EQUITIES LUXURY GOODS Best Of: Brand Trivialisation 30 JUNE 2015 Luca Solca (+44) 203 430 8503 luca.solca@exanebnpparibas.com Paola Bertini (+44) 207 039 9521 paola.bertini@exanebnpparibas.com Hui Fan (+44) 203 430 8507 hui.fan@exanebnpparibas.com For the convenience of our clients, we are re-publishing and updating the most significant research insights lest they were lost in the flow of big reports. Brand trivialisation risk is not something you can anticipate from sales and profit trends You will eventually see an impact on sales and profits by which time it is too late. Yet, the seeds of brand equity destruction are sown long before one sees the pernicious results. We think that analysing brand perception, brand distribution and product range architecture can help in anticipating and detecting trivialisation risk before it materialises: 1. Is the brand obvious to all? Or is it hiding in plain sight? Hard luxury brands offer a better scale vs visibility ratio. We use Google and Baidu hits as well as website traffic statistics as proxies of brand ubiquity. 2. Is distribution directly controlled? Brand exclusivity as perceived by consumers rests heavily on their building the equation Price = Value. Direct retail maximises price discipline. 3. Is the ratio of full-price stores to factory outlets high or low? If luxury is about perceived exclusivity, then in the ideal world factory outlets would not exist. The more products there are walking on the street bought at full price or not the greater the impression of ubiquity. 4. Is the brand identified with a few specific products? The narrower the sales mix and the stronger the brand association with a specific product, the higher the risk of brand trivialisation. 5. What is the ratio of spontaneous top-of-mind recognition to volumes in circulation? Spontaneous top-of-mind recognition correlates with intention to buy = desirability. At equal top-ofmind recognition levels, we prefer brands with a smaller installed base / higher average price. When we bring all this together, we discover that the Burberry, Marc Jacobs, Gucci and Moncler brands could be more vulnerable to brand trivialization. Louis Vuitton, by contrast, looks less at risk, especially on distribution grip. Key valuation metrics Available on Rating Mkt cap Price TP Upside P/E (x) EV/EBITA (x) (EURm) (LC) (LC) 15e 16e 15e 16e Burberry (=) 9,856 15.9 19 20% 19.8 18.3 13.4 11.9 Hermès Int. (=) 36,702 352.0 300-15% 35.6 32.1 22.6 20.0 Hugo Boss (+) 7,040 102.0 130 27% 17.4 15.0 12.9 11.0 Kering (+) 20,462 162.5 200 23% 16.6 14.4 14.3 12.3 Luxottica (=) 28,771 60.5 59-2% 30.1 26.8 18.8 16.8 LVMH (+) 82,014 163.6 180 10% 20.5 18.6 13.5 12.2 Prada (=) 11,163 37.7 45 20% 21.2 19.9 14.4 13.2 Richemont (+) 42,205 77.7 90 16% 19.0 17.4 13.7 12.3 Swatch Group B (+) 19,557 373.7 485 30% 14.8 13.2 11.2 9.5 * Prices at 29 June 2015 See Appendix (on p11) for Analyst Certification, Important Disclosures and Non-US Research Analyst disclosures.
The art of managing luxury brands is to navigate the paradox of selling exclusivity by the thousands or millions depending how successful one is. If you accept our definition of luxury luxury is being cool by having something other people don't maintaining the perception / illusion of exclusivity is vital for brand equity resilience. In this report we bring together a number of ideas on how to assess and measure brand trivialisation risk. We apply these ideas to score the companies and brands we cover. Finally, we draw investment conclusions from these scores and the risk profiles we ascertained. Brand trivialisation risk is not something you can anticipate from sales and profit trends. Of course, you will eventually see brand trivialisation s impact on sales and profits by which time it is too late. We are convinced that the seeds of brand equity destruction are sown long before one sees the pernicious results. When brands take steps to grow their top lines and expand their margins, they need to be mindful of the impact on their brand equity. This is the period and process we want to focus on in this report. We think that analysing brand perception, brand distribution and product range architecture can help in anticipating and detecting trivialisation risk before it materialises: 1. Is the brand obvious to all? Or is it hiding in plain sight? We like big brands that are not obvious to consumers. Scale brings competitive advantage in a fixed cost business. But high visibility and ubiquity bring high brand trivialisation risk. We use Google hits, Baidu hits and website traffic statistics as proxies of brand ubiquity; we conclude that hard luxury brands offer a better scale vs. visibility ratio. 2. Is distribution directly controlled? Or is it largely dependent on wholesale? Brand exclusivity as perceived by consumers rests heavily on their building the equation Price = Value. That is why when you ask the price of something in a wellmanaged store try LV or Chanel the typical reply is the value of this product is Direct retail maximises price discipline. The end-of-season sales habitually held by multi-brand wholesale customers destroys brand equity. 3. Is the ratio of full-price stores to factory outlets high or low? If luxury is about perceived exclusivity, then in the ideal world factory outlets would not exist. In fact, they bring brands to a broader audience, offering them at a fraction of their full price. The notion that these are products from the past season if they are indeed so is a weak excuse: the more products there are walking on the street bought at full price or not the greater the impression of ubiquity. 4. Is the brand identified with a few specific products? The narrower the sales mix and the stronger the brand association with a specific product, the higher the risk of brand trivialisation. This is the reason behind the demise of many premium brands Crocs, Timberland, Locman, etc. It is also the key to the mystery of why Hermes does not increase the availability of its Birkin and Kelly handbags, even as it produces new models. 5. What is the ratio of spontaneous top-of-mind recognition to volumes in circulation? We like top-of-mind brands as spontaneous top-of-mind recognition correlates with intention to buy = desirability. At equal top-of-mind recognition levels, we prefer brands that have the smaller installed base / higher average price. This, we think, bodes well for future full-price volume development. When we bring all this together, we discover that the Burberry, Marc Jacobs, Gucci and Moncler brands could be more vulnerable to brand trivialization. Louis Vuitton by contrast, looks less at risk, especially on distribution grip. Exane BNP Paribas Research Luxury Goods 30 June 2015 page 2
Figure 1: Luxury is about selling a promise of exclusivity Commercial success risks undermining brand equity Source: Exane BNP Paribas Exane BNP Paribas Research Luxury Goods 30 June 2015 page 3
Figure 2: When we bring all this together, we discover that the Burberry, Marc Jacobs, Gucci and Moncler brands could be more vulnerable to brand trivialization. Louis Vuitton, by contrast, looks less vulnerable, especially on distribution grip Source: Exane BNP Paribas Analysis Exane BNP Paribas Research Luxury Goods
Figure 3: Hard luxury brands are better at 'hiding in plain sight Retail Equivalent Brand Footprint (EUR bn) Brand exposure as measured by Google hits Ralph Lauren Chanel Rolex Louis Vuitton Cartier Calvin Klein Gucci Hermès Armani Burberry Omega Coach Prada Tiffany Chanel Louis Vuitton Coach Gucci Ralph Lauren Hermès Prada Armani Burberry Calvin Klein Cartier Rolex Tiffany Omega 0 2 4 6 8 10 12 Retail-Equivalent Sales (EUR bn) 0 100 200 300 400 500 Google Hits (m) Note: brand footprint calculated on the basis of retail equivalent sales: 1 retail = 2.5X wholesale = 10X license Source: Company reports, Google (20/06/2013), Exane BNP Paribas estimates Figure 4: Off-price engagement at lowest risk would entail choosing options that offer a combination of high brand control and low full-price contamination Brand Control Low High 3. Multi-brand in-store end-of-season "explicit" discounting 1. Mono-brand instore end-of-season "explicit" discounting Full-Price Contamination High 6a. Multi-brand physical discounters / chains 7. Multi-brand online pure-play discounters 2. Mono-brand instore end-of-season "soft" discounting Low 6b. Multi-brand physical discounters / independents 5. Mono-brand physical off-price store / franchisedwholesale 4. Mono-brand physical off-price store / concession Source: Exane BNP Paribas Exane BNP Paribas Research Luxury Goods 30 June 2015 page 5
Figure 5: Chanel, Hermès, LV and Loro Piana are probably the most virtuous in off-price engagement. Moncler, Burberry, Hugo Boss, Prada and Gucci seem more exposed to off-price risk Kering LVMH Physical Mono-brand In-Store Multi-Brand In-Store Sales Multi-brand Online Discounters Outlet Sales Off 5th Bergdorf Goodman Yoox Century 21 TK Maxx Gucci Bottega Veneta Saint Laurent Balenciaga A McQueen Stella McCartney Brioni LV Fendi Celine Kenzo Marc Jacobs Givenchy Pucci DKNY Christian Dior Loro Piana Herm è s Hermès Chanel Chanel Burbe rry Burberry Hugo Boss Hugo Boss Prada Richemont Italian brands American brands Prada Miu Miu Chloe Dunhill Tod's Cucinelli Ferragamo Moncler Armani Corneliani Dolce & Gabbana Valentino Versace Zegna Furla Tory Burch Kate Spade Michael Kors Ralph Lauren Coach Source: Exane BNP Paribas Luxury POS Database, Retailers websites, Exane BNP Paribas Industry Experience Stockists Exane BNP Paribas Research Luxury Goods
Figure 6: US luxury players tend to rely more on physical outlet stores to deal with unsold merchandise Soft Luxury brands - # Physical Factory Outlets Coach Calvin Klein Ralph Lauren Michael Kors Hugo Boss Armani Kate Spade DKNY Burberry Furla Zegna Ferragamo Gucci Versace Valentino Dunhill Tod's Prada Tory Burch Dolce & Gabbana Marc Jacobs Moncler Loro Piana Pinko Bottega Veneta Zadig & Voltaire Sandro Patrizia Pepe Saint Laurent Maje Church's Chloe Longchamp Gerald Darel Fendi Givenchy Loewe Cucinelli Christian Dior Corneliani Coccinelle Kooples Celine Brioni A McQueen Kenzo Miu Miu Lancel Kiton Stella McCartney Balenciaga Stefano Ricci Shanghai Tang Pucci LV Isabelle Marant Hermès Chanel 0 50 100 150 200 250 Survey of 360 outlet centers in 30 countries. Source: Exane BNP Paribas Proprietary Luxury POS database (updated as of June 2015). Exane BNP Paribas Research Luxury Goods 30 June 2015 page 7
Figure 7: US luxury players tend to rely more on outlet stores: Kors and Coach at c.3 4 POS / Outlet Outlet Stores (#) Mono-brand POS (#) POS / Outlet Store (x) Kors 142 483 3.4 Coach 231 1024 4.4 Versace 28 134 4.8 Dunhill 22 125 5.7 Tory Burch 20 123 6.2 Moncler 16 107 6.7 Burberry 52 409 7.9 Hugo Boss 94 935 9.9 Pinko 13 140 10.8 Hour Passion 4 44 11.0 Patrizia Pepe 11 133 12.1 Dolce & Gabbana 20 254 12.7 Prada 21 269 12.8 Marc Jacobs 19 257 13.5 Saint Laurent Paris 9 122 13.6 Gucci 30 422 14.1 Kiton 3 45 15.0 Chloe 9 144 16.0 Brioni 5 84 16.8 Cucinelli 6 108 18.0 Bottega Veneta 13 239 18.4 Fendi 8 193 24.1 Loewe 6 149 24.8 Maje 9 227 25.2 Celine 5 142 28.4 Lancel 3 92 30.7 Sandro 12 378 31.5 Christian Dior 6 203 33.8 Bulgari 6 255 42.5 Longines 2 85 42.5 Miu Miu 3 163 54.3 Tissot 3 165 55.0 The Kooples 5 283 56.6 Sw atch 11 713 64.8 Balenciaga 1 97 97.0 Tiffany 3 301 100.3 Blancpain 0 37 - Breguet 0 34 - Cartier 0 292 - Chanel 0 307 - Hermès 0 305 - Isabelle Marant 0 18 - IWC 0 64 - JLC 0 65 - LV 0 453 - Omega 0 348 - Patek Philippe 0 3 - Piaget 0 85 - Pucci 0 51 - Rolex 0 97 - Shanghai Tang 0 43 - Stefano Ricci 0 43 - VCA 0 125 - TOTAL 851 11,417 13.4 Exane BNP Paribas Research Luxury Goods 30 June 2015 page 8
Figure 8: The relative weight of off-price vs full-price stores at Marc Jacobs and Dunhill has shrunk significantly since our last check Apr-13 POS / Outlet Store Survey of 360 outlet centers in 30 countries. Source: Exane BNP Paribas Proprietary Luxury POS database (updated as of June 2015) Jun-15 Marc Jacobs 30 14 Dunhill 9 6 Gucci 19 14 Chloe 21 16 Celine 35 28 Lancel 36 31 Bottega Veneta 21 18 Burberry 9 8 Fendi 25 24 Christian Dior 29 34 Prada 11 13 Kors 3 3 Coach 3 4 Saint Laurent Paris 8 14 Tory Burch 4 6 Miu Miu 24 54 Balenciaga 27 97 Figure 9: The narrower the sales mix and the stronger the brand association with a specific blockbuster product, the higher the brand trivialisation risk Product Category Concentration - % Sales Leather RTW Footwear Watches Jewelry Other Moncler 0% 100% 0% 0% 0% 0% Omega 0% 0% 0% 100% 0% 0% Bottega Veneta 86% 6% 6% 0% 1% 2% Cucinelli 9% 85% 4% 0% 2% 0% Louis Vuitton 80% 5% 10% 1% 2% 2% Tod's 25% 0% 75% 0% 0% 0% Prada 69% 16% 14% 0% 1% 0% Celine 69% 16% 14% 0% 1% 0% Burberry 32% 58% 3% 1% 0% 6% Cartier 4% 0% 0% 52% 35% 9% Miu Miu 60% 20% 18% 0% 0% 2% Marc Jacobs 53% 25% 15% 1% 2% 5% Gucci 58% 16% 14% 5% 2% 5% Fendi 58% 16% 14% 5% 2% 5% Hermès 44% 24% 4% 4% 10% 14% Saint Laurent 44% 24% 22% 0% 1% 9% Ferragamo 33% 13% 43% 0% 2% 8% Chanel 32% 14% 3% 3% 5% 43% Source: Company reports, Exane BNP Paribas estimates Exane BNP Paribas Research Luxury Goods 30 June 2015 page 9
Figure 10: The higher the GM%, the higher the trivialisation risk for a brand were it to be perceived as expensive, rather than precious Average Retail Price (EUR) vs. Gross Margin (%) by brand 85% 80% Louis Vuitton Bottega Veneta Achieved Gross Margin % 75% 70% 65% 60% Moncler M. Jacobs Gucci Saint Laurent Prada Burberry Tod's Miu Miu Fendi Ferragamo Cucinelli Tiffany Celine Hermès Cartier 55% Omega 50% 0 1000 2000 3000 4000 5000 6000 Avge Retail Price (EUR) Source: Company reports, Exane BNP Paribas Analysis & Estimates Exane BNP Paribas Research Luxury Goods 30 June 2015 page 10
DISCLOSURE APPENDIX Analyst Certification We, Paola Bertini, Hui Fan, Luca Solca, (authors of or contributors to the report) hereby certify that all of the views expressed in this report accurately reflect our personal view(s) about the company or companies and securities discussed in this report. No part of our compensation was, is, or will be, directly, or indirectly, related to the specific recommendations or views expressed in this research report. Non-US Research Analyst Disclosure The research analysts named below were involved in preparing this research report. Research analysts at Exane Ltd and Exane SA are not associated persons of Exane Inc. and thus are not registered or qualified in the U.S. as research analysts with the Financial Industry Regulatory Authority (FINRA) or the New York Stock Exchange (NYSE). These non-u.s. analysts are not subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Paola Bertini Exane Ltd Hui Fan Exane Ltd Luca Solca Exane SA Exane SA is regulated by the Autorité des Marchés Financiers (AMF) in France, Exane Ltd is authorised and regulated by the Financial Conduct Authority (FCA) in the United Kingdom, and Exane Inc. is regulated by FINRA and the U.S. Securities and Exchange Commission in the United States. Research Analyst Compensation The research analyst(s) responsible for the preparation of this report receive(s) compensation based upon various factors including overall firm revenues, which may include investment banking activities. Disclosure of the report to the company/ies Companies NONE Disclosures 1 Sections of this report, with the research summary, target price and rating removed, have been presented to the subject company/ies prior to its distribution, for the sole purpose of verifying the accuracy of factual statements. 2 Following the presentation of sections of this report to this subject company, some conclusions were amended. Definitions For an explanation of definitions used in Exane research reports, please see the glossary at https://www.exane.com/jsp/action/commun/jspaclexique.jsp Commitment to transparency on potential conflicts of interest: BNP Paribas While BNP Paribas ( BNPP ) holds a material ownership interest in the various Exane entities, Exane and BNPP have entered into an agreement to maintain the independence of Exane's research reports from BNPP. These research reports are published under the brand name Exane BNP Paribas. Nevertheless, for the sake of transparency, we separately identify potential conflicts of interest with BNPP regarding the company/(ies) covered by this research document. The latest company-specific disclosures, valuation methodologies and investment case risks for all other companies covered by this document are available on www.exane.com/toolbox/compliance. Exane BNP Paribas Research Luxury Goods 30 June 2015 page 11
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