Oakley 88 

Total sales 4,135 4,676 4,967 5,202 5,094 5,798 6,222 7,084 7,689 8,204 13% 6% 5% -2% 14% 7% 14% 9% 7% 

Wholesale 304 446 528 440 356 462 529 605 702 771 46% 18% -17% -19% 30% 15% 14% 16% 10% 

Retail 355 431 362 431 367 424 437 566 621 682 21% -16% 19% -15% 15% 3% 30% 10% 10% 

Inter-Segments -78 -121 -60 -121 -140 -174 -159 -182 -203 -223 55% -50% 101% 16% 25% -9% 14% 12% 10% 

Oakley EBIT 3 

Total EBIT 581 756 833 750 583 712 807 990 1,120 1,230 30% 10% -10% -22% 22% 13% 23% 13% 10% 

Wholesale 23.2% 26.0% 26.5% 21.0% 18.2% 20.7% 21.5% 22.3% 23.1% 23.7% 

Retail 11.6% 13.1% 11.2% 13.8% 11.7% 11.9% 11.6% 13.0% 13.4% 13.8% 

Total EBIT margin 14.1% 16.2% 16.8% 14.4% 11.4% 12.3% 13.0% 14.0% 14.6% 15.0% 

Reported dil EPS (EUR) 0.73 0.94 1.07 0.83 0.69 0.83 0.98 1.24 1.44 1.61 29% 14% -23% -17% 21% 18% 27% 16% 12% 

HSBC dil EPS* (EUR) 0.73 0.94 1.10 0.96 0.80 0.99 1.09 1.35 1.55 1.72 29% 17% -13% -17% 23% 10% 24% 15% 11% 

Retail comps (worldwide) 5.5% 6.7% 1.2% -5.4% -4.2% 4.5% 5.5% 5.0% 4.0% 4.0% 

* Excluding exceptional items and trademark amortisation ** change in sales & EBIT breakdown methodology 


14e vs 

13e 

52

6 

. 

0 



March 2012 

abc 

Financials & valuation: Luxottica 

Neutral 



DCF analysis 




Revenue 6,222 7,084 7,689 8,204 

EBITDA 1,131 1,330 1,477 1,605 


Operating profit/EBIT 807 990 1,120 1,230 

Net interest -109 -104 -91 -78 

PBT 695 886 1,029 1,152 

HSBC PBT 695 886 1,029 1,152 

Taxation -237 -305 -354 -396 




Cash flow from operations 811 854 975 1,069 

Capex -307 -325 -345 -366 


Dividends -202 -226 -286 -332 


FCF equity 491 528 630 704 





Cash & others 905 905 905 905 

Total assets 8,644 8,840 8,943 9,056 


Gross debt 2,937 2,710 2,365 1,993 

Net debt 2,032 1,805 1,460 1,088 






Revenue 7.3 13.8 8.5 6.7 

EBITDA 9.4 17.6 11.1 8.7 


PBT 14.8 27.5 16.1 11.9 

HSBC EPS 10.4 24.0 14.8 11.1 

Ratios (%) 

Revenue/IC (x) 1.1 1.2 1.3 1.4 

ROIC 9.3 10.9 12.2 13.3 

ROE 14.6 16.5 17.3 17.5 

ROA 6.5 7.4 8.3 9.0 

EBITDA margin 18.2 18.8 19.2 19.6 









DPS 0.49 0.62 0.72 0.80 

NAV 7.92 8.69 9.52 10.43 







7.25% 33.4 34.3 34.8 

7.75% 30.4 31.2 31.7 

8.25% 27.8 28.5 29.0 

8.75% 25.5 26.1 26.6 

9.25% 23.5 24.0 24.5 



EV/sales 2.3 2.0 1.8 1.7 

EV/EBITDA 12.9 10.8 9.5 8.5 

EV/IC 2.5 2.4 2.3 2.2 

PE* 24.7 19.9 17.3 15.6 

P/NAV 3.4 3.1 2.8 2.6 

FCF yield (%) 3.9 4.2 5.0 5.6 





Reuters (Equity) LUX.MI Bloomberg (Equity) LUX IM 




Goods 





33 

31 

29 

27 

25 

23 

21 

19 

17 

Jun-11 

Luxottica 

Source: HSBC 



Dec-11 

33 

31 

29 

27 

25 

23 

21 

19 

17 

53



March 2012 

abc 

LVMH 

16% EPS growth in 2012e is strong, but we believe several luxury 

players are likely to achieve 20%+ 

17.8x 2012e and 15.9x 2013e PE, broadly in line with the sector 

Remain Neutral, target price increased to EUR135 (from EUR127) on 


A real proxy in a sector that 

may deserve a breather 

We have never been much at ease with the use of 

the ‘sector proxy’ by certain investors when they 

talk about LVMH, since it is a very vague notion, 

in our view. As far as earnings growth is 

concerned though, we are currently happy to state 

that LVMH is a good proxy for what the sector can 

deliver. Our 2012 EPS growth forecast is for a 

16% increase y-o-y: we believe several luxury 

players will achieve 20%+ but are comfortable that 

LVMH is trading broadly in line with the sector 

due to its more superior earnings predictability. 

As for many other luxury stocks now, we believe 

that after its 18% share price performance since 

the beginning of the year (slightly below the 

European average, but ahead of the percentage 

increase in the FTSE Eurofirst 300), LVMH shares 

are up with events, hence our Neutral rating. 

The ‘proxy’ or ‘average’ status also reflects that 

some of LVMH businesses will, in our view, 

perform above the average (DFS, smaller fashion 

& leather brands) whilst others will perform in 

line (the LV brand, Cognac, Sephora) or underperform 

(Champagne, perfumes). 

LVMH: 2012e EBIT by division 

Champagne & Wines 

Other Fashion brands 

8% 

5% 

Cognac & spirits 

10% 

Selective retailing 

14% 

Louis Vuitton brand 

51% 


Watches & Jewellery 

6% 

Perfumes & Cosmetics 

6% 

Above average: DFS, smaller fashion & leather 

brands 

DFS: this business should continue to be the star 

performer as an increasing share of its sales 

(c40% in 2011) are now generated by mainland 

tourists, leveraging an existing store network for 

which limited capex is needed. 

Smaller fashion & leather brands: we expect 

the likes of Fendi, Céline and Loewe to continue 

to grow at a faster rate than LV in 2012 and to 

improve their profitability further from a low base 

In line with average: LV brand, Cognac, Sephora 

LV: achieving the 8% organic growth we forecast 

for 2012 would be another considerable 

achievement given that it would represent a 

EUR500m addition (ie 1.5x the size of a brand 

like YSL). Nevertheless, bear in mind that we 

54



March 2012 

abc 

forecast 9% average organic growth for the 

industry and that LV’s business model is not 

aimed at increasing its c44% EBIT margin, the 

highest in the industry. 

Cognac: we see Hennessy’s EBIT growing in line 

(14%) in 2012 with the group average thanks to 

8% organic sales growth (with volume up 4%) 

and a 60bp EBIT margin expansion. But we think 

Hennessy is likely to underperform Martell 

(Pernod) and Rémy, which have more exposure to 

Asia (the US still accounted for 44% of Hennessy 

volumes in 2010) and more inventories of older 

qualities of eau-de-vie. 

Sephora: even though the same-store sales growth 

rates of 14% in the US and 7% in Europe are unlikely 

to be sustained, in our view, store expansion in the US 

and China should support growth. 

Below average: Champagne, perfumes 

Champagne: although we raise our 2012 organic 

sales growth forecast from -5% to 0%, we 

continue to expect an 80bp EBIT margin 

contraction. Champagne remains a Franco-British 

drink with a strong US following but with little 

support in emerging markets. 

Perfumes: this division remains very exposed to 

Europe (47% of sales) and has already 

underperformed in Q3 and Q4 (organic sales 

growth of 6% and 5%, respectively) 

Bulgari and Hermès may weigh 

In three years, Bulgari (acquired in 2011) may be 

seen as a fantastic addition if LVMH manages to 

make the brand a threat to Cartier, as it once was. 

In the meantime, we think the new management 

team will have to review its strategy (eg 

distribution, product) very thoroughly to put the 

brand back on the high-end consumer’s radar. 

This, together with the fact that Bulgari has 

historically been more vulnerable than peers to 

economic downturns (the brand is not considered 

a reference in watches by retailers and 

consumers), is likely to weigh on profitability 

short term. On the Hermès investment, while the 

interest in buying shares on a (very) long-term 

patrimonial view is clear (we can’t think of a 

brand in the space with higher differentiation and 

barriers to entry), on any shorter term view, 

returns on that investment are likely to be limited. 


Organic sales growth was 12% in Q4 2011, in line 

with our 12% estimate. This compares to 14% in 

Q1, 15% in both Q2 and Q3. FY 2011 EBIT 

increased 22% y-o-y (20% ex Bulgari), ie a 100bp 

EBIT margin improvement to 22.2%. 

For 2012e, we forecast 14.6% reported sales 

growth (8.5% organic, 3% FX, consolidation 

3.1%). We expect a 15% y-o-y rise in EBIT (14% 

excluding Bulgari), implying a 10bp EBIT margin. 

The limited margin improvement is linked to the 

outperformance of lower-margin businesses (DFS 

and smaller fashion brands), the full integration of 

Bulgari (c12% EBIT margin) and our forecast of 

an 80bp EBIT margin deterioration in Champagne. 

We increase our 2012-14 EBIT estimates by 2%, 

2% and 5% due to higher sales forecasts (notably 

for the US region and for Champagne and smaller 

fashion & leather brands). 

We increase our DCF-based target price for 

LVMH to EUR135 from EUR127 on the back of 

our currency-led earnings increases. The 

assumptions used in our target price are detailed 

on page 57. Under our research model, for stocks 

without a volatility indicator, the Neutral band is 5 


for Europe ex-UK stocks of 9.0%. Our target 

price of EUR135 provides a potential return of 

4.8%, within the Neutral band of our model; 

therefore, we are reiterating our Neutral rating on 

LVMH stock. Potential return equals the 




The main specific upside risks to our rating would be 

a greater resilience in sales and greater SG&A 

leverage. The main specific downside risks would be 

destocking of Champagne and Spirits and value 

destruction linked to M&A activity (past and future). 

55



March 2012 

abc 

LVMH FY results & forecasts 


% chg 

YoY 2009a 

% chg 

YoY 2010a 

% chg 

YoY 2011a 

% chg 

YoY 2012e 

% chg 

YoY 2013e 

% chg 

YoY 2014e 

% chg 

Sales 16,481 8 17,193 4 17,053 -1 20,320 19 23,659 16 27,125 15 29,300 8 31,590 8 

Current operating income (EBIT) 3,555 12 3,628 2 3,352 -8 4,321 29 5,263 22 6,055 15 6,680 10 7,330 10 

Other operating income and expenses -126 -143 -191 -152 -109 -100 -100 -100 

Operating income 3,429 12 3,485 2 3,161 -9 4,169 32 5,154 24 5,955 16 6,580 10 7,230 10 

Net financial expenses -252 -281 -342 612 -242 -163 -94 -13 

Income before taxes 3,177 6 3,204 1 2,819 -12 4,781 70 4,912 3 5,792 18 6,487 12 7,218 11 

Taxes -853 -893 -849 -1,469 -1,453 -1,796 -2,011 -2,237 

Associates 7 7 3 7 6 8 10 12 

Minority interests -306 -292 -218 -287 -400 -409 -458 -509 

Net pft before goodwill and exceptionals 2,025 8 2,026 0 1,755 -13 3,032 73 3,065 1 3,596 17 4,027 12 4,483 11 

EPS (EUR) 4.22 7 4.26 1 3.70 -13 6.32 71 6.23 -1 7.22 16 8.08 12 9.00 11 

Sales by division 

Wines & Spirits 3,226 8 3,126 -3 2,740 -12 3,261 19 3,524 8 3,767 7 4,085 8 4,391 7 

Leather and Fashion 5,628 8 6,010 7 6,302 5 7,581 20 8,712 15 9,749 12 10,529 8 11,371 8 

Perfume and cosmetics 2,731 8 2,868 5 2,741 -4 3,076 12 3,195 4 3,377 6 3,529 4 3,688 4 

Selective distribution 4,179 7 4,376 5 4,533 4 5,378 19 6,436 20 7,418 15 8,090 9 8,797 9 

Watches 833 13 879 6 764 -13 985 29 1,949 98 2,814 44 3,067 9 3,343 9 

Others -116 nm -66 nm -27 nm 39 nm -157 nm 0 nm 0 nm 0 nm 

Total sales 16,481 8 17,193 4 17,053 -1 20,320 19 23,659 16 27,125 15 29,300 8 31,590 8 

EBIT by division 

Wines & Spirits 1,058 10 1,060 0 760 -28 930 22 1,101 18 1,176 7 1,305 11 1,430 10 

Leather and Fashion 1,829 12 1,927 5 1,986 3 2,555 29 3,075 20 3,463 13 3,772 9 4,108 9 

Perfume and cosmetics 256 15 290 13 291 0 332 14 348 5 371 7 395 6 420 6 

Selective distribution 439 10 388 -12 388 0 536 38 716 34 867 21 976 13 1,087 11 

Watches 141 76 118 -16 63 -47 128 103 265 107 394 49 460 17 525 14 

Others -168 34 -155 -8 -136 -12 -160 18 -242 51 -217 -10 -228 5 -240 5 

Total EBIT 3,555 12 3,628 2 3,352 -8 4,321 29 5,263 22 6,055 15 6,680 10 7,330 10 

EBIT margin by division 

Wines & Spirits 32.8% 33.9% 27.7% 28.5% 31.2% 31.2% 31.9% 32.6% 

Leather and Fashion 32.5% 32.1% 31.5% 33.7% 35.3% 35.5% 35.8% 36.1% 

Perfume and cosmetics 9.4% 10.1% 10.6% 10.8% 10.9% 11.0% 11.2% 11.4% 

Selective distribution 10.5% 8.9% 8.6% 10.0% 11.1% 11.7% 12.1% 12.4% 

Watches 16.9% 13.4% 8.2% 13.0% 13.6% 14.0% 15.0% 15.7% 

Others nm nm nm nm nm nm nm nm 

Total EBIT margin 21.6% 21.1% 19.7% 21.3% 22.2% 22.3% 22.8% 23.2% 


YoY 

% chg 

56

4 

. 

8 



March 2012 

abc 

Financials & valuation: LVMH 

Neutral 



DCF analysis 




Revenue 23,659 27,125 29,300 31,590 

EBITDA 6,187 6,873 7,547 8,249 



Net interest -242 -163 -94 -13 

PBT 4,918 5,800 6,497 7,230 

HSBC PBT 4,912 5,792 6,487 7,218 

Taxation -1,453 -1,796 -2,011 -2,237 





Capex -1,749 -1,400 -1,500 -1,600 

Cash flow from investment -6,309 -1,400 -1,500 -1,600 

Dividends -1,069 -1,324 -1,482 -1,631 

Change in net debt 1,982 -1,239 -1,755 -2,041 

FCF equity 2,209 2,852 3,526 3,961 





Cash & others 2,606 2,606 2,606 2,606 

Total assets 47,372 49,740 51,570 53,501 


Gross debt 7,266 6,027 4,272 2,231 

Net debt 4,660 3,421 1,666 -375 






Revenue 16.4 14.6 8.0 7.8 

EBITDA 19.9 11.1 9.8 9.3 


PBT 2.7 17.9 12.0 11.3 

HSBC EPS -1.5 15.9 12.0 11.3 

Ratios (%) 

Revenue/IC (x) 0.9 0.9 0.9 0.9 

ROIC 13.6 13.4 14.3 15.2 

ROE 15.5 15.2 15.5 15.6 

ROA 8.6 8.5 9.0 9.5 

EBITDA margin 26.2 25.3 25.8 26.1 









DPS 2.60 2.91 3.20 3.52 

NAV 44.18 48.65 53.65 59.27 







8.1% 155 158 159 

8.6% 143 146 147 

9.1% 133 135 137 

9.6% 124 126 127 

10.1% 116 117 119 



EV/sales 2.8 2.4 2.2 2.0 

EV/EBITDA 10.8 9.6 8.5 7.6 

EV/IC 2.2 2.1 2.0 1.8 

PE* 20.7 17.8 15.9 14.3 

P/NAV 2.9 2.6 2.4 2.2 

FCF yield (%) 3.5 4.6 5.7 6.3 





Reuters (Equity) LVMH.PA Bloomberg (Equity) MC FP 




Goods 





151 

141 

131 

121 

111 

101 

91 

Jun-11 

LVMH 

Source: HSBC 



Dec-11 

151 

141 

131 

121 

111 

101 

91 

57



March 2012 

abc 

PPR 

We believe PPR’s luxury division has the potential to continue to 

outperform peers in terms of EBIT growth in 2012 as it did in 2011 

We see the 16 January announcement regarding Redcats’ and Fnac 

Italy’s classifications as discontinued assets as a sign that the 

disposal of the two assets in 2012 is likely 

Remain Overweight, raise target price to EUR150 (from EUR142) on 

2011 EBIT beat and lower tax rate 

All eyes should be on luxury 

Luxury division: Potential to continue to 

outperform peers in 2012 as in 2011 

In 2011, PPR’s Luxury division registered 34% 

EBIT growth (restated for the accounting change 

affecting central costs), which is likely to have 

been one of the strongest in the industry. For 

2012, we forecast 19% EBIT growth, again above 

our estimate for the average of the industry (17%). 

The performance of the Gucci brand in Q4 2011 

(12% organic sales growth) did not meet our 

expectation (16%) due to unimpressive (12%) 

organic sales growth in Asia. Gucci is one of the 

most exposed brands to Korea (c8% of brand 

sales), which suffered from a sales decline in Q4. 

However, we continue to believe that the Gucci 

brand is well positioned in Asia, since its ‘fashion’ 

positioning is resonating well with Chinese 

consumers. Gucci has adopted a gradual approach 

and still only had 46 stores at the end of 2011 

compared to 39 at end-2010 and 32 at end-2009. 

The next three years should see 7-10 store openings 

pa (net of some possible closures/relocations). For 

the Gucci brand, Greater Chinese consumers 

accounted for c35% of total sales in 2011 (c23% 

locally and c12% abroad). 

One also should not forget the above-average 

performance of the Gucci brand in the five previous 

quarters (ie since Q3 2010), and we expect it to 

register organic sales growth of 9% in 2012 and 8% 

in 2013. 2012 should see c45 store openings, 

bringing the total numbers of Gucci stores to c421 

end-2012 (compared to 317 at end-2010). 

In addition, we believe the Gucci brand has 

significant EBIT margin improvement potential, 

even after the 180bp gain to 30.2% seen in 2011: we 

forecast EBIT margin to increase from 28.7% in 

2010 to 32.5% in 2014. Gucci is moving average 

prices higher by focusing on the medium segment of 

its handbag proposition, with a higher leather content 

vs canvas and fewer logo products, and achieving a 

higher share of carry-overs. Gucci’s average price in 

leather goods has risen by c30% in two to three 

years. This is boosting sales and profitability since 

management claims that carry-over leather goods 

products do not have a lower margin than canvas, 

and markdowns are more limited. 

Bottega Veneta and Balenciaga, in our view, have 

the potential to outpace the industry average due 

to their niche positioning and the credibility of 

their leather goods offering (more than 70% of 

58



March 2012 

abc 

sales for both of them). For Bottega in particular, 

which accounts for 14% of PPR’s Luxury 

division’s EBIT, we forecast organic sales growth 

of 18% in 2012 after 34% in 2011. YSL, 

Alexander McQueen, Stella McCartney, Brioni 

and Girard-Perregaux also have significant sales 

and margin potential, in our view. 

Too much weight given to ‘wrong debates’, in 

our view 

Talking to investors, it seems that many investors 

continue to put too much weight on certain 

debates instead of focusing on the strength of the 

group’s luxury portfolio. 

We see the 16 January announcement regarding 

Redcats and Fnac Italy, classifying them as 

discontinued assets, as a sign that the disposal of 

the two assets in 2012 is likely. We believe that if 

external auditors authorised PPR to use this IFRS 

classification, the probability of selling these two 

assets within the next 12 months is high. 

If these two disposals were to take place in 2012, 

the only remaining non-core assets would be Fnac 

(6% of our SOTP) and the residual 42% stake in 

CFAO (4% of our SOTP). PPR would have 

almost accomplished its transformation into a 

luxury (75% of SOTP) and sporting goods & 

lifestyle (15%) company. 

Not only does the market not seem to recognise 

that PPR’s good track record in selling assets is a 

proxy for future disposals, it also appears worried 

about the potential dilution risk linked to PPR’s 

stated M&A ambitions in luxury and branded 

goods. We have fewer concerns than most about 

PPR’s possible next move, especially in the next 

12-18 months. 2011 showed that PPR is focusing 

on small to medium-sized deals. PPR acquired the 

sports & lifestyle company Volcom (for an EV of 

USD516m), the premium menswear company 

Brioni (EUR170m in sales in 2010, undisclosed 

price – our estimate is EUR300m) and increased 

its stake in the watch company Sowind (Girard- 

Perregaux and JeanRichard brands as well as 

watch movements manufacturing capacities) from 

23% to 50.1% for cEUR200m (a hefty price, in 

our view, but on a small deal). 

We acknowledge that Puma’s disappointing 

operating and share price performance since its 

acquisition may lead to scepticism about PPR’s 

ability to create value from acquisitions in 

sporting goods & lifestyle. We note though that 

since Q2 2011, Puma’s top line has been 

encouraging. Organic sales growth was 14% in 

Q2, 10% in Q3 and 16% in Q4. 


We have raised our 2012-2014 EPS estimates by 

6% following the 3% EBIT beat in 2011 and now 

use a 25% tax rate instead of 27% (Redcats, which 

has a higher tax rate, is no longer in the base). 

We are increasing our sum-of-the-parts-based 

target price to EUR150 (from EUR142) on the 

back of the above-mentioned upward revision in 

our EBIT estimates for the Luxury division. For 

details of our sum-of-the-parts valuation approach, 

please refer to page 61. Under our research model, 

for Europe ex-UK stocks without a volatility 

indicator, the Neutral band is 5 percentage points 

above and below the hurdle rate of 9.0%. Since 

our target price implies a 16.6% potential return, 

which is above the Neutral band, we reiterate our 

Overweight rating on PPR. Potential return equals 

the percentage difference between the current 

share price and the target price, including the 

forecast dividend yield when indicated. 

Downside risks to our Overweight rating include 

underperformance of the Gucci brand, disposals of 

assets at lower-than-expected prices, and value 

destruction linked to acquisitions. 

59



March 2012 

abc 

PPR earnings forecasts 

EURm 

2003 pro 2004 pro 

forma forma 

2005a 2006a 2007a 2008a 2009a* 2010a* 2011a 2012e 2013e 2014e 

Sales 

Luxury Goods 2,576 2,712 3,034 3,568 3,867 3,380 3,390 4,011 4,917 5,775 6,283 6,820 

Retail 13,903 14,358 13,906 14,365 14,196 14,318 10,690 7,909 4,165 4,123 4,247 4,374 

Puma 1,718 2,524 2,461 2,706 3,009 3,330 3,565 3,820 

Volcom 147 311 333 356 

Other -30 -29 -2 -2 -20 -21 -16 -21 -10 -14 -18 -21 

Total PPR 16,449 17,042 16,938 17,931 19,761 20,201 16,525 14,605 12,227 13,525 14,410 15,350 

Sales growth y-o-y (%) 

Luxury Goods 5.3 11.9 17.6 8.4 -12.6 0.3 18.3 22.6 17.4 8.8 8.5 

Retail 3.3 -3.1 3.3 -1.2 0.9 -25.3 -26.0 -47.3 -1.0 3.0 3.0 

Puma 47.0 -2.5 10.0 11.2 10.7 7.1 7.2 

Volcom 111.7 7.1 7.1 

Total PPR 3.6 -0.6 5.9 10.2 2.2 -18.2 -11.6 -16.3 10.6 6.5 6.5 

EBIT 

Luxury Goods 250 288 392 565 731 731 692 897 1,263 1,497 1,683 1,881 

Retail 754 760 729 759 785 695 422 353 103 82 127 131 

Puma 236 350 320 337 333 376 424 478 

Volcom 14 36 42 46 

Holding companies & other -61 -59 -50 -57 -54 -50 -56 -110 -111 -116 -116 

Total PPR 1,003 986 1,063 1,275 1,696 1,721 1,383 1,531 1,602 1,880 2,160 2,420 

EBIT margins (%) 

Luxury Goods 9.7 10.6 12.9 15.8 18.9 21.6 20.4 22.4 25.7 25.9 26.8 27.6 

Retail 5.4 5.3 5.2 5.3 5.5 4.9 3.9 4.5 2.5 2.0 3.0 3.0 

Puma 13.7 13.9 13.0 12.5 11.1 11.3 11.9 12.5 

Volcom 9.2 11.6 12.5 13.0 

Total PPR 6.1 5.8 6.3 7.1 8.6 8.5 8.4 10.5 13.1 13.9 15.0 15.8 

EBIT growth y-o-y (%) 

Luxury Goods 15.3 36.3 44.2 29.3 0.0 -5.3 29.7 40.7 18.6 12.4 11.8 

Retail 0.8 -4.0 4.1 3.4 -11.5 -39.3 -16.3 -70.9 -19.6 54.5 3.0 

Puma 48.2 -8.6 5.5 -1.2 12.8 12.8 12.7 

Volcom 166.9 15.4 11.3 

Total PPR -1.7 7.7 19.9 33.1 1.5 -19.6 10.7 4.6 17.3 14.9 12.0 

Other operating inc/charges nm nm 3 0 100 -361 -547 -194 -58 0 0 0 

Operating income nm nm 1,066 1,274 1,796 1,360 837 1,337 1,544 1,880 2,160 2,420 

Net Interest nm nm -307 -290 -322 -373 -381 -254 -215 -210 -177 -125 

Tax nm nm -187 -260 -298 -335 -177 -304 -317 -417 -496 -574 

Tax rate (%) nm nm -24.7% -26.4% -20.2% -33.9% -38.8% -28.1% -23.9% -25.0% -25.0% -25.0% 

Equity Affiliate Share nm nm 3 2 1 1 0 36 47 58 69 79 

Minorities nm nm -38 -47 -119 -117 -32 -51 -59 -75 -85 -96 

Net profit reported nm 536 685 922 537 985 964 986 1,305 1,541 1,774 

Net profit (base of diluted EPS calculation) 578 698 904 875 712 932 1,055 1,305 1,541 1,774 

Avg number of shares used in diluted EPS (m) nm 132.5 121.7 128.7 126.1 126.5 126.7 126.3 126.3 126.3 126.3 

HSBC EPS (diluted)** (EUR) nm 4.36 5.73 7.03 6.94 5.63 7.35 8.35 10.33 12.20 14.05 

HSBC EPS growth (%) nm nm 31.3 22.6 -1.2 -18.8 30.5 13.6 23.7 18.1 15.1 

*2009 not restated for the disposal of Conforama, 2010 not restated for Redcats discontinuation and change in central costs accounting 

**HSBC 2012-2014e EPS includes discontinued activities 


60

1 

6 

. 

6 



March 2012 

abc 

Financials & valuation: PPR 

Overweight 




Revenue 12,227 13,525 14,410 15,350 

EBITDA 1,911 2,212 2,512 2,793 



Net interest -215 -210 -177 -125 

PBT 1,376 1,728 2,052 2,374 

HSBC PBT 1,329 1,670 1,983 2,295 

Taxation -317 -417 -496 -574 

Net profit 999 1,235 1,471 1,705 




Capex -325 -348 -372 -399 

Cash flow from investment 104 -648 -372 -399 

Dividends -441 -448 -475 -503 

Change in net debt -414 -334 -888 -1,077 

FCF equity 819 1,030 1,310 1,527 





Cash & others 1,271 1,271 1,271 1,271 

Total assets 24,954 25,599 25,910 26,248 


Gross debt 4,678 4,343 3,455 2,378 

Net debt 3,407 3,073 2,185 1,108 



PPR sum-of-the-parts valuation 

Valuation Per share 

(EURm) (EUR) 

Methodology 

Gucci brand 11,603 91 9.5x 2012e EBITDA 

Bottega Veneta 3,461 27 13x 2012e EBITDA 

Other luxury businesses 1,739 14 1.5x 2012e sales (adj for minorities) 

Sub-total Luxury 16,802 132 

Fnac 1,237 10 0.3x 2012e sales 

Redcats 949 7 0.3x 2012e sales 

Retail (Fnac+Redcats) 2,186 17 

CFAO (41.98%) 904 7 HSBC target price EUR35 

Puma (75.12%) 2,942 23 HSBC target price EUR275 

Volcom 356 3 Acquisition price 

Other -1,113 -9 10 x 2012e EBITDA 

Total PPR 22,078 174 

Net debt end-2012e -3,073 -24 

Total PPR equity value 19,005 150 

Note: CFAO (CFAO FP, EUR30.09, OW); Puma (PUM GR, EUR256.95, OW) 



EV/sales 1.6 1.4 1.3 1.1 

EV/EBITDA 10.3 8.8 7.4 6.2 

EV/IC 1.5 1.4 1.3 1.2 

PE* 15.4 12.4 10.5 9.2 

P/NAV 1.5 1.4 1.3 1.2 

FCF yield (%) 5.0 6.3 8.0 9.4 








Revenue -16.3 10.6 6.5 6.5 

EBITDA 2.7 15.7 13.6 11.2 


PBT 22.9 25.6 18.8 15.7 

HSBC EPS 13.6 23.7 18.1 15.1 

Reuters (Equity) PRTP.PA Bloomberg (Equity) PP FP 



Country France Sector Multiline Retail 





Ratios (%) 

Revenue/IC (x) 0.8 1.0 1.0 1.1 

ROIC 8.4 10.5 11.7 13.0 

ROE 9.8 11.5 12.5 13.2 

ROA 4.9 5.8 6.6 7.3 

EBITDA margin 15.6 16.4 17.4 18.2 






147 

147 

137 

127 

117 

107 

97 

87 

Jun-11 

PPR 


Dec-11 

137 

127 

117 

107 

97 

87 


Source: HSBC 



DPS 3.50 3.71 3.93 4.17 

NAV 86.09 92.84 101.24 111.26 


61



March 2012 

abc 

Prada 

Execution has been very strong for the past 18 months and we 

expect 2011 results on 29 March to be impressive once again 

Growth story appealing but risks remain. Despite higher estimates 

than consensus, we struggle to see much upside from here 

Increase our target price to HKD48 (from HKD39) on higher 

estimates, remain Neutral (V) 

Fantastic execution but well 

priced in now, we believe 

A very impressive delivery, expect 

more short term 

Strong Q3 

On 29 November 2011, Prada published very 

impressive Q3 results with an acceleration in sales 

growth (linked to both an acceleration in same 

store sales growth as well as a higher contribution 

from new stores and a rebound by wholesale) and 

conversely very impressive operating leverage. 

Group EBIT margin shot up 620bps (to 23.3% of 

sales) as the non recurrent IPO-related charge of 

cEUR10m weighed on the first half at the SG&A 

level and the group benefited from a greater scale 

effect given the sales growth rates. 

With no slowdown by brand or region, but a 

worrying macro backdrop, management at the 

time could only state the obvious ("continue to 

monitor trends in order to promptly react as in the 

past"). We are now convinced that Q4 (ended 

January 2012) will probably prove to be 

somewhat a re-run of the very strong Q3. 

Q4/FY should also impress 

Prada should publish FY results on 29 March and 

we expect these to be strong. We believe Q4 

should show a similar top-line performance (31% 

vs 33% reported growth in Q3) and see a 510bps 

EBIT margin expansion (to a record high 30.0% 

in the quarter), implying net profit in Q4 would 

almost double year-on-year. Undoubtedly, if this 

is the case, Prada will have been taking market 

share. Over the FY to January 2012, this will 

mean sales growth of 27%, gross margin 

expansion of 370bps (to 71.5%) and EBIT margin 

of 25.1% (up c500bps), a very sizeable feat. 

When we initiated coverage in October 2011, we 

explained that the “group’s capacity to disappoint 

in the next 18 months years [was] limited” as Prada 

fits particularly well into our travel theme. Not only 

has it grown on booming sales in Asia, but sales in 

Europe and Italy have clearly benefited from 

tourism. The magnitude of growth (and associated 

margin expansion) has taken us by surprise and we 

think the stock’s recent re-rating has been well 

justified; we continue to believe there are risks, 

implying the stock may be close to correctly 

valued at this stage. 

62



March 2012 

abc 

Gauging risk/reward in 2012 

One of the reasons we were cautious on October was 

that we viewed the retail expansion strategy at Prada 

as too aggressive, especially considering this is a 

family-controlled business. The recent same store 

sales growth seems to underline that for now, the 

company’s expansion is supported by trends. 

However, we still believe Prada will be more 

exposed to a slowdown in demand that others from a 

P&L point of view given the level of fixed costs the 

business is currently incurring. 

Note this is theoretical and we expect strong 

operating leverage in FY Jan 2013 and the 

following year but while Prada should be able to 

reach Gucci/Cartier-type 30% EBIT margins, it 

might take a few years still. 

The pricing power that luxury brands can apply is 

proportionate to this idea of scarcity associated 

with service and the notion that a brand can 

become too “commonplace”. Selling expenses as 

a percentage of sales have come down and this 

despite the opening of c75 stores in 2011. 

Although this is supportive of margins short term, 

as sales improve, it leads us to question the level 

of service in the group’s stores and the potential 

for long-term depreciation of the brand. Current 

store locations might lose relevance in the 

coming quarters. 

What it means to be listed in HK 

We also believe it is quite relevant, particularly as 

our team is based in both Europe and Hong Kong, 

that Prada should trade in line with EU and USlisted 

peers. In other words the HK-listing 

premium, were it to reappear, would be difficult 

to justify. This is because, from an operations 

perspective, other companies, eg Richemont and 

LVMH, have theoretically as much legitimacy to 

be HK-listed as Prada. 


For FY Jan 13e, we continue to take the view that 

Prada should have the highest sales growth in the 

sector (16% organic, 19% reported). Gross margin 

should increase by another 120bps (to72.7%) as 

the shift to retail from wholesale continues and FX 

becomes favourable. At the EBIT margin level, we 

have factored in another 190bps of improvement 

to 27.0% of sales. For us, the biggest unknown 

will be selling expenses: we currently see these 

coming down by 30bps (to 30.8% of sales) but this 

will vary greatly depending on sales growth and 

associated staff costs. 

We have increased our FY Jan 13e-14e EBIT 

estimates by 16% on the back of much higher sales 

growth than expected in FY Jan 12e, generating 

impressive operating leverage. 

We have increased our DCF-based target price to 

HKD48 (from HKD39) on these revisions and 

changes to our assumptions (RFR 3.0% vs 3.5%, 

ERP 5.5% vs 4.5%, WACC 10.26% vs 8.7%; see 

page 65). Under our research model, for stocks 

with a volatility indicator, the Neutral band is 

10ppts above and below the hurdle rate for Hong 

Kong stocks of 8.5%. Our target price of HKD48 

provides a potential return of 10%, which is 

within the Neutral band, therefore we reiterate our 

Neutral (V) rating. Potential return equals the 




On our new estimates, Prada is trading at 18.8x 

CY12e and 16.1x CY13e EPS, or at an average 2% 

premium to its Europe-listed peers for 2012e. 

Risks (on both the upside and downside) include 

those common to most luxury stocks, ie macroeconomic 

conditions in emerging markets and the 

USD/EUR rate. Company-specific risks include a 

placement of shares from Prada family members 

and failure/success to execute the retail strategy 

(translating into greater/smaller operating 

leverage than we model). 

63



March 2012 

abc 

Prada SPA – P&L 

Year ending Jan+1 (EURm) FY 2009a Q4 2010a H2 2010a FY 2010a Q4 2011a H2 2011e FY 2011e FY 2012e FY 2013e 

Net sales 1,531 654 1,097 2,017 855 1,444 2,562 3,050 3,400 

Royalties 31 7 13 30 15 22 38 46 51 

Net revenues 1,561 661 1,110 2,047 869 1,466 2,600 3,096 3,451 

Gross profit 975 460 774 1,388 623 1,054 1,859 2,251 2,537 

Gross margin (%) 62.4% 69.6% 69.7% 67.8% 71.7% 71.9% 71.5% 72.7% 73.5% 

Product and development expenses (97) (26) (48) (97) (27) (49) (100) (105) (110) 

as a % of sales 6.2% 4.0% 4.3% 4.7% 3.2% 3.3% 3.8% 3.4% 3.2% 

Advertising and promotion expenses (76) (23) (48) (85) (33) (69) (123) (155) (179) 


Selling expenses (485) (195) (353) (643) (252) (451) (809) (953) (1 056) 


General and administrative expenses (130) (46) (78) (145) (51) (85) (174) (201) (221) 


SG&A as a % of sales 44.4% 47.6% 47.4% 42.4% 44.6% 46.4% 45.7% 45.4% 

EBIT 187.1 164.9 241.5 413.7 260.8 399.7 653.1 836.1 970.3 

EBIT margin (%) 12.0% 24.9% 21.8% 20.2% 30.0% 27.3% 25.1% 27.0% 28.1% 


64

9 

. 

6 



March 2012 

abc 

Financials & valuation: Prada SPA 

Neutral (V) 



DCF analysis 




Revenue 2,047 2,600 3,096 3,451 

EBITDA 531 770 975 1,126 



Net interest -21 -21 -21 -21 

PBT 388 628 811 945 

HSBC PBT 388 628 811 945 

Taxation -135 -163 -211 -246 





Capex -188 -257 -275 -293 


Dividends -59 -132 -171 -199 


FCF equity 112 263 416 528 



Tangible fixed assets 725 865 1,000 1,138 

Current assets 770 1,185 1,563 1,985 

Cash & others 97 351 593 917 

Total assets 2,366 2,921 3,434 3,995 


Gross debt 498 397 397 397 

Net debt 401 46 -196 -520 






Revenue 31.1 27.0 19.1 11.5 

EBITDA 87.9 44.9 26.7 15.4 


PBT 150.2 61.7 29.2 16.6 

HSBC EPS 147.9 81.8 29.3 16.6 

Ratios (%) 

Revenue/IC (x) 1.2 1.4 1.5 1.5 

ROIC 16.0 26.1 30.2 32.2 

ROE 22.3 31.1 30.2 28.6 

ROA 11.9 18.2 19.4 19.2 

EBITDA margin 26.0 29.6 31.5 32.6 



Net debt/equity 33.1 2.6 -8.9 -19.3 

Net debt/EBITDA (x) 0.8 0.1 -0.2 -0.5 

CF from operations/net debt 93.2 1130.0 




DPS 0.05 0.07 0.08 0.09 

NAV 0.48 0.69 0.86 1.05 





Sensitivity and valuation range (HKD/share) 


9.3% 52.4 53.1 53.7 

9.8% 49.8 50.4 51.0 

10.3% 47.4 48.0 48.5 

10.8% 45.3 45.8 46.2 

11.3% 43.3 43.7 44.1 



EV/sales 5.5 4.2 3.4 3.0 

EV/EBITDA 21.2 14.1 10.9 9.2 

EV/IC 6.4 5.6 5.0 4.5 

PE* 43.1 23.7 18.3 15.7 

P/NAV 9.0 6.2 5.0 4.1 

FCF yield (%) 1.0 2.4 3.8 4.9 




Share price (HKD) 43.80 Target price (HKD) 48.00 

Reuters (Equity) 1913.HK Bloomberg (Equity) 1913 HK 

Market cap (USDm) 14,450 Market cap (HKDm) 112,076 


Country Hong Kong Sector Textiles, Apparel & Luxury 

Goods 





51 

46 

41 

36 

31 

26 

Jun-11 

Prada SPA 

Source: HSBC 


Rel to HANG SENG INDEX 

Dec-11 

51 

46 

41 

36 

31 

26 

65



March 2012 

abc 

Richemont 

Valuation remains undemanding but while the year probably started 

well, tough comps are ahead (April-September) 

There is a case for high-end watches underperforming the average 

short term; this implies operating leverage may be lacking this year 

Downgrade to Neutral from Overweight, cut target price to CHF62 

(from CHF66) on lower estimates 

Absolute valuation fine, shortterm 

turbulence likely though 

On our estimates Richemont is trading at a 2012e 

calendar PE of 16.6x. Looking at the barriers to 

entry in the luxury space generally and the power 

of the Cartier brand in particular, and given it is 

impossible to match its portfolio with the specialist 

watchmakers (Baume et Mercier aside maybe), it 

is difficult to avoid thinking this asset is not very 

cheap in absolute terms at current levels. 

But since we believe there is a case for high-end 

watches underperforming the average short term, 

the valuation argument may not be sufficient. 

What could make things more difficult in the next 

few months is how unpredictable trends will be 

given H1’s (ended September 2011) very strong 

organic sales growth and how easy it will be for 

the group to lap this tough basis of comparison. 

H1 ending September sales were up 36% at 

constant FX and we estimate that pure pricing was 

c8%, volume growth was in the high teens and the 

rest (high single digit to low double digit) was 

various mix effects (shifting from franchise to 

DOS, streamlining of wholesale distribution in the 

US leading to consumers buying in DOS rather 

than third-party retailers, product mix). 

Richemont: organic sales growth rates 

FY March 2008a 2009a 2010a 2011a 2012e 

H1 16% 16% -20% 22% 36% 

H2 15% -12% 10% 16% 19% 

FY 16% 2% -5% 19% 27% 


Although pricing can offer another 3-4% of growth 

for FY March 2013e, we estimate, we believe 

volumes will be flattish or even slightly down and a 

further shift to retail can add a few more points to 

top-line growth. All in, we expect growth to slow 

from 27% in FY March 2012 to 5% in FY March 

2013. On the face of it the market may think this is 

a poor figure but for us, this is more a return to 

almost “trend-like” growth despite the very tough 

basis of comparison. 

Don’t want to be left “high and dry” 

This part is common to the investment cases of 

Hengdeli, Richemont and the Swatch Group and 

concerns all three. We believe trends in China will 

slow but not see a steep step down and the recent 

Swiss watch exports point to very decent orders that 

will support February/March sales. 

We think, however, that price points will matter 

more this year than last, with higher-end products 

probably seeing sales slow more than the average 

66



March 2012 

abc 

for the watch space. There are several reasons we 

think this will be the case: 

We estimate that up to two-thirds of 

consumers purchasing luxury products in 

China are new to the brands they buy (ie not 

“repeat purchasers”) and are taking the view 

that the proportion of clients “new to a brand” 

is greater at the lower price points (Rado, 

Mido, Longines, Tissot) than for Omega and 

above type of price points. 

We believe that consumers able to afford 

higher price points are more “travelled” and 

exposed to negative headline news weighing 

on sentiment and will take the view that they 

can postpone a EUR10k purchase, waiting for 

a better psychological environment. 

We are convinced that corporate gift giving 

(or Guanxi) drives high-end purchases more 

than it drives sales of the likes of Rado, 

Longines, Tissot, etc and if real estate deals 

are scarce and government officials change at 

year-end, we could see gifting slowing, at 

least temporarily. 

Our estimate for Greater China is that sales 

growth for Omega and above price points will be 

in the high single digits/low double digits only 

while lower-priced brands could still grow 

comfortably in the high 20s, if not more, on the 

back of middle-class expansion and higher wages. 

We think Hengdeli is a good proxy for the space 

in Greater China and we see it increasing total 

sales by 19% (vs 37% in 2011e), or 20% at retail 

(vs 36%), with mainland China up 26% (vs 38%) 

and HK up 10% only (vs 32%). Note there is a 

correlation between regional exposure and price 

points (the mainland being far more volume 

driven than HK). 

As far as Richemont is concerned, we still believe 

that Cartier can act as the Louis Vuitton of watches 

and jewellery, ie progressively become the reference 

brand but top-line growth could be temporarily 

muted as high-end consumers, including in China, 

postpone their purchase intentions. 


We have cut our FY March 13e-14e EBIT 

estimates by 4-8% on the back of lower sales 

growth (high-end underperforming the average for 

watches) and the impact this has on EBIT (lack of 

operating leverage in FY March 13 as the 

company continues to invest much behind the 

brands). On our revised estimates, EBIT margin 

should dip by 20bps in FY March 2013 and regain 

50bps (to 21.8% of sales) in FY March 2014. 

We have lowered our DCF-based target price to 

CHF62 (vs CHF66) following these estimate 

revisions. Our DCF assumptions are unchanged 

(see table on page 69). Under our research model, 

for stocks without a volatility indicator, the Neutral 

band is 5 ppts above and below the hurdle rate for 

Swiss stocks of 7.5%. Our target price of EUR62 

provides a potential return of 11%, which is within 

the Neutral band; therefore, we downgrade the 

stock Neutral from Overweight. Potential return 




On our new estimates, Richemont is trading at 16.6x 

CY 2012e and 14.6x CY 2013e EPS, an attractive 

valuation for long-term investors. Specific risks 

include the Swiss franc’s strength (on the downside) 

or weakness (on the upside). 

Downside risks are the historically lower resilience 

of watches compared to other luxury segments in 

case of a severe economic downturn, and failure to 

improve results of underperforming assets. Upside 

risks include a much better resilience of sales trends 

and more convincing margin turnaround at Baume 

& Mercier, Dunhill and Net-à-Porter. 

67



March 2012 

abc 

Richemont FY results and forecasts 

YE March (EURm) 2007a 2008a 2009a H1 10a H2 10a 2010a H1 11a H2 11a 2011a H1 12a H2 12e 2012e 2013e 2014e 

Net sales 4,827 5,302 5,418 2,379 2,797 5,176 3,259 3,633 6,892 4,214 4,361 8,575 9,325 10,000 

% change 12.0% 9.8% 2.2% -15.0% 6.8% -4.5% 37.0% 29.9% 33.2% 29.3% 20.0% 24.4% 8.8% 7.2% 

Gross profit 3,074 3,405 3,417 1,464 1,727 3,191 2,113 2,281 4,394 2,665 2,737 5,402 5,875 6,332 

Gross margin 63.7% 64.2% 63.1% 61.5% 61.7% 61.6% 64.8% 62.8% 63.8% 63.2% 62.8% 63.0% 63.0% 63.3% 

Selling & distribution 1,090 1,181 1,235 598 679 1,277 761 893 1,654 891 1,077 1,968 2,176 2,337 

as a % of sales 22.6% 22.3% 22.8% 25.1% 24.3% 24.7% 23.3% 24.6% 24.0% 21.1% 24.7% 23.0% 23.3% 23.4% 

Administration 503 528 542 259 286 545 314 342 656 342 353 695 751 800 


Communication 570 607 644 204 302 506 264 435 699 340 526 866 933 990 


Other/non-recurring items -5 -13 28 13 20 33 14 16 30 17 13 30 30 30 

Total operating exps 2,158 2,297 2,449 1,074 1,287 2,361 1,353 1,686 3,039 1,590 1,970 3,560 3,889 4,157 


EBIT reported 916 1,108 968 390 440 830 760 595 1,355 1,075 768 1,843 1,985 2,175 

EBIT underlying 900 1,108 968 390 440 830 760 595 1,355 1,075 768 1,843 1,985 2,175 

EBIT margin underlying 18.6% 20.9% 17.9% 16.4% 15.7% 16.0% 23.3% 16.4% 19.7% 25.5% 17.6% 21.5% 21.3% 21.8% 

Financial result 31 47 -101 24 -161 -137 -120 -163 -283 -227 15 -212 20 26 

Exceptional 102 0 102 0 0 

Taxation -158 -195 -133 -70 -24 -94 -98 -98 -196 -139 -133 -272 -335 -368 

Minority interest -1 1 3 0 4 4 -2 103 101 0 0 0 -1 0 

Luxury net profit (reported) 788 961 737 344 259 603 642 437 1,079 709 649 1,358 1,670 1,834 


Richemont FY sales and EBIT by segment 

YE March (EURm) 2007a 2008a 2009a H1 10a H2 10a 2010a H1 11a H2 11a 2011a H1 12a H2 12e 2012e 2013e 2014e 

Sales by segment 

Jewellery maisons 2,435 2 657 2 762 1 222 1 465 2 688 1 619 1 860 3 479 2 165 2 305 4 470 4 976 5 349 

Specialist watchmakers 1,203 1 378 1 437 655 699 1 353 901 873 1 774 1 171 1 039 2 210 2 409 2 578 

Writing instruments 585 637 587 238 313 551 303 369 672 334 372 706 755 793 

Other businesses 604 630 632 264 320 584 436 531 967 544 646 1 190 1 311 1 430 

Total sales 4,827 5,302 5,418 2,379 2,797 5,176 3,259 3,633 6,892 4,214 4,361 8,575 9,450 10,150 

EBIT by segment 

Jewellery maisons 667 767 777 349 393 742 541 521 1 062 734 666 1 400 1 573 1 701 

Specialist watchmakers 274 376 301 133 98 231 259 120 379 312 171 483 553 607 

Writing instruments 110 120 69 29 50 79 48 61 109 54 52 106 117 125 

Other businesses 9 2 -39 -29 -7 -36 -19 -16 -35 -17 15 -2 27 55 

Total EBIT before 

1,060 1,265 1,108 482 534 1,016 829 687 1,516 1,083 904 1,987 2,270 2,489 

unallocated costs 

EBIT reported 916 1,108 968 390 440 830 760 595 1,355 1,075 768 1,843 2,053 2,256 

EBIT margin by segment 

Jewellery maisons 27.4% 28.9% 28.1% 28.6% 26.8% 27.6% 33.4% 28.0% 30.5% 33.9% 28.9% 31.3% 31.6% 31.8% 

Specialist watchmakers 22.8% 27.3% 20.9% 20.3% 14.0% 17.1% 28.7% 13.8% 21.4% 26.6% 16.5% 21.9% 23.0% 23.6% 

Writing instruments 18.8% 18.8% 11.8% 12.2% 16.0% 14.3% 15.8% 16.5% 16.2% 16.2% 14.0% 15.0% 15.5% 15.8% 

Other businesses 1.5% 0.3% -6.2% -11.0% -2.2% -6.2% -4.4% -3.0% -3.6% -3.1% 2.3% -0.2% 2.1% 3.9% 

Total EBIT margin before 22.0% 23.9% 20.4% 20.3% 19.1% 19.6% 25.4% 18.9% 22.0% 25.7% 20.7% 23.2% 24.0% 24.5% 

unallocated costs 

EBIT margin reported 19.0% 20.9% 17.9% 16.4% 15.7% 16.0% 23.3% 16.4% 19.7% 25.5% 17.6% 21.5% 21.7% 22.2% 


68

1 

0 

. 

8 



March 2012 

abc 

Financials & valuation: Richemont Br 

Neutral 



DCF analysis 




Revenue 6,892 8,575 9,325 10,000 

EBITDA 1,760 2,288 2,476 2,714 



Net interest -283 -212 20 26 

PBT 1,174 1,631 2,005 2,201 

HSBC PBT 1,072 1,631 2,005 2,201 

Taxation -196 -272 -335 -368 


HSBC net profit 978 1,358 1,670 1,834 



Capex -323 -600 -653 -700 


Dividends -141 -191 -256 -330 

Change in net debt -694 -780 -1,040 -1,163 

FCF equity 894 971 1,297 1,494 





Cash & others 3,381 3,490 4,530 5,693 

Total assets 9,693 10,359 11,926 13,560 


Gross debt 791 120 120 120 

Net debt -2,590 -3,370 -4,410 -5,573 






Revenue 33.2 24.4 8.8 7.2 

EBITDA 53.8 30.0 8.2 9.6 


PBT 70.1 38.9 23.0 9.8 

HSBC EPS 60.5 38.9 22.9 9.8 

Ratios (%) 

Revenue/IC (x) 2.2 2.4 2.3 2.3 

ROIC 35.3 42.3 41.2 41.5 

ROE 15.5 18.0 18.9 17.8 

ROA 13.9 15.3 14.8 14.2 

EBITDA margin 25.5 26.7 26.5 27.1 









DPS 0.34 0.45 0.58 0.67 

NAV 12.16 14.19 16.65 19.27 





Sensitivity and valuation range (CHF/share) 


8.5% 68.5 69.7 70.6 

9.0% 64.6 65.7 66.5 

9.5% 61.1 62.0 62.8 

10.0% 57.9 58.7 59.4 

10.5% 55.1 55.7 56.4 



EV/sales 3.5 2.6 2.3 2.0 

EV/EBITDA 13.6 9.8 8.7 7.5 

EV/IC 7.0 5.9 5.1 4.5 

PE* 26.8 19.3 15.7 14.3 

P/NAV 3.8 3.3 2.8 2.4 

FCF yield (%) 3.4 3.8 5.0 5.8 




Share price (CHF) 55.75 Target price (CHF) 62.00 

Reuters (Equity) CFR.VX Bloomberg (Equity) CFR VX 

Market cap (USDm) 35,409 Market cap (CHFm) 32,012 


Country Switzerland Sector Textiles, Apparel & Luxury 

Goods 





61 

56 

51 

46 

41 

36 

Jun-11 

Richemont Br 

Source: HSBC 


Rel to SMI 

Dec-11 

61 

56 

51 

46 

41 

36 

69



March 2012 

abc 

Swatch 

Still a very China-driven call but one we are happy to reiterate 

There is a case for access brand watches outperforming the highend 

segment short term; with c58% sales exposure to the access 

segment, Swatch should continue to gain market share 

Remain Overweight; increase TP to CHF500 from CHF465 on 

higher sales growth estimates 

Purest play on China and 

access brands after Hengdeli 

“Cheap and cheerful” part of the 

portfolio should do very well in 2012 

It's not often that a company produces year 2 sellside 

estimates in year 1. Publishing an update 

twice a year and having had an exceptional finish 

to 2011, the group published FY 2011 sales 

figures in early January and achieved just that. 

Sales for 2011 were pretty much in line with 

expectations for 2012. We think this was possible 

because volume-driven brands have started to 

outperform the average for the sector in the latter 

part of 2011. We take the view this will continue. 

Swatch group sales grew by double digits in 

February (as in January). This is a positive 

performance since Chinese New Year occurred in 

January this year (vs February last year), so 

February faced a tougher basis of comparison. 

We think, however, that price points will matter 

more this year than last, with higher-end products 

probably seeing sales slow more than the average 

for the watch space. According to CEO Mr Hayek, 

in mainland China (but not in Hong Kong), midrange 

brands did better than high-end brands. 

January/February sell out (sales to the endconsumer) 

in Mainland China were 50% for 

Longines, 57% for Tissot and 14% for Omega. In 

Mainland China, Mr Hayek thinks that the group's 

high-end brands could grow at 9-10% in 2012 and 

the rest of the portfolio at "high double digit rates". 

Swatch 2011 sales breakdown 

Electronic Systems 

5% 

Production external sales 

7% 

Low end watch 

segment 

14% 

Medium watch segment 

44% 

High end watch 

segment* 

30% 

*Includes Breguet, Blancpain, Glasshütte, Léon Hatot, Jacquet Droz, 50% of Omega sales 


There are several reasons we think this will be 

the case: 

We estimate that up to two-thirds of 

consumers purchasing luxury products in 

China are new to the brands they buy (ie not 

“repeat purchasers”) and take the view that 

70



March 2012 

abc 

the proportion of clients “new to a brand” is 

greater at the lower price points (Rado, Mido, 

Longines, Tissot) than for Omega and above 

type of price points. 

We believe consumers able to afford higher 

price points are more “travelled” and exposed 

to negative headline news weighing on 

sentiment and will take the view that they can 

postpone a purchase, waiting for a better 

psychological environment. The access 

segment is also less vulnerable to the ‘guilt 

factor’ (buying a USD1,500 watch is less of a 

statement than buying a USD50,000 watch). 

We are convinced that corporate gift giving (or 

Guanxi) drives high-end purchases more than 

it drives sales of the likes of Rado, Longines, 

Tissot, etc and if real estate deals are scarce 

and government officials change at year-end, 

we see gifting slowing, at least temporarily 

We think Hengdeli is a good proxy for the space 

in Greater China and we see it increasing total 

sales by 19% (vs 37% in 2011e), or 20% at retail 

(vs 36%), with mainland China up 26% (vs 38%) 

and HK up 10% only (vs 32%). Note there is a 

correlation between regional exposure and price 

points (the mainland being far more volume 

driven than HK). 

Swatch 2011 sales by region 

Greater 

Japan 

China 

2% 

Oceania 

38% 

1% 

Africa 

Asia ex 

1% 

GC ex 

Japan 

14% 

Europe 

Americas 

36% 

8% 


The CEO confirmed that 5-10% sales growth 

seemed achievable in 2012, and that the group 

would try to be "as close as possible" from the 

CHF8bn gross sales level. 

We factor in 12% organic sales growth (vs 7% 

previously) for the year and are confident that with 

exposure to China and a more recent trend – retail 

expansion in the US – this is an achievable number. 

If FX stays at the current level, Swatch believes 

the FX impact at the sales and EBIT level would 

be broadly neutral in H1 2012 and slightly 

positive in H2 2012. This is good news since FX 

pressures were the main cause behind the lack of 

leverage in 2011. We have raised our 2012-2014 

EBIT estimates by 4%, 6% and 8%. 

We have increased our DCF-based target price to 

CHF500 (vs CHF465) on these revisions. Our 

DCF assumptions are unchanged (see table on 

page 73). Under our research model, for stocks 

without a volatility indicator, the Neutral band is 

5ppts above and below the hurdle rate for Swiss 

stocks of 7.5%. Our target price of CHF500 

implies a potential return of 22.3%, above the 

Neutral band of our model; therefore, we reiterate 

our Overweight rating on Swatch. Potential return 




Swatch currently trades at 14.6x 2012e PE and 

13.1x 2013e PE. Restated for the group’s net cash 

pile (CHF2.5bn at end-2012e), Swatch’s cash 

2013e PE is 11.0x. We believe this is an attractive 

valuation if our assumption that Asian 

consumption (local and travel related) will hold 

up is correct. 


71



March 2012 

abc 

We welcome the news that, after 18 months of 

having no IR manager, Swatch announced that Mr 

Félix Knecht (Treasurer) would assume an IR role 

(although only part-time). 

Downside risks to our rating include a slower-thanexpected 

return of the production division’s EBIT 

margin to 2007 peak; watch movement shortages 

weighing on sales, negative macro newsflow on 

China, and a stronger CHF. 

Swatch P&L 

CHFm 2006a YoY 

(%) 

2007a YoY 

(%) 

2008a 

YoY 

(%) 

2009a 

YoY 

(%) 

2010a* YoY 

(%) 

2011a 

YoY 

(%) 

2012e YoY 2013e 

(%) 

YoY 

(%) 

2014e 

YoY 

(%) 

Sales 

Watches & Jewellery 3,723 14 4,456 20 4,547 2 4,187 -8 5,225 25 5,953 14 6,798 14 7,376 9 7,927 7 

Watches Production 1,335 9 1,624 22 1,742 7 1,429 -18 1,487 4 1,972 33 2,213 12 2,401 9 2,581 8 

Electronics Systems 586 9 623 6 526 -16 391 -26 436 12 334 -23 364 9 388 6 411 6 

General services 6 0 5 7 5 5 5 5 5 5 

Elimination internal sales -830 10 -1,062 28 -1,145 8 -870 -24 -1,045 20 -1,500 44 -1,680 12 -1,820 8 -1,954 7 

Total net sales 4,820 12 5,646 17 5,677 1 5,142 -9 6,108 19 6,764 11 7,700 14 8,350 8 8,970 7 

Total gross sales 5,050 12 5,941 18 5,966 0 5,421 -9 6,440 19 7,143 11 8,106 13 8,784 8 9,434 7 

EBIT 

Watches 738 18 920 25 828 -10 804 -3 1,257 56 1,352 8 1,574 16 1,739 10 1,891 9 

Watches production 147 213 235 60 281 20 94 -67 186 98 322 73 376 17 420 12 465 11 

Electronics systems 106 36 99 -7 104 5 24 -77 62 158 13 -79 25 96 35 37 41 18 

General services -18 13 -18 0 -11 -39 -19 73 -69 263 -73 6 -76 4 -79 4 -82 4 

Total 973 32 1,236 27 1,202 -3 903 -25 1,436 59 1,614 12 1,900 18 2,115 11 2,315 9 

EBIT margin 

Watches 19.8% 20.6% 18.2% 19.2% 24.1% 22.7% 23.2% 23.6% 23.9% 

Watches production 11.0% 14.5% 16.1% 6.6% 12.5% 16.3% 17.0% 17.5% 18.0% 

Electronics systems 18.1% 15.9% 19.8% 6.1% 14.2% 3.9% 7.0% 9.0% 10.0% 

Total 20.2% 21.9% 21.2% 17.6% 23.5% 23.9% 24.7% 25.3% 25.8% 

Net financial result & associates 84 37 -196 46 -38 -3 35 47 59 

Taxes -227 -258 -168 -186 -318 -335 -416 -465 -510 

Tax rate 21.5% 20.3% 16.7% 19.6% 22.7% 20.8% 21.5% 21.5% 21.5% 

Minority interest -3 -4 -4 -4 -6 -7 -9 -11 -13 

Net consolidated income (reported) 827 35 1,011 22 834 -18 759 -9 1,074 42 1,269 18 1,510 19 1,686 12 1,850 10 

EPS (bearer) (reported) (CHF) 14.87 39 18.50 24 15.76 -15 14.48 -8 20.28 40 23.49 16 27.95 19 31.21 12 34.25 10 

EPS (bearer) (HSBC) (CHF) 14.87 41 18.50 24 15.76 -15 14.48 -8 20.28 40 23.49 16 27.95 19 31.21 12 34.25 10 

* Restated 


72

2 

2 

. 

3 



March 2012 

abc 

Financials & valuation: Swatch 

Overweight 



DCF analysis 



Profit & loss summary (CHFm) 

Revenue 6,764 7,700 8,350 8,970 

EBITDA 1,843 2,138 2,363 2,573 




PBT 1,611 1,935 2,162 2,374 

HSBC PBT 1,611 1,935 2,162 2,374 

Taxation -335 -416 -465 -510 



Cash flow summary (CHFm) 

Cash flow from operations 644 1,158 1,593 1,741 

Capex -515 -410 -450 -450 


Dividends -270 -317 -377 -422 

Change in net debt 183 -444 -778 -880 

FCF equity 129 748 1,143 1,291 

Balance sheet summary (CHFm) 




Cash & others 2,169 2,613 3,391 4,271 

Total assets 9,805 11,111 12,540 14,098 


Gross debt 91 91 91 91 

Net debt -2,078 -2,522 -3,300 -4,180 






Revenue 10.7 13.8 8.4 7.4 

EBITDA 11.2 16.0 10.5 8.9 


PBT 15.2 20.1 11.7 9.8 

HSBC EPS 15.8 19.0 11.7 9.7 

Ratios (%) 

Revenue/IC (x) 1.3 1.2 1.2 1.2 

ROIC 24.4 24.2 24.3 24.6 

ROE 16.8 17.5 17.0 16.4 

ROA 13.9 14.3 14.0 13.6 

EBITDA margin 27.2 27.8 28.3 28.7 






Per share data (CHF) 



DPS 5.87 6.99 7.80 8.56 

NAV 149.11 171.18 195.41 221.86 





Sensitivity and valuation range (CHF/share) 


8.5% 562 573 581 

9.0% 525 534 542 

9.5% 492 500 507 

10.0% 462 469 476 

10.5% 436 442 448 



EV/sales 2.8 2.4 2.1 1.8 

EV/EBITDA 10.1 8.5 7.4 6.4 

EV/IC 3.2 2.8 2.4 2.1 

PE* 17.4 14.6 13.1 11.9 

P/NAV 2.7 2.4 2.1 1.8 

FCF yield (%) 0.6 3.6 5.5 6.2 




Share price (CHF) 408.90 Target price (CHF) 500 

Reuters (Equity) UHR.VX Bloomberg (Equity) UHR VX 

Market cap (USDm) 23,684 Market cap (CHFm) 21,411 

Free float (%) 73 Enterprise value (CHFm) 18,173 

Country Switzerland Sector Textiles, Apparel & Luxury 

Goods 





459 

439 

419 

399 

379 

359 

339 

319 

299 

279 

Jun-11 

Swatch 

Source: HSBC 

Rel to SMI 


Dec-11 

459 

439 

419 

399 

379 

359 

339 

319 

299 

279 

73



March 2012 

abc 

Tiffany 

Tiffany registered the slowest growth in our universe during the 

holiday season 

Still no definite answer to why performance was weaker than peers 

(apart from the usual vulnerability to US local jewellers discounting 

in tougher times) 

Remain Neutral, unchanged USD69 target price 

The industry outlier 

Slowest growth in our universe during the 

holiday season 

On 10 January, Tiffany warned on FY Jan 2012 

profits following weaker-than-expected November- 

December sales. Reported sales increased 7% on a 

worldwide basis in the two months (comps 4%, 

contribution from new stores 2%, FX 1%). This 7% 

increase compared with low double-digit company 

guidance for Q4 ended January 2012. The 6% 

growth at constant FX was below the following 

figures disclosed by peers for calendar Q4: 

Richemont 24%, Burberry 21%, Ferragamo 20%, 

Swatch c19% (HSBC estimate), Hugo Boss (17%), 

Coach 15%, Luxottica 9% and Tod’s 8%. 

The slowdown in the Americas (sales up 4%, 

comps 2% in November-December compared with 

comps 15% in Q3), which accounts for c50% of 

sales, was the main reason for the earnings miss. 

Tourist sales increased y-o-y, but local sales 

declined. The weakness seen in November in the 

East Coast spread to the rest of the US in December 

(with the East Coast still being the softer area). 

By price segment, trends were broad-based. 

Management indicated that Tiffany (which has a 

no-discount policy) suffered from competitive 

discounting from local jewellers. 

The second main reason was the negative trend 

seen in London (slightly less than half of European 

sales, ie c6% of total sales). As a consequence, 

comp sales in Europe declined 4% (2% including 

new stores) in spite of a modest rise in sales in 

Continental Europe. Compared with European 

peers, Tiffany does not benefit as much from 

tourist-related sales. 

In Asia, trends remained robust (18% at constant 

FX, comps 12%), but moderated compared with 

the very strong growth rates seen in previous 

quarters (36% in Q2 and 41% in Q3). According to 

Tiffany, this is a normalisation of trends towards 

growth rates sustainable for the medium term 

(rather than a negative inflexion point). The 

positive surprise came from Japan, which saw a 6% 

rise in comps. 

On the back of these lower-than-expected 

November-December trends, the company cut its 

FY Jan 2012e EPS guidance to USD3.60-3.65 

(versus USD3.70-3.80 previously). Traditionally, 

Tiffany needs a 5-6% comps figure to generate 

positive leverage on SG&A. We thus believe the 

4% comp figure is likely to translate into a slight 

decline in gross margin combined with a negative 

SG&A leverage in Q4 Jan 2012e. 

74



March 2012 

abc 

Still no definite answer to why performance 

was weaker than peers: Richemont’s strong 

performance is evidence that the issue is not the 

segment (jewellery), while that of the affordable 

luxury player Coach suggests that Tiffany’s price 

positioning (on average lower than peers) is also 

not a problem. Two factors have played a role: (i) 

Tiffany benefits less than peers from touristrelated 

sales in the US and to a greater extent in 

Europe; and (ii) it is always more vulnerable than 

peers to the discounting habits of US local ‘mom 

& pop’ jewellers in tougher times. Beyond that, 

we are always reluctant to draw definite 

conclusions from trends over two to three months. 

Tiffany’s 2010 sales breakdown by region 

Americas 

50% 


Japan 

18% 

Other 

2% 

Asia Pacific 

18% 

Europe 

12% 


We leave our 2011-13 EPS estimates unchanged. 

For 2011, our estimate is USD3.65, in line with the 

higher end of the USD3.60-3.65 company guidance 

(and close to the USD3.64 consensus estimate). Our 

2012 and 2013 EPS estimates remain below 

consensus (5% and 4%, respectively). 

We leave our DCF-based target price unchanged at 

USD69. The assumptions used to generate our 

DCF-derived target price are detailed on page 77. 




for US stocks of 7.0%. Our target price of USD69 

implies a potential return of 3.7%, within the 

Neutral band of our model; therefore, we reiterate 

our Neutral rating on Tiffany. Potential return 




After its marked underperformance y-t-d (shares 

down 1% vs 16-43% increases for other players), 

Tiffany currently trades at 15.2x calendar 2013e, 

ie in line with European peers. 

Upside risks to our rating include stronger-thanexpected 

comps in the US and SG&A leverage as 

well as speculation that Tiffany may be a takeover 

target following the termination of the watch 

contract with Swatch (announced 11 September, 

2011), which has been described as a poison pill 

(see FT article from 22 May 2008). Downside 

risks to our rating include a more pronounced US 

slowdown than the one embedded in our 

forecasts, non-domestic investment weighing on 

earnings (stores, ad spend) and disappointing 

results in watches. 

For 2012, we forecast 3% reported sales growth 

(comps 0%, contribution from new stores 3%, FX 

0%). Our worldwide 0% comps forecast is based on 

the following regional comps assumptions: 

Americas -5%, Europe -3%, Japan +1% and Asia 

+13%. We expect the EBIT margin (adjusted for 

one-offs) to decrease 90bp to 19.9% on the back of a 

30bp gross margin deterioration and negative SG&A 

leverage (even though Tiffany said it is currently 

adjusting costs to the recent slowdown in trends). 

75



March 2012 

abc 

Tiffany results & forecasts 

USDm FY08a FY09a FY10a Q1 11a Q2 11a Q3 11a Q4 11e FY11e FY12e FY13e 

Net sales 2,860.0 2,709.7 3,085.3 761.0 872.7 821.8 1,179.6 3,635.0 3,760.0 4,120.0 

Gross profit 1,645.4 1,530.2 1,822.3 443.7 514.7 475.8 713.7 2,147.8 2,210.9 2,443.2 

Gross margin 57.5% 56.5% 59.1% 58.3% 59.0% 57.9% 60.5% 59.1% 58.8% 59.3% 

SG&A 1,172.6 1,089.7 1,227.5 307.7 374.2 329.7 424.2 1,435.7 1,462.9 1,588.2 

SG&A as % of sales 41.0% 40.2% 39.8% 40.4% 42.9% 40.1% 36.0% 39.5% 38.9% 38.5% 

Operating income reported 472.8 440.5 594.8 136.0 140.5 146.2 289.5 712.0 748.0 855.0 

Operating income HSBC* 472.8 440.5 610.8 145.0 174.0 146.2 289.5 754.5 748.0 855.0 

Operating margin HSBC* 16.5% 16.3% 19.8% 19.0% 19.9% 17.8% 24.5% 20.8% 19.9% 20.8% 

Interest income 28.9 50.5 47.3 10.1 9.6 10.4 9.8 40.0 20.0 0.0 

Earnings before tax 346.1 390.0 547.4 125.8 130.9 135.8 279.6 672.0 728.0 855.0 

Income taxes 126.1 124.3 179.0 44.8 40.9 46.1 95.1 226.8 247.5 290.7 

Tax rate (%) 36.4% 31.9% 32.7% 35.6% 31.2% 33.9% 34.0% 33.7% 34.0% 34.0% 

Net earnings 220.0 264.8 368.4 81.1 90.0 89.7 184.6 445.2 480.5 564.3 

Net EPS common (diluted) HSBC* (USD) 1.74 2.11 2.93 0.67 0.86 0.70 1.44 3.65 3.74 4.39 

Net EPS common (diluted) reported (USD) 1.74 2.11 2.87 0.63 0.69 0.70 1.44 3.45 3.74 4.39 

Weighted avg com share outst. (diluted, m) 126.4 125.4 128.4 129.4 129.8 128.8 128.5 129.1 128.6 128.6 

Americas 1,586.6 1,410.9 1,574.6 374.7 438.2 387.7 597.8 1,798.4 1,766.4 1,922.9 

Japan 543.4 527.1 546.5 123.4 142.5 146.4 204.7 617.0 635.5 635.5 

Asia ex-Japan 378.6 430.0 549.2 167.2 173.2 183.2 224.1 747.7 897.3 1,058.8 

Europe 284.6 311.8 360.8 85.6 101.3 92.5 136.5 415.9 399.2 435.2 

Other 66.7 29.9 54.2 10.1 17.4 11.9 16.6 56.0 61.6 67.7 

Total sales (USDm) 2,860.0 2,709.7 3,085.3 761.0 872.6 821.8 1,179.6 3,635.0 3,760.0 4,120.0 

Americas 55% 52% 51% 49% 50% 47% 51% 49% 47% 47% 

Japan 19% 19% 18% 16% 16% 18% 17% 17% 17% 15% 

Asia ex-Japan 13% 16% 18% 22% 20% 22% 19% 21% 24% 26% 

Europe 10% 12% 12% 11% 12% 11% 12% 11% 11% 11% 

Other 2% 1% 2% 1% 2% 1% 1% 2% 2% 2% 

Total sales (as a % of total) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 

YoY evolution 

Sales -3% -5% 14% 20% 30% 21% 7% 18% 3% 10% 

Selling, G&A -3% -7% 13% 18% 37% 10% 8% 17% 2% 9% 

EBIT 11% -7% 35% 29% 24% 50% 4% 20% 5% 14% 

PBT -34% 13% 40% 35% 28% 61% 5% 23% 8% 17% 

Net earnings -34% 20% 39% 26% 33% 63% 2% 21% 8% 17% 

EPS diluted (HSBC) -25% 21% 39% 39% 56% 51% 0% 25% 2% 17% 

Reported sales growth 

Americas -10% -11% 12% 19% 25% 17% 4% 14% -2% 9% 

Japan 4% -3% 7% 7% 7% 12% 12% 13% 3% 0% 

Asia ex-Japan 10% 20% 29% 37% 29% 44% 19% 36% 20% 18% 

Europe 17% 10% 16% 25% 32% 19% -1% 15% -4% 9% 

Other -18% -55% 81% -18% 46% -18% 8% 3% 10% 10% 

Total sales -3% -5% 14% 20% 30% 21% 7% 18% 3% 10% 

Comp store sales 

Americas -14% -11% 8% 17% 23% 15% 2% 13% -5% 6% 

Japan -10% -12% -4% -3% 8% 4% 6% 4% 1% 0% 

Asia ex-Japan 5% 10% 14% 26% 41% 36% 12% 27% 13% 11% 

Europe 6% 9% 18% 15% 11% 6% -4% 6% -3% 5% 

Total sales -9% -7% 8% 15% 22% 16% 4% 13% 0% 6% 

*Restated for one-offs 


76

3 

. 

7 



March 2012 

abc 

Financials & valuation: Tiffany 

Neutral 



DCF analysis 



Profit & loss summary (USDm) 

Revenue 3,085 3,635 3,760 4,120 

EBITDA 743 869 914 1,031 



Net interest -47 -40 -20 0 

PBT 547 672 728 855 

HSBC PBT 547 672 728 855 

Taxation -179 -227 -248 -291 



Cash flow summary (USDm) 


Capex -127 -250 -226 -247 


Dividends -120 -148 -165 -185 

Change in net debt -21 230 -133 -175 

FCF equity 173 30 268 328 

Balance sheet summary (USDm) 




Cash & others 741 511 644 819 

Total assets 3,736 3,932 4,288 4,710 


Gross debt 688 688 688 688 

Net debt -53 177 44 -131 






Revenue 13.9 17.8 3.4 9.6 

EBITDA 28.1 17.0 5.2 12.8 

Operating profit 38.7 23.5 -0.9 14.3 

PBT 40.4 22.8 8.3 17.4 

HSBC EPS 38.6 24.7 2.4 17.4 

Ratios (%) 

Revenue/IC (x) 1.9 1.9 1.7 1.7 

ROIC 25.1 24.8 22.2 23.1 

ROE 18.5 20.8 18.9 19.4 

ROA 11.1 12.3 12.0 12.5 

EBITDA margin 24.1 23.9 24.3 25.0 


EBITDA/net interest (x) 15.7 21.7 45.7 

Net debt/equity -2.4 7.5 1.6 -4.2 

Net debt/EBITDA (x) -0.1 0.2 0.0 -0.1 

CF from operations/net debt 173.7 1182.3 

Per share data (USD) 



DPS 1.00 1.16 1.30 1.46 

NAV 17.23 18.51 21.21 24.43 





Sensitivity and valuation range (USD/share) 


7.7% 79 81 82 

8.2% 73 75 76 

8.7% 68 69 70 

9.2% 63 64 65 

9.7% 59 60 61 



EV/sales 2.7 2.4 2.3 2.0 

EV/EBITDA 11.3 9.9 9.3 8.1 

EV/IC 4.9 4.1 3.7 3.2 

PE* 22.7 18.2 17.8 15.2 

P/NAV 3.9 3.6 3.1 2.7 

FCF yield (%) 2.1 0.4 3.2 3.9 




Share price (USD) 66.53 Target price (USD) 69.00 

Reuters (Equity) TIF.N Bloomberg (Equity) TIF US 

Market cap (USDm) 8,447 Market cap (USDm) 8,447 

Free float (%) 100 Enterprise value (USDm) 8,623 

Country United States Sector Specialty Retail 





89 

84 

79 

74 

69 

64 

59 

54 

Jun-11 

Tiffany Rel to S&P 500 

Source: HSBC 


Dec-11 

89 

84 

79 

74 

69 

64 

59 

54 

77



March 2012 

abc 

Tod’s 

Tod’s brand should be less affected by macro issues (thanks to its 

distinctive positioning and balanced geographic mix) than Hogan 

and Fay, whose sales exposure to the Italian market is over 90% 

Share price recovery (23%) since the beginning of 2012 

Downgrading to Neutral from Overweight, increasing target price to 

EUR81 (from EUR80) following higher Q4 2011 sales 

Potential risk due to Hogan 

and Fay 

Share price recovery since the 

beginning of 2012 

When Tod’s published its Q4 sales, the market 

was disappointed by the 12% sales decline in Italy 

(50% of group sales) even though Q4 sales overall 

came out above expectations (reaching 

EUR195m). True, Italy sales growth slowed down 

compared to Q3 (-12% vs +9% in Q3). But this 

negative performance was mostly due to Hogan 

(c55% of Italy sales according to our estimates) 

and Fay (c20%). The Tod’s brand itself (55% of 

sales) registered 19% organic sales growth in Q4, 

ie an acceleration compared to Q3 (18%) whilst 

Hogan (-c10% in Q4 vs c+11% in Q3) and Fay (- 

c20% in Q4 vs c1% in Q3) decelerated. All in all, 

the Tod's group managed to register 8% 

worldwide organic sales growth thanks to very 

strong sales growth elsewhere (Rest of Europe 

16%, US 23% and RoW 37%). 

Even though Tod’s shares lost 7% when the group 

published its Q4 2011 sales, the group share price 

has recovered markedly since the beginning of 

2012 (23%). 

Tod’s brand itself (55% of sales in 

2011) should be resilient 

Distinctive positioning should enable the 

brand to be resilient in Italy 

The Tod’s brand has a distinctive positioning 

(classic, discreet, comfortable, yet perceived as 

luxury). In 2008-2009, ‘core buyers’ of shoes in 

Italy (defined as women buying up to 10 pairs per 

year) scaled down their purchases, but continued 

to buy their pair of Tod’s, which has no substitute 

product. Italy only registered one quarter of 

negative trends (-1% in Q4 2009). We thus 

forecast flat organic sales growth in Europe 

(including Italy) for the Tod’s brand. 

Higher growth rate in Asia and RoW as the 

brand is an emerging brand there 

Asia (including ROW) only accounted for 18% of 

sales in 2011 versus 9% in 2008 (compared to 

more than 30% on average for the industry), but is 

growing at one of the fastest rates in the industry 

(China and Greater China both grew by more than 

50% in 2011). The group is accelerating the storeopening 

process (20 additional stores in 2012e, of 

which 90% will be in Asia ex-Japan). 

Management expects to have c50 stores for Tod’s 

group by the end of 2012e and the target is to 

reach 100 stores in the long term. We thus believe 

that the relatively small size of the group and the 

78



March 2012 

abc 

distinctive positioning of the brand should enable 

it to register better organic sales growth rates in 

Asia ex-Japan than its peers in the next three 

years. In addition, margins should benefit from 

the resulting geographic mix effect as in Asia (i) 

the mark-up is higher (3x-3.5x and even 4.0x for 

leather goods) vs 2.3x-2.5x in Continental Europe, 

and 2.6x-2.7x in UK; and (ii) the proportion of 

leather goods and accessories sales is higher 

(margins on leather goods and accessories are 

500-1,000bp higher than for shoes). 

Over-exposure to Italy, mainly due to 

Hogan and Fay 

Italy represented 50% of the total group sales in 

2011, of which c55% from Hogan, c20% from 

Fay and c25% from the Tod’s brand itself plus 

Roger Vivier. HSBC economists are forecasting a 

2% GDP decline in Italy (vs a 0.4% rise in 2011) 

and we believe these brands, which are mainly 

exposed to the Italian market (c90% for Hogan 

and c95% for Fay) will suffer more than the Tod’s 

brand itself, which benefits from tourism in Italy 

(c15-20% of sales in that country). We forecast a 

3% decline in Italy in 2012e for the group. 

Tod’s sales breakdown by region, 2011 

Italy 

51%: 

o/w Tod's + Roger Vivier 

25% 

o/w Fay 

20% 

o/w Hogan 

55% 

Europe 

20% 

ROW 

22% 

Source: Company data, HSBC estimate for Italy breakdown by brand 

North America 

7% 


Tod’s will report its 2011 results on 13 March 

2012. During the Q4 sales publication, 

management mentioned that the 25.9% EBITDA 

margin expected by the consensus (implying a 

140bp improvement) was ‘very feasible’. We 

expect a 160bp increase to 26.1% (vs 25.9% 

previously). For 2012e, management also 

indicated that it was comfortable with current 

consensus sales expectations (6.5%) as order 

backlogs for Spring/Summer are up mid-single 

digits (of which half from pricing and half from 

volume). Management considered the 26.2% 

EBITDA margin consensus ‘very feasible’ as 

leather goods in the order backlog for 

Spring/Summer continued to outperform shoes, 

according to management. 

We increase our 2011e-13e estimates by 3%, 2% 

and 1%, respectively, on the back of higher sales 

growth in Q4. For 2012e and 2013e, we forecast 

organic sales growth of 5% (7% previously) and 

7% (unchanged) and EBITDA margins of 26.3% 

(unchanged) and 26.6% (vs 26.7% previously). 

We are 2% above consensus for 2012e but in line 

with it for 2013e. 

All in all, we increase our DCF-based target price 

from EUR80 to EUR81 on the back of our 

estimate changes (see above). The assumptions 

used to generate our DCF-derived target price are 

detailed on page 81. Our new WACC is 10.2% vs 

9.5% (changes are: RFR 3.0% vs 3.5%, ERP 6.0% 

vs 5.0%). Tod’s is currently trading at 16.8x 2012e 

and 15.5x 2013e PE, ie in line with the sector. 


volatility indicator, the Neutral band is 5ppts 

above and below the hurdle rate for Europe ex-UK 

stocks of 9.0%. Our EUR81 target price implies a 

potential return of 4.1%, within the Neutral band; 

therefore, we are downgrading our rating to 

Neutral (from Overweight). Potential return equals 

the percentage difference between the current 

share price and the target price, including the 

forecast dividend yield when indicated. 

Downside risks to our rating include: (i) evidence 

that there is a limit to growth in Italy; (ii) failure 

to expand significantly beyond shoes, and (iii) a 

new sale of shares by the family, which has 

repeatedly said it wanted to increase the free float 

and only have more than 50% (currently, the 

Della Valle family holds c57%). 

Upside risks include a faster-than-expected 

increase in the awareness of the Hogan’s brand. 

79



March 2012 

abc 

Tod's FY results and forecasts 

YE Dec (EURm) 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011e 2012e 2013e 2014e 

Net Sales 421 503 573 657 708 713 788 894 953 1,020 1,095 

Change (%) 13.3% 19.5% 13.9% 14.7% 7.7% 0.8% 10.4% 13.5% 6.6% 7.0% 7.4% 

Total production costs 336 396 445 517 567 570 613 680 721 768 818 

as % of sales 79.8% 78.7% 77.6% 78.7% 80.1% 79.9% 77.9% 76.0% 75.6% 75.3% 74.7% 

Change (%) 8.7% 17.8% 12.4% 16.3% 9.6% 0.6% 7.6% 10.8% 6.1% 6.5% 6.6% 

EBITDA 89 113 137 153 155 159 193 233 251 271 296 

as % of sales 21.1% 22.4% 24.0% 23.3% 22.0% 22.2% 24.5% 26.1% 26.3% 26.6% 27.0% 

Change in % 15.9% 27.0% 21.8% 11.3% 1.6% 2.0% 21.7% 20.7% 7.7% 8.0% 9.2% 

Amortization and reserves 22 23 24 27 30 32 33 41 43 46 49 

EBIT 67 90 114 126 126 126 160 192 208 225 247 

Percent of revenue 15.9% 17.9% 19.9% 19.3% 17.8% 17.7% 20.3% 21.5% 21.8% 22.0% 22.5% 

Change in % 53.4% 34.3% 26.3% 11.2% -0.5% 0.5% 26.5% 20.1% 8.0% 8.3% 9.7% 

Financial income 0 2 -1 0 -1 0 3 3 3 4 6 

Income before taxes 67 92 113 127 125 127 163 195 211 229 253 

% of revenue 15.9% 18.3% 19.7% 19.3% 17.7% 17.7% 20.7% 21.8% 22.1% 22.4% 23.1% 

Change (%) 44.7% 37.2% 23.2% 11.9% -1.2% 1.1% 29.1% 19.1% 8.3% 8.6% 10.4% 

Taxes 28 38 46 48 41 40 53 62 67 73 81 

Tax rate 42.1% 41.4% 41.0% 37.8% 33.2% 31.9% 32.2% 32.0% 32.0% 32.0% 32.0% 

Minority interests 0 1 1 1 1 0 2 2 2 2 2 

Consolidated net profit 38 53 66 77 83 86 109 131 142 154 170 

% of revenue 9.1% 10.6% 11.5% 11.8% 11.7% 12.0% 13.8% 14.6% 14.9% 15.1% 15.5% 

Change (%) 49.4% 38.7% 23.8% 17.1% 6.7% 3.8% 27.3% 19.8% 8.5% 8.7% 10.5% 

EPS diluted (EUR) 1.24 1.68 2.08 2.43 2.66 2.80 3.56 4.27 4.63 5.03 5.56 

Y-o-y change ( %) 36% 24% 17% 9% 5% 27% 20% 8% 9% 10% 


Tod's FY sales by segment 

YE Dec (EURm) 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011 2012e 2013e 2014e Split in 

2004 

Sales by brand 

Tod's 240 289 326 348 357 349 407 488 565 619 672 57% 61% 

Hogan 102 126 155 200 239 257 268 281 265 271 279 24% 25% 

Fay 69 77 82 90 93 92 90 88 76 76 80 16% 7% 

Other 10 11 9 20 19 16 23 37 47 53 64 2% 6% 

Total 421 503 573 657 708 713 788 894 953 1,020 1,095 

Sales by product category 

Shoes 268 315 358 427 486 506 565 647 706 759 816 64% 75% 

Leather goods & accessories 85 112 133 139 127 111 123 145 159 173 187 20% 17% 

Apparel 67 75 81 89 95 95 99 102 87 87 92 16% 8% 

Other 1 1 1 1 1 1 1 1 1 1 1 0% 0% 

Total 421 503 573 657 708 713 788 894 953 1,020 1,095 

Sales by channel 

DOS 220 259 283 318 336 349 404 474 510 551 599 52% 55% 

Third parties 201 244 290 339 372 364 384 420 443 469 496 48% 45% 

Total 421 503 573 657 708 713 788 894 953 1,020 1,095 

Sales by region 

Italy 205 241 280 334 384 405 426 449 436 445 459 49% 42% 

Europe 117 135 145 161 161 151 164 182 185 194 206 28% 19% 

North America 50 57 60 66 59 46 53 62 70 71 74 12% 7% 

Rest of World 50 70 88 97 103 111 145 200 263 310 357 12% 33% 

Total 421 503 573 657 708 713 788 894 953 1 020 1 095 


Split in 

2014e 

80

4 

. 

1 



March 2012 

abc 

Financials & valuation: TOD'S 

Neutral 



DCF analysis 




Revenue 894 953 1,020 1,095 

EBITDA 233 251 271 296 



Net interest 3 3 4 6 

PBT 195 211 229 253 

HSBC PBT 195 211 229 253 

Taxation -62 -67 -73 -81 





Capex -70 -50 -50 -49 


Dividends -107 -75 -82 -89 

Change in net debt 25 -39 -46 -152 

FCF equity 77 123 136 154 




Current assets 539 604 678 863 

Cash & others 147 186 232 384 

Total assets 991 1,063 1,141 1,325 


Gross debt 75 75 75 75 

Net debt -72 -111 -156 -309 






Revenue 13.5 6.6 7.0 7.4 

EBITDA 20.7 7.7 8.0 9.2 


PBT 19.1 8.3 8.6 10.4 

HSBC EPS 19.8 8.5 8.7 10.5 

Ratios (%) 

Revenue/IC (x) 1.6 1.6 1.6 1.7 

ROIC 23.2 23.0 24.1 25.7 

ROE 20.4 20.3 20.3 19.4 

ROA 13.9 14.0 14.1 13.9 

EBITDA margin 26.1 26.3 26.6 27.0 


EBITDA/net interest (x) 







DPS 2.46 2.67 2.90 3.20 

NAV 22.05 24.03 26.19 31.81 







9.8% 83.8 85.2 86.2 

10.0% 81.7 83.0 84.1 

10.2% 79.8 81.0 82.0 

10.4% 77.9 79.0 80.0 

10.6% 76.1 77.2 78.1 



EV/sales 2.6 2.4 2.2 1.9 

EV/EBITDA 9.9 9.0 8.2 7.0 

EV/IC 3.8 3.6 3.5 3.1 

PE* 18.2 16.8 15.5 14.0 

P/NAV 3.5 3.2 3.0 2.4 

FCF yield (%) 3.2 5.1 5.7 6.5 





Reuters (Equity) TOD.MI Bloomberg (Equity) TOD IM 




Goods 





115 

105 

95 

85 

75 

65 

55 

Jun-11 

TOD'S 

Source: HSBC 



Dec-11 

115 

105 

95 

85 

75 

65 

55 

81



March 2012 

abc 

Notes 

82



March 2012 

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Notes 

83



March 2012 

abc 

Notes 

84



March 2012 

abc 

Disclosure appendix 

Analyst Certification 

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the 

opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their 

personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific 

recommendation(s) or views contained in this research report: Antoine Belge, Erwan Rambourg and Sophie Dargnies 

Important disclosures 

Stock ratings and basis for financial analysis 

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which 

depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. 

Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities 

based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; 

and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, 

technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. 

HSBC has assigned ratings for its long-term investment opportunities as described below. 

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when 

HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at 

www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this 

website. 

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's 

existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating 

systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research 

report. In addition, because research reports contain more complete information concerning the analysts' views, investors 

should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not 

be used or relied on in isolation as investment advice. 

Rating definitions for long-term investment opportunities 

Stock ratings 

HSBC assigns ratings to its stocks in this sector on the following basis: 

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, 

regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock 

to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the 

potential return, which equals the percentage difference between the current share price and the target price, including the 

forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months 

(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be 

expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points 

for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. 

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility 

status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, 

expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily 

triggering a rating change. 

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March 2012 

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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 

months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, 

stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past 

month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, 

however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. 

Rating distribution for long-term investment opportunities 

As of 08 March 2012, the distribution of all ratings published is as follows: 

Overweight (Buy) 50% (26% of these provided with Investment Banking Services) 

Neutral (Hold) 36% (24% of these provided with Investment Banking Services) 

Underweight (Sell) 14% (16% of these provided with Investment Banking Services) 

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its longterm 

investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research. 

HSBC & Analyst disclosures 

Disclosure checklist 

Company Ticker Recent price Price Date Disclosure 

BURBERRY GROUP BRBY.L 14.37 07-Mar-2012 4, 7 

CHRISTIAN DIOR DIOR.PA 114.00 07-Mar-2012 6 

HENGDELI HOLDINGS LTD 3389.HK 3.48 08-Mar-2012 4 

HERMES HRMS.PA 278.00 07-Mar-2012 2,6,7 

LUXOTTICA LUX.MI 26.46 07-Mar-2012 7 

LVMH LVMH.PA 125.95 07-Mar-2012 1,2,4, 5,6,7,11 

PPR PRTP.PA 126.70 07-Mar-2012 2,6,7,11 

PRADA SPA 1913.HK 47.25 08-Mar-2012 6,7 

RICHEMONT(CIE FIN) CFR.VX 55.10 07-Mar-2012 2,7 

SALVATORE FERRAGAMO SFER.MI 14.18 07-Mar-2012 7 

SWATCH UHR.VX 408.80 07-Mar-2012 4,6 

Source: HSBC 

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 

2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 

3 months. 

3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this 

company. 

4 As of 31 January 2012 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 

5 As of 31 January 2012, this company was a client of HSBC or had during the preceding 12 month period been a client of 

and/or paid compensation to HSBC in respect of investment banking services. 


and/or paid compensation to HSBC in respect of non-investment banking-securities related services. 


and/or paid compensation to HSBC in respect of non-securities services. 

8 A covering analyst/s has received compensation from this company in the past 12 months. 

9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as 

detailed below. 

10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this 

company, as detailed below. 

11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in 

securities in respect of this company 

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment 

banking revenues. 

86



March 2012 

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For disclosures in respect of any company mentioned in this report, please see the most recently published report on that 

company available at www.hsbcnet.com/research. 

* HSBC Legal Entities are listed in the Disclaimer below. 

Additional disclosures 

1 This report is dated as at 08 March 2012. 

2 All market data included in this report are dated as at close 01 March 2012, unless otherwise indicated in the report. 

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its 

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research 

operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier 

procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or 

price sensitive information is handled in an appropriate manner. 

4 As of 31 January 2012, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities 

managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 

1% or more of the total capital of the subject companies securities in the market for the following Company(ies): 

BURBERRY GROUP, HENGDELI HOLDINGS LTD, LVMH, SWATCH 

87



March 2012 

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Disclaimer 

* Legal entities as at 04 March 2011 

‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, 

Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada) Inc, Toronto; 

HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank 

(RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities 

(Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, 

Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The 

Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai 

Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC 

Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) 

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MICA (P) 208/04/2011 and MICA (P) 040/04/2011 

[323009] 

88

Antoine Belge* 

Analyst 

HSBC Bank plc, Paris Branch 

+33 1 5652 4347 

antoine.belge@hsbc.com 

Antoine Belge is Head of Consumer Brands and Retail Equity Research and is a top ranked analyst covering the luxury, sporting goods 

and spirits sectors. He has been an analyst since 1998 and joined HSBC in 2003. Prior to this, he worked for seven years in the industry 

as a Finance Controller for Christian Dior and Chanel. 

Erwan Rambourg* 

Analyst 

The Hongkong and Shanghai Banking Corporation Limited 

+852 2996 6572 

erwanrambourg@hsbc.com.hk 

Erwan Rambourg is Head of Consumer Brands and Retail Equity Research and is a top ranked analyst covering the luxury, sporting 

goods and spirits sectors. He joined HSBC in January 2005 and in 2011 relocated from London to Hong Kong as many stocks under 

coverage are now Asia-driven. Before moving to HSBC, Erwan worked for eight years as Marketing Manager in the luxury industry, 

notably for Richemont and LVMH. 

Sophie Dargnies* 

Analyst 

HSBC Bank plc, Paris Branch 

+33 1 5652 4348 

sophie.dargnies@hsbc.com 

Sophie is an equity analyst covering the luxury, sporting goods and spirits sectors. She joined the Luxury and Sporting Goods team 

at HSBC in May 2008. Before joining HSBC, Sophie worked as a consultant for three years. She is a graduate of EDHEC Business School. 

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.

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