value and opportunity

Almost exactly 4 years ago I pondered shorting luxury stocks in 2 posts.

Part 1 – Idea Generation

Part 2- follow up

The only stock I actually shorted was Prada and I gave up 1 year later as the stock strongly went against me.

Back then, I divided (totally arbitrary) a “peer group” of luxury stocks into 2 sub groups, “tier 1” and “tier 2” brands. Let’s look how those stocks performed over the past 4 years:

First of all, embarrassing for me, the “tier 2” basket performed significantly better than the “tier 1” basket. As we can easily see, this is driven by 3 stocks: Adidas, Nike & Samsonite. All 3 I would classify as “mass market” luxury. Interestingly enough, Nike now trades at higher valuations than any luxury brand with the exception of Hermes.

Secondly, both baskets and the 20 stocks in total did underperform all broad indexes over the last 4 years, and the one I actually shorted (Prada) would have been the worst in the whole basket. The stock I considered shorting, TUMI, struggled but then was taken over by Samsonite. So apart from the bad execution, my stock picking was not that bad.

Prada

Interestingly, Prada still isn’t cheap despite the significant decline. Maybe the announced accounting change will help ? Prada had earnings of around 0,25 USD/Share for 2012/2013 which declined by almost -50% to around 0,13 USD/share in 2015/2016. LVMH in contrast managed to slightly increase earnings from 7,15 EUR per share in 2012 to 7,37 EUR per share in 2015.

So yes, Prada has fallen a lot more than the others but the results also deteriorated significantly. I haven’t looked into Prada in too much detail, but my guess is that their aggressive growth in Asia “hit the wall” and now they are suffering from lower sales but still have to pay the expensive leases in their newly opened stores.

LVMH in contrast with their diversified strategy, at least for the time being seems to be able to cope better with the reduction of Asian demand.

When I look at the Prada chart:

it is pretty interesting to see that when I closed my Prada short in November 2013, it was just before the decline began. Very bad timing indeed.

The most positive aspect about Prada is that analysts are really negative, sentiment is even worse tha for instance Richemont.

Hugo Boss

Hugo Boss is also a favourite of many German investors at the moment. A well-known brand name and the stock trades at ~50% of its peak share price 1 year ago and looks optically cheap at around 10x trailing P/E.

However their 6M report really looks ugly. They seem to have a specific US problem, but also the rest of world is not doing that great.

In general, comparable to Prada, Hugo Boss has transformed itself over the last 10 years or so from a producer/designer to a retailer. In 2005 sold 10% of total sales through its own stores, in the first half of 2016 around 62%. In my opinion however that made them much more vulnerable to sales declines (more capital in stores and leases) and to the change in distribution models (online).

A clothing retailer in decline is hard to turn around, especially if there are fundamental changes going on. It also seems that they are somehow “stuck in the middle” from a strategic point of view. For me this is much to difficult to assess at the moment, so I will stay away from Boss for the time being. Sentiment in my opinion is still to positive, so there might be more pain down the road.

Summary:

Looking back, shorting luxury stocks in 2012 would have created some relative outperformance but no absolute gains. Interestingly, “mass market” brands like Adidas, Nike and Samsonite performed best and are now valued higher than almost all luxury brands.

Fashion oriented brands like Boss and Prada with own stores seem to be struggling most. Overall the sector at the moment is neither cheap nor expensive, so maybe “fairly valued”. My top pick would be still Richemont but at a slightly lower price point.

Somehow, Nike, Adidas and Samsonite look too expensive in comparison, but looking at my experience with Prada, one should only short if the trend is broken.