value and opportunity

After a first glance at Piquadro and many interesting comments from readers, I wanted to follow up un a couple of the points raised.

Return on Equity / Return on capital

One reader commented that Return on Equity (ROE) decreased significantly. This is correct. However, just looking at ROE ignores if the quality of the balance sheet has changed.

If we look at the 4 years we have currently one can clearly see the effect if we add return on capital and return on invested capital:

	ROE	RoC	ROIC
2007	64.6%	29.5%	30.3%
2008	52.2%	28.1%	27.3%
2009	38.5%	22.3%	21.6%
2010	38.9%	25.9%	25.6%

ROE has indeed decreased, but including the reduction in debt, return on capital still looks pretty OK in the hiogh 20ties. In my opinion, ROE is not a very good indicator if the capital structure changes.

Increase in inventory

Another reader commented that inventory increased significantly in June 2011, which of course would not be a good sign. I quickly checked the half year report (September) for the latest figures:

	30.06.2011	31.03.2011	30.09.2010
Trade receivables	25.3	21.4	22
Inventory	14.3	10.1	11.9
Payables	-18.1	-16	-15.1
net Working Capital	21.5	15.5	18.8
Sales (6m)	30.1		27.1
Net WC in% of sales	71.4%		69.4%

If we look at the more meaningful net working capital, one can clearly see that working capital compared to 6m sales is still at a relatively high level, even after the increased payables. The increase is not dramatic (71.4% of 6m sales vs. 69.4%), but definitve something to watch. I am not sure if this is a side effect of increased store openings.

Business model / competitive advantages

I am not a business model expert, but in my opinion most of the “Branded fashion” companies do not really have a “hard” competitive advantage. The classical competitve advantages or moats are:

– barriers to entry
– economies of scale /cost advantages
– Switching costs
– network effects
– brand equity

I think for someone who produces relatively expensive branded bags, the first 4 factors do not really apply per se. I would also question number 5, “brand equity” in the classical meaning. The best example for brand equity is usually Coca Cola or other comparable “consumer brands”. Their concept is very simply spoken that the consumer “trusts” those brands and therefore both, prefers the product when she shops in the supermarket and is prepared to pay more.

In my opinion, for Piquadro and similar companies, the concept of an “Apirational brand” applies which is slightly different than mass market branding. If we look at the definition at Wiki,an aspirational brand can be described as follows:

In consumer marketing, an aspirational brand (or product) means a large segment of its exposure audience wishes to own it, but for economical reasons cannot. An aspirational product implies certain positive characteristics to the user, but the supply appears limited due to limited production quantities.

An important characteristic of an aspirational product is that the part of its exposure audience that is at present economically unable to purchase it, thinks of itself as having a fair probability of at a certain point in the future being able to do so.

Of course it is not easy to createan Aspirational Brand, otherwise everyone would do it. In its March 2011 company presentation, Piquadro explicitely states about their brand proposition:

Distinctive brand for “moving” people in leather goods industry
Aspirational brand: high quality, technological mood, innovation, design and ergonomic performance
Premium/performance positioning

Clear distinction from competitors at comparable price level through commitment to innovation, design, high quality and ergonomic performance.

Of course, those statements contain a lot of marketing bs, but pages 6-10 clearly show the strategy. Especially page 9 is quite interesting. Piquadro wants to position itself as a brand one wants to buy for oneself rather than to show off.

It remains to be analysed how succesful this approach is, but in my opnion, the currrent success in the very “fashionist” Italian market is a good foundation for further international expansion. And once a succesfull aspirational brand is established, a company is able to earn signifcant returns on capital.

However if one looks for example in an old Mediobanca research report, one could read the following quote:

This also takes into account Piquadro’s positioning in the accessible luxury market, which is showing itself to be highly vulnerable to market downturns, coupled with the company’s small size and limited stock liquidity.

So this might be one of the reasons for the low stock price: The expected downturn especially in its home market Italy will hit Piquadro harder than the even more “aspirational” luxury brands.

Luxury Leather goods industry

Some remarks about the bag / leather goods industry in general: What I find interesting is the fact, that this industrys seems to have some natural advantages compared to the luxury clothing industry or even the luxury shoe industry:

– “one size fits all”: for bags, one doesn’t have to carry different sizes like for clothes or shoes, so inventory should be considerably lower than for “size” products

– due to the relatively “compact” presentation, those companies don’t need huge flagship stores like Armani etc. If one looks for example at TUMI or Mandarina Duck stores, they are usually relatively small. One also doesn’t need changing rooms etc. This should lead in theory to relatively lower rental costs compared for example to Dolce etc.

– it is clear to see that the traditional fashion labels try to sell more bags. It is to be seen how “specialists” will perform, but one of the issues with the “general” labels is that they usually only offer a very limited variety of bags, the specialists offer a lot more choice.

– so far, Piquadro seems to have concentrated its efforts on male customers, especially briefcases. I find this quite interesting, as for example one analyst told me that Louis Vuitton makes most of its money in China with male handbags. So this segment of the market might be especiallyinteresting in growth markets and maybe less competitive than the female segment.

– also, the developement of a new class of gadgets like the Ipad and the Kindle offers additional potential for those companies.I am not sure how big this market will be but one should keep this in mind

Summary: So far no decision to buy or not to buy yet. Piquadro looks like an interesting company in an interesting segment, but I need to dig a little bit more into it, especially with regard to competitive analysis.