Aside from writing on this blog, I’ve got some other nice skills, particularly in the areas of financial analysis and valuation. I am also fortunate to be part of a select group of MBA students, who manage approximately $500K for the Mason School of Business. In my duties as an equity analyst for The Batten Fund, I cover the consumer staples & discretionary sectors, and as such all the securities associated with luxury firms fall under my purview.
Yesterday, Francesco Lavecchia, an equity data analyst with Morningstar Italy published an opinion piece on the biggest decision luxury brands are facing in their bids to enter the growing Asian market. There are two choices lux companies have in conquering Asia:
- Get acquired by a larger luxury firm with the capital resources and strategic leverage to take your brand into Asia. French holding company, Pinault-Printemps-Redoute (aka PPR) acquired Gucci and Bottega Veneta in 2001. Brioni, manufacturer of tailor-made suits joined the PPR family in 2011. Bvlgari was acquired by LVMH in October, 2011. Of course, this choice bears the consideration of many other factors, particularly:
- The issue of the safe and responsible stewardship of the acquired brand by the acquirer.
- Resolving the issue of control over brand development, distribution channels, and marketing strategies.
The decision to go public was not just about retaining control – it was also an issue of survival in a market that represents upwards of 20% of revenues for each brand. However, as the IPO fever escalates, investors are now having to pay more for companies that should otherwise price at lower earnings multiples.
At the initial public offering, Prada was trading at a forward price/earnings multiple of 23 times 2011 earnings while Ferragamo had an even higher valuation, equal to 24,4 times… LVHM, the worldwide luxury leader, has an EBIT margin of 20%, compared with 11% for Prada and 12% for Ferragamo, but LVHM is currently trading at a forward price/earnings of 18 times… US company, Coach, has the highest EBIT margin in the sector at 30% but its stock trades at a price/earnings multiple of 21 times.
Asian luxury revenues are forecasted to advance by 90% in 2015. As the rhetoric continues to be pushed in investment pitches for lux IPOs, it is only inevitable that financial valuations will be overly optimistic of future cash flows from a market that may represent up to 50% of global sales in 2015. The question to answer is: will investors be cautious enough to look at the fine print?