Laurent Perrier

Stock price: €67
Conclusion: Premium pricing went too far, reducing medium term visibility. In addition, management turmoil is a concern. Laurent Perrier looks fundamentally fully priced but remains a highly attractive take over target in champagne.

F10: sales down 5% to €172m (-4.7% organic)-Net earnings fell 44% to €10.6m
No guidance for F11.

Bad timing for wrong pricing.
-A contrasted year. Sales bounced back 10% in H2 following a 23% fall in H1. The rebound was driven by volume, while price/mix remained negative (-12% for the year). Exports started to rebound in Q4(+38%).
-Gross margin was even below expectations, down 780bp to 49.7% of sales. The negative price/mix had a huge impact on gross margin (-22m), only partly offset by higher volume (+7m).
-Operating profit fell 34% to €29m. Operating expenses decreased 7%, largely driven by a sharp cut in communication expenses (down 26%), and to a lesser extent lower administrative spending. Nevertheless, operating earnings resisted better in H2.

Visibility remains limited for the second half of 2010 .
-Easy comps in H1 will help. The first half will compare with sales in Q1 (-25%) and in Q2 (-21%) last year which were heavily impacted by destocking.
-H2 looks more uncertain considering Laurent Perrier’s exposure to Europe, notably the UK (15-20% of sales). Consumers in all the major economies expressed lower confidence in May, which shows the fragility of the recovery.
-Mix should benefit from higher exports but pricing might remain under pressure given the gloomy consumer environment.
-We look for sales up 20% in H1 and 5% in H2 to €192m (+9% organic FY), margin could remain below 20% and earnings back to €17m in F11.

Medium term target of 30% looks too optimistic
-Laurent Perrier suffers from a lack of leadership since Yves Dumont left the group in 2008. Stephane Tsassis, his successor, stayed less than two years. According to the CFO, the transition period could last 18-24 months…
-Price elasticity in champagne proved to be higher than expected leading us to question the viability of Laurent Perrier premium strategy.
-Moreover, communication expenses might increase more than budgeted. We were surprised to hear that communication expenses should stay at 7-8% of sales this year (vs 11% in 2008-2009) at a time when Laurent Perrier is facing tougher competition which might require additional support.

Laurent Perrier trades at 25xP/E based on 2010 estimates. We think that Laurent Perrier looks fondamentally fully valued. Nevertheless, the brand remains a highly attractive take over target, which provides a floor (€70+ per share on our estimates).

Laurent Perrier

Stock Price: €53.5

Conclusion: Margin could remain under pressure due to negative mix impact in champagne. We think the stock is fully priced based on 2010 earnings outlook.

H1: sales down14% reported, down 13% like for like. EBIT down 62% to €9m, net earnings down 84%. No guidance given for the full year.

Touching bottom in fiscal 2010.
-Following a 45% fall in earnings last year, we expect Laurent Perrier profits to further decline by 50% this year to €9-10m. Laurent Perrier suffered from a negative volume ( -14%) and price/mix (-7%) impact, resulting in an almost 23% decrease in sales in H1. We expect some pick up in volume in H2, but more than offset by negative mix/price impact. Sales could decrease by 5% in H2 and 13% for the whole year.

-Management made it clear that the crisis is not over and that consumers are looking for cheaper champagne either in the mid range (€15-€22) with Castellane or
Oudinot or even at the low end of the market with Jeanmaire (€9-€14) , which leaves little room for manoeuvre in the premium segment with Laurent Perrier brand. Moreover, CFO acknowledged that Laurent Perrier “will need to maintain a competitive positioning”. In other words, one should not exclude price adjustments, if needed…

-As a result, we project the gross margin to decrease to 52% of sales, down 500bp against last year, and gross profit to fall to €82m vs €104m last year. Operating expenses should decrease but to a lesser extent than sales and EBIT might come down below €30m vs €43m last year.

-Net debt reached €347m (end of Sept) as a result of higher inventories (up €66m). Cashwise, we expect the group to benefit from the conjunction of improved volume in H2 and a 30% decrease in purchasing costs derived from the decision to reduce the crop yield combined with lower pricing for grapes.

Back to growth next year, but at what price ?
Rising unemployment, deleveraging and fiscal tightening should continue to affect the consumer mood next year. We think that premium champagne will continue to struggle as pricing went probably too far. Although Laurent Perrier management keeps saying that it sticks to a long term value strategy, it could be forced to some adjustments depending on the competition. As a result, Laurent Perrier may find it hard to achieve its mid term guidance of 30% operating margin versus 17% estimated this year.

Laurent Perrier trades at almost 23xP/E based on calendarised 2010 estimates, which implies a 60% premium to peers. We think that such a premium anticipates a quick return to high pricing which remains to be seen. Nevertheless, Laurent Perrier should remain a highly attractive target given the scarcity of champagne brands.

Laurent Perrier

Stock price:€45,8
Conclusion: Lack of visibility in champagne should prevent the stock from rebounding in the short term.

Fiscal 2009 (end of March) release: Sales down 27% to €181m (reported), down 25% like for like. EBIT margin down 2,5pt to 23.9%, net earnings down 45% to €29m. No guidance given for fiscal 2010.

The timing of the price repositioning could not be worse! As a result of sharp price increases (LP brand raised prices by 16% last year), Laurent Perrier has lost 32% volume of champagne last year. In addition, price increase have been partly offset by a negative mix impact, leading to only 7% increase in price/mix despite the sharp price increase for the Laurent Perrier brand. As a result, sales decreased by 27% last year. Notwithstanding a positive impact on gross margin from higher pricing, both gross profit and operating earnings collapsed, down 21% and 34% respectively. The decline in net earnings was even more pronounced due to higher debt (€306m or 6,5xEBITDA) resulting from a -€64m cash outflow.

Management reiterated mid term guidance of 30% operating margin and 15% return on capital employed, which does not really help us to make short term forecast for fiscal 2010. We feel that sales could go further down this year, as a result of the existence of excess inventories in the trade (around 60m bottles worlwide). It might take 12-18 months to restore a balance in champagne. Consequently, it seems reasonable to forecast another year of decline in volume, added to a negative mix impact resulting from higher promotions. Laurent Perrier sales could retreat by 10% to €175m, while gross margin could be affected by negative mix, volume and forex. The decline in operating earnings and net earnings could be limited to 21% and 24% respectively , provided management succeeds in controlling operating expenses, notably communication and administrative spending and also reducing financial expenses thanks to lower rates.
Importantly, from a cash standpoint, assuming that sales would fall by 10%, Laurent Perrier should manage to break-even, thanks to primarily a tighter control of working capital helped by lower grapes purchases. In addition, cash will benefit from lower capex expected to return to €5-6m versus €9m in fiscal 2009.
Beyond 2010, we expect the champagne business to return to growth and Laurent Perrier to benefit from its superior brand image, notably in the highly valued “rosé” segment.

In conclusion, we think that the next 12 months will be difficult but this is largely discounted in the stock price down 53% in a year, 24% YTD. The stock trades at high multiples of 17x and 15.7x P/E based on calendar 2009 and 2010 estimates. Nevertheless, the book value (€38 per share) provides a floor, while our long term DCF based valuation suggests a valuation above €50 per share. Last, Laurent Perrier should remain a very attractive take over target for spirit groups in search of a champagne brand.