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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 8 September 2017 Global Equity Research Luxury Goods Global Luxury Goods CONNECTIONS SERIES The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. Research Analysts Guillaume Gauvillé, CFA 442078880321 guillaume.gauville@credit-suisse Christian Buss 2123259667 christian.buss@credit-suisse Sara Shuler 2123257643 sara.shuler@credit-suisse Pallavi Bakshi 2125388434 pallavi.bakshi@credit-suisse Looking for the next brand turnaround ■ Assessing turnaround potential at six US/European luxury goods companies:
With the success of Coach, Gucci and Calvin Klein, investors are looking for the next turnaround story in the soft-luxury universe. We believe companies that have seen declining sales, margin pressure and falling CFROI largely as a result of brand fatigue and lack of cost discipline could qualify. In this report, we identify Burberry and Ralph Lauren as our top premium/luxury turnaround picks, while we remain positive on Tod&39;s Group and cautious on Ferragamo, Hugo Boss, and Michael Kors. ■ We look at seven factors:
(1) the health of the underlying market,(2) brand value/equity currently discounted in the stock price,(3) the existing price/value proposition,(4) changes to management and creative teams, (5) the progress made so far regarding cleaning up distribution,(6) cost cutting potential, and (7) potential margin upside. ■ We upgrade Burberry to Outperform (new TP 2,000p from 1,650p):
We note Burberry has undergone the biggest management reshuffle since its 2002 IPO and we believe the brand is well placed to capitalise on the need for newness in luxury thanks to its apparel exposure. Margins are close to historical lows and the cost cutting plan in place should alleviate concerns about further earnings downgrades. With sell-side positioning the most negative it has been since 2009, we think this creates a buying opportunity. ■ We upgrade Ralph Lauren to Outperform (new TP $111 from $91):
We believe the company is on track to return to meaningful growth and margin expansion from FY19. This follows significant changes to management, visible efforts to reinvigorate the brand/products, cleaning up distribution and rightsizing of the cost structure. ■ We remain Neutral on Hugo Boss, Ferragamo and Michael Kors:
We believe Hugo Boss (new TP �65) still faces a challenging suit market and we think its current price/value proposition may not yet be adequate. We like Ferragamo in the long term but the transition phase is likely to hurt margins and trigger further earnings downgrades. We remain concerned about Michael Kors’ underlying brand health which is necessitating store and wholesale distribution rationalisation and a re-focus on pricing discipline. Moreover, we find cost savings targets relatively underwhelming. Figure 1: Brand turnaround scorecard for the six selected companies BurberryTod&39;s GroupFerragamoHugo BossRalph LaurenMichael Kors Underlying market++++-+++ Brand equity+++++=++++ Positioning or price/value proposition+++++=+++ Management / creative director changes++++++++++- Progress on distribution clean-up+===+- Cost cutting potential++++=+++- Margin upside potential++++-=++- Average score++++=++= Source: Credit Suisse research. Notes:+++ highly supportive,++ supportive,+ mildly supportive,= neutral and - not supportive 8 September 2017 Global Luxury GoodsKey charts Figure 2: Brand fatigue and little cost discipline have weighed on EPS forecasts for all six brands Figure 3: This has resulted in share prices lagging their peer groups Consensus EPS forecasts (June 2015=100) Share price relative to European luxury or US softlines (2015=100) 40 50 60 70 80 90 100 110 120 Jul-15Sep-15Nov-15Jan-16Mar-16May-16Jul-16Sep-16Nov-16Jan-17Mar-17May-17Jul-17Sep-17 Tod&39;s (FY17e)Hugo Boss (FY17e)Burberry (FY18e) Ferragamo (FY17e)Ralph Lauren (FY18e)Michael Kors (FY18e) 40 50 60 70 80 90 100 110 120 130 140 Jan-15Apr-15Jul-15Oct-15Jan-16Apr-16Jul-16Oct-16Jan-17Apr-17Jul-17 Tod&39;sHugo BossBurberryFerragamoRalph LaurenMichael Kors Source: Thomson Reuters, Credit Suisse researchSource: Company data, Credit Suisse research Figure 4: Burberry is well placed to capitalise on the need for newness in luxury Figure 5: We expect Burberry&39;s underlying margins in FY18 to be close to historical lows Estimated revenue breakdown for Burberry (% of total, in FY17) Retail/wholesale operating margins for Burberry Trench coats15% Scarves and ponchos10% Womenswear20% Menswear16% Handbags19% Footwear and other accessories 9% Beauty7%Children4% 9.6% 12.0% 14.2%14.8%14.5%14.6%14.9% 9.8% 11.6% 15.6%16.4% 17.8%17.5% 16.3%15.4%15.9%15.4%16.9% 17.7% 4% 6% 8% 10% 12% 14% 16% 18% 20% FY0FY0FY0FY0FY0FY0FY0FY0FY1FY1FY1FY1FY1FY1FY1FY1FY1 8e FY1 9e FY2 0e FX tailwind since FY17Average Source: Company data, Credit Suisse estimatesSource: Company data, Credit Suisse estimates Figure 6: Ralph Lauren continues to improve its distribution with less reliance on wholesale Figure 7: We expect sales growth to pick up and margin to rebound from FY19 for Ralph Lauren Estimated revenue breakdown by channel (% of total, in FY22e) Long-term sales growth and operating margins for Ralph Lauren Wholesale39% Outlet Retail29% Ralph Lauren brand Full Price 18% Club Monaco Brand Full Price 3% eCommerce8%Licensing3%15.2% 13.6% 10.7%10.1%10.3%10.5%11.0%11.6% 12.2% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 0% 2% 4% 6% 8% 10% 12% 14% 16% FY14FY15FY16FY17FY18eFY19eFY20eFY21eFY22e Operating margin (lhs)Sales growth (Y/Y % chg., rhs) Source: Company data, Credit Suisse estimatesSource: Company data, Credit Suisse estimates 淘宝店铺 “Vivian研报” 首次收集整理 获取最新报告及后续更新服务请在淘宝搜索店铺“Vivian研报” 或直接用手机淘宝扫描下方二维码 8 September 2017 Global Luxury GoodsTable of contents Looking for the next brand turnaround4 Assessing the turnaround potential9 Burberry Group (BRBY.L)Hugo Boss (BOSSn.DE) 31 Salvatore Ferragamo Spa (SFER.MI) 35 Tod’s Group Spa (TOD.MI) 3 8Ralph Lauren (RL) 43 Michael Kors (KORS) 55 8 September 2017 Global Luxury GoodsLooking for the next brand turnaround Setting the scene At what point can we start talking about a potential brand turnaround Brand appeal in apparel or leather goods typically runs in cycles. And luxury/premium brands, even those with a long history, are no exception to the rule. In fact, some have gone through periods of very strong growth followed by severe downturns. The reason behind it is generally brand fatigue as a result of products being over distributed, growing competition from existing/new brands and/or inappropriate price positioning. Whenever this happens, companies typically enter a period of sluggish growth or possibly declining sales, falling margins and declining ROIC that can last for a couple of years or more. At that stage, discussions about a potential brand turnaround strategy and the conditions for its successful execution start to emerge. Positive results generally translate into sales growth picking up, margins recovering and ROIC increasing. Which brands have reached that stage We limit ourselves to premium/luxury brands and, therefore, we exclude the likes of Abercrombie & Fitch or Gap in the US. On that basis, we find six brands in our European and US coverage can now be part of the brand turnaround debate. These are Burberry, Hugo Boss, Salvatore Ferragamo
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