Shorting Luxury stocks – Follow up

So shorting luxury stocks is not easy. I mentioned Bronte’s Richemont short in the previous post. Howver, Richemont issued very strong numbers with no slow down detectable. The same seems to be true for Prada:

Italian fashion house Prada SpA (1913.HK), which competes with Louis Vuitton (LVMH.PA) and PPR’s (PRTP.PA) Gucci, posted a 36.5 percent jump in first-half revenue, buoyed by strong growth in Asia, with sales driven mainly by its Prada and Miu Miu brands.

Revenue for the six months ended in July rose to 1.55 billion euros ($1.9 billion), the Milan-based maker of luxury bags and clothing said on Monday.

John Hempton reacted pretty quickly but seems to be confused.

One alternative explanation of Richemonts numbers comes from the WSJ:

“China’s outbound tourism industry has boomed in recent years, helped in part by the allure of luxury goods overseas.”

So with a relatively cheap Euro, Chines Mainlanders might not fly to Hongkong but straight to Europe to shop for their Richemont Watches and Hermes bags. Just on the week end I was astonished by the long queue of Asians on the Munich Airport waiting for their sales tax refund.

My current thesis for shorting luxury stocks is the following:

– the ultimate top level luxury brands like Hermes etc. will suffer less from a slow down as the very rich will keep on spending, no matter what
– tier 2 brands, those who get bought by the upper middle class will suffer more as those guys will have to cut back quicker and harder in a crisis
– companies who expanded their own sales network rapidly in the last few a lot will get hit harder than companies which don’t run own outlets.

So the focus should be on “tier 2” luxury brands with a lot of retail exposure (operating leases) and weak balance sheets. Preferrably, store growth should have slowed done already, or maby some store closings should have already happened.

So lets look at a list of luxury/high end retailers. For fun I included Nike, Adidas and Piquadro as well to look how they compare:

Name
Tier 1
PRADA S.P.A.
CHRISTIAN DIOR
HERMES INTERNATIONAL
LVMH MOET HENNESSY LOUIS VUI
PPR
BURBERRY GROUP PLC
TIFFANY & CO
SALVATORE FERRAGAMO SPA
CIE FINANCIERE RICHEMON-BR A
Tier 2
PIQUADRO SPA
BRUNELLO CUCINELLI SPA
ADIDAS AG
NIKE INC -CL B
SAMSONITE INTERNATIONAL SA
TUMI HOLDINGS INC
TOD’S SPA
RALPH LAUREN CORP
COACH INC
MICHAEL KORS HOLDINGS LTD
HUGO BOSS AG -ORD

The Tier 1 /Tier 2 classification is a totally subjective classification from my side.

So to add some “meat” to this, lets look at some “raw” valuation metrics:

Name EV/EBITDA 2012 P/E P/B P/FCF
Tier 1        
PRADA S.P.A. 15.5 34.7 8.3 65.9
CHRISTIAN DIOR 6.1 15.1 2.2 9.8
HERMES INTERNATIONAL 19.7 39.0 10.0 40.5
LVMH MOET HENNESSY LOUIS VUI 10.5 19.0 2.8 30.7
PPR 9.8 15.2 1.4 24.8
BURBERRY GROUP PLC 10.4 21.9 6.7  
TIFFANY & CO 8.4 15.7 3.0  
SALVATORE FERRAGAMO SPA 12.8 34.3 13.2 34.7
CIE FINANCIERE RICHEMON-BR A 9.6 17.4 3.0 26.4
Tier 2        
PIQUADRO SPA 5.5 9.0 2.7 10.9
BRUNELLO CUCINELLI SPA 17.3 34.3 19.1 67.4
ADIDAS AG 8.9 16.6 2.3 17.3
NIKE INC -CL B 11.3 20.0 4.2 33.6
SAMSONITE INTERNATIONAL SA 8.1 26.3 2.6 85.3
TUMI HOLDINGS INC 21.2 42.7 43.9  
TOD’S SPA 9.1 17.4 3.4 26.4
RALPH LAUREN CORP 9.9 20.8 3.8 22.7
COACH INC 8.4 15.5 7.9 16.0
MICHAEL KORS HOLDINGS LTD 19.9 38.0 18.1  
HUGO BOSS AG -ORD 10.9 17.4 11.9 29.8

One can see clearly that in the “Tier 1” category, Prada and Hermes stand out in terms of valuation, but also they are outstanding premium brands.

In “Tier 2”, especially the new IPOs, TUMI, Michael Kors and Brunello look expensive, especially I highly doubt that those brands are even close to the long term value of a Hermes or Prada brand.

Some additional infos in the next table:

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.tableizer-table th {background-color: #104E8B; color: #FFF; font-weight: bold;}

Name Future Minimum Operating Lease Obligations LF Revenue T12M Lease/revenue Debt/EBITDA LF
Tier 1        
PRADA S.P.A. 1,318,771,727.17 2,212,724,598.94 59.6% 0.5
CHRISTIAN DIOR 4,499,997,166.86 23,185,601,928.23 19.4% 1.4
HERMES INTERNATIONAL   2,465,950,626.43   0.0
LVMH MOET HENNESSY LOUIS VUI   22,261,439,383.88   1.3
PPR   9,599,553,313.27   2.8
BURBERRY GROUP PLC 640,300,032.00 1,857,200,000.00 34.5%  
TIFFANY & CO   2,327,788,295.92   1.0
SALVATORE FERRAGAMO SPA   856,156,635.81   0.6
CIE FINANCIERE RICHEMON-BR A 1,194,736,463.41 7,644,616,343.90 15.6% 0.4
Tier 2        
PIQUADRO SPA   55,621,116.76   0.9
BRUNELLO CUCINELLI SPA   210,603,043.70   1.4
ADIDAS AG   12,125,170,682.01   1.2
NIKE INC -CL B 1,386,834,706.54 15,181,364,342.46 9.1% 0.1
SAMSONITE INTERNATIONAL SA 129,442,413.07 976,677,821.80 13.3% 0.0
TUMI HOLDINGS INC 0.00 228,242,106.47   4.5
TOD’S SPA 250,946,920.20 775,643,994.46 32.4% 0.3
RALPH LAUREN CORP 1,227,233,677.46 4,301,242,776.32 28.5% 0.2
COACH INC   3,010,310,037.06   0.0
MICHAEL KORS HOLDINGS LTD 335,036,357.76 770,199,265.10 43.5% 0.0
HUGO BOSS AG -ORD   1,867,480,409.77   0.8

I tried to gather some data regarding debt and leases. Although I have not filled all the blanks, it looks like TUMI has quite a lot of debt, whereas Michael Kors has some serious lease obligations.

So those two might be interesting short candidates. Although for Tumi, Short interest is already ~37% of float…

To be continued….

6 comments

  • The price for Prada looks good to me?

  • Bei der Suche nach aktuellen Short-Kandidaten würde ich zwecks Timing auch auf Inventar (DSI) und Forderungen (DSO) schauen.

    Bezüglich “companies who expanded their own sales network rapidly in the last few a lot will get hit harder than companies which don’t run own outlets” bin ich geteilter Meinung. Sicher gehen mit einer höheren Capex (oder höheren Leasing-Verpflichtungen) eine geringere Flexibilität und somit größere Schlechtwetter-Risiken einher. Andererseits bedeutet Direktvertrieb mehr Kundennähe (!) und die Möglichkeit einer besseren Inventarsteuerung. Auch ist man dann weniger von etwaigen Kreditklemmen bei Großhändlern betroffen. So sanken Piquadros Großhandelsverkäufe im Q2 um 16 %, während der Umsatz über eigenen Läden um 11% zunahm. In der Summe -8%, Ebit -35%.

  • just from hearsay and observation:
    Chinese I met even bougt WMF stuff, made in China, in Germany because it was cheaper here.
    Also Hugo Boss seems to be cheaper in Europe – for me a normal brand, in Asia it seems to be premium.

    Totally agree with your thesis. The question is when will a crisis occur? At the moment I like China, but the system is not sustainable. Don’t know whether a crisis is inevitable in the end. In my opinion the middle class will grow faster than upper class until crisis. This makes it risky to short your “tier2” before you are sure middle class is in a decline.

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