PPR

Stock price:€104.1
Conclusion: We reconfirm that PPR could be worth €115-120 per share, offering 15% upside potential. The marked improvement in retail bodes well for future disposals and further focus on luxury and lifestyle.

Bottom line surprisingly strong in retail
-Top line grew low single digit in H1 held back by subdued demand in France and in Europe. Redcats remained negative, while Fnac grew 3% and Conforama went up 6%.
-Bottom line went up strongly (EBIT up+39% in retail) driven by excellent cost control, sourcing gains and pricing at Conforama and Redcats. According to PPR, the gain in H1 reflects structural improvement both on the revenue and the cost sides implying further progress in profitability in the second half of the year.

Top line growth in luxury and lifestyle slightly disappointing.
-Puma sales declined by 5% in H1, impacted by the restructuring of the retail network, combined with lower promotional sales compared with H1 last year and with inventory related issues. Nevertheless, bottom line was preserved with a 130bp gain in margin in H1 and +4% EBIT. H2 should show a return to growth based on the existing order book.
-Luxury sales rose +8.5% in H1, lagging behind Hermès and LVMH. Gucci group performed well in Asia (+24%) and in Europe (+10%) but suffered in the US with only 2% growth. The management of the Gucci brand in the US failed to reposition the brand. The team has been changed and PPR is now looking for a visible improvement in H2. Bottega Veneta and Yves Saint Laurent performed well in H1 but they are still relatively less exposed than Gucci to Asia. Operating earnings at Gucci group rose +23% posting a 200bp gain to 20% of sales in H1.
According to the CEO F.H Pinault, sales growth could slightly accelerate in H2 in luxury and lifestyle while the trend in retail could remain unchanged. We are now looking for €17.5bn (+5.9%)- EBIT €1668m (9.5% margin) and net results of €917m (up 28% against +16% previously).

PPR trades at 14.3x P/E and 8.1xEV/EBITDA based on our 2010 estimates, implying 25-30% discount to peers in the luxury sector. We think that the strong achievement on the retail side bode well for future disposals. We feel that the stock looks cheap in light of its expected portfolio restructuring and migration towards luxury and lifestyle. Our valuation suggests 15% upside potential.

LVMH

Stock price: €92
Conclusion: Luxury revival coupled with positive forex lead to a strong year. We now look for +35% EPS growth vs +27% previously. We raise our valuation target up to €109-112 per share.

H1: sales up 16% to €9bn (+14% organic H1-+15% Q2) -EBIT +33%-net earnings +53% to €1050m. Management “very confident” but declined to give guidance for the full year.

H2 will slightly decelerate.
-We look for +8% organic sales in H2 driven by Louis Vuitton, the watches and selective retail. Visibility looks lower in wines and spirits. By region, Asia and the US should keep a double digit growth momentum while Europe could slowdown and Japan stay negative.
-Forex impact should increase to +4.5% for the full year (vs +2% in H1), based on current exchange rates.

We look for 21.4% operating margin for the full year (+170bp)
-The gain in H2 should be less pronounced than H1 (+120bp) owing to tougher comps. Margins held up well last year in H2, down only 70bp vs 2008. We also expect advertising and promotion to continue to expand faster than sales (+18% in H1), notably at Moet-Hennessy, Dior and also Louis Vuitton. Last, visibility on administrative expenses remains low following a higher charge than expected in the first half of the year.
-Net earnings could jump 35% to €2.4bn (EPS €5.0) helped by lower net financial income. FCF improved €800m to achieve €1145m in H1. We look for €2.4bn for the year and expect net debt to fall below €2bn by the end of the year.

LVMH trades at 18.4x and 8.9xEV/EBITDA based on our 2010 estimates. Our revised numbers suggest a valuation around €109-112 per share, offering 18%+ upside potential.

Hermes

Stock price: €118.3
Conclusion: Still worth it. Although management’s new guidance is now in line with our last forecast (cf our June 8th comment), we think Hermes could do even better. We raise our valuation range to €115-€120 per share.

Q2 sales:+27% reported (+19.8% organic). H1 +22.8% (+20% organic). New guidance 2010: sales growth +10-12%- “Operating margin to improve at least by 100 bp”.

+10-12% growth for the year looks conservative.
-Hermes forecast implies only 5% growth in H2. We think Hermes should exceed it, helped by its stong momentum in Asia, the US and also Europe. The second quarter shows no slowdown. Comps in Q3 are more or less in line with Q2, up 20% this year. Q4 will be slightly more difficult with 11% growth reported last year.
-We look for 10% growth in H2, which should lead to +14.7% sales for the full year at constant exchange rate. Forex might add +6% to sales based on current rates. We forecast sales to reach €2310m in 2010 (+20.7%).

Operating margin could gain 130bp to 25.5%.
-COGS and administrative expenses should benefit fro the weakness of the Euro, more than offsetting a rebound in communication expenses and continuing increases in distribution spending.
-net earnings could jump +35% to €389m (+4% upgrade vs our previous forecast)

Hermes trades at 31.9x and 28.4xP/E based on our 2010 and 2011 forecasts. We think the premium looks sustainable (unique visibility, brand equity, potential for retail expansion), but difficult to further improve…Our valuation range (€115-€120 per share) assumes a stable premium for Hermes.

Burberry

Stock price: p812
Conclusion: Strong start in Q1 coupled with the buy out of Chinese franchises lead us to upgrade our valuation target for Burberry to p900-p920 per share. As a result, we reintegrate Burberry in our invesment list.

Q1 sales: up 27% reported to £291m (+21% organic-+24% excluding Spain). guidance 2011 unchanged.

F11 numbers roughly unchanged notwithstanding a strong start.
-We have slightly increased our sales forecast for retail to account for better comparable store sales (+10% in Q1).
-Q1 growth in wholesale and licensing should not be extrapolated. Revenue in wholesale (+46% organic) benefited from the re-phasing of deliveries in the first quarter enabled by supply chain efficiencies. Sales in licensing (+14% organic) were boosted by timing differences related to the Japanese apparel licence.
-We look for £1458m sales, implying +17% sales (excluding Spain) for the rest of the year. This is clearly well ahead of competitors in the luxury sector, owing to the strong momentum of the Burberry brand.

-As to margin, we continue to expect a slight erosion due to the conjunction of higher operating expenses related to the store network expansion, start up losses in new markets and termination of licences and wholesale accounts, combined with a trading loss in Spain (included in our numbers unlike management reporting). We expect EPS to increase 6% to 37.2p (including Spain) and to jump +26% next year to 46.7p.

The acquisition of Chinese retail operations is great news.
-Burberry pays £70m from its cash resources (autumn 2010) to acquire 50 stores located in 30 Chinese cities, making £75m retail sales (year to December 2009) and £14m EBIT. A franchisee will hold a 15% stake in the business.
-The deal should be EPS neutral this year and add up to £20m to group operating profit next year, implying a better yield than the current return on cash.
-Strategically, the deal should further enhance Burberry’s medium term growth profile by increasing its exposure to Asia Pacific (28% of sale by 2012) and to retail (67% of sales projected by 2012).

Burberry trades at 22x and 18.3xP/E based on our 2010 and 2011 forecast. We think the stock deserves to trade at a premium to the luxury sector, owing to superior medium term growth potential (cf May 27 comment). Our DCF suggests around 13% upside potential.

Burberry

Stock price: p798

Conclusion: Time for a break.
Burberry has almost reached our valuation target of p800, providing 26% return in 5 months (cf previous comments). Burberry trades at 21.7xP/E based on calendar 2010 estimates. Burberry’s premium fairly reflects long term mid teens growth prospects. We feel that the stock looks now fairly priced.

Hermes

Stock price: €107
Conclusion: We expect Hermes to report 30%+ EPS growth this year, driven by double digit organic growth compounded by a weak euro. Notwithstanding a 50% premium to peers, we think the stock looks worth it, based on our valuation range of €108-115 per share.

Q1 sales: up 18.5% to €508m (+20% organic). No guidance for 2010.

Sales could grow high teens this year…
-12% organic growth seems reasonable in light of +20% achieved in Q1. We think management is right to play down expectations following a strong Q1. Comps will be more difficult (Q1-5%,Q2+4%, Q3+5%, Q4+11%). However, 12% implies 9% for the rest of the year, which looks in line with the long term expansion profile of Hermes. The good news is the recent return to growth in Japan, which accounts for 22% of sales.
-Reported sales should be boosted by a weak euro. We estimate the positive impact at around +6+7% for the year.

Margin could gain 100bp, on our estimates (25.2%).
-Cost of goods “made in France” should definitely benefit from current exchange rates. We expect a gain of 120bp.
-Administrative expenses should also be contained by the weakness of the euro.
-Conversely, communication expenses should rebound from a low base last year, while selling spending should rise driven by retail expansion. Hermes plans to open 12 new stores and renovate 8 units in 2010.
Consequently we expact sales to reach €2265m, EBIT €571m and net earnings €377m (+31%) in 2010.

Hermes premium looks sustainable
-Unrivalled earnings visibility in the luxury industry, 2009 speaks for itself (sales +8% EBIT+3% Net earnings flat).
-Unique brand equity leads to premium pricing vs peers.
-Potential for retail expansion (304 stores vs 446 Louis Vuitton stores). Hermes owned only 181 stores early 2010, the rest belongs to franchisee.
- In addition to leather bags, watches, ready to wear and perfumes are gaining momentum. We feel that the appointment of a new designer, Christophe Lemaire, who revamped Lacoste, is good news for the women collection.
-US market and Asia Pacific still under-penetrated. Hermes projects to double its store network in China in five years (16 stores currently).
-Acquisition risk ? cannot be excluded with €500m of net cash. We are more convinced by management’s capacity to grow organically than by diversifications. The latest attempt with Wally Yachts led to write-off of more than €12m last year.

In conlusion, we think Hermes is worth its premium (29x and 26xP/E based on 2010 and 2011 estimates). We upgrade our valuation range up to €108-115 per share.

Richemont

Stock price: SF37.8
Conclusion: Both operating margin and cash were better than expected last year. EPS should rebound, driven by organic growth in Asia and the US combined with a positive forex impact. We raise our valuation target to SF46-SF48 per share.

Richemont proved to be resilient last year.
-Sales fell by only 5%, despite its exposure to the hard luxury segment, supposed to be more cyclical than soft luxury items. Richemont has clearly gained share in both jewellery and watches (down only 4%) last year. Richemont’s key brands, notably Cartier but also Piaget, Vacheron or Montblanc have weathered the recession quite well.
-Margin resisted well (down to 16% vs 17.9%) helped by 21% fall in communication expenses, while selling, distribution and administrative expenses remained under control.
-Cash flow surprised us (FCF €1.9bn vs 682m in 2008) benefiting from a positive swing in working capital (€686m) and lower capex.

We feel confident on balance for 2010
-We do not ignore some headwinds. Unemployment and fiscal tightening should continue to impact consumers in Europe, while demand for luxury goods in Japan remains depressed. On the forex front, a stronger SF is expected to increase cost of goods in watches. As to costs, communication spending will rebound from a low base.
-However, we see key positives: good growth visibility (high teens) in Asia Pacific based on positive macro factors and a return to growth in America in H2 last year (+8%) which bodes well for 2010. We look for +7.5% organic growth this year, assuming a further decline in Japan (-5%) and only 3% growth in Europe. Forex impact could be strongly positive this year (7%+) based on current spot rates. Gross margin should improve helped by increased volume, while administrative costs and selling costs should increase at a lesser rate than sales.
-We expect sales to increase to €5.9bn (+15%), Ebit to achieve €1070m (implying 18% margin) and net earnings to reach €910m. Last year, net earnings were impacted by €132m currency translation losses, with no effect on cash.

Longer term, Richemont seems to be well positioned
-Strong brand equity (Cartier,Van Cleef, Montblanc,Jaeger, IWC, Piaget..) H2 last year shows that Richemont could increase sales by around 7% while continuing to cut communication spending, which speaks for the strength of its portfolio.
-Strong presence in Asia Pacific (34% ofs sales). China (including HK and Macau) accounts for almost 30% of the retail network with 389 boutiques, which bodes well for future growth. Richemont is under-represented in the US (only 10% of sales) and in Latam.
-Retail (46% of sales with 817 stores) will further expand in jewellery but also in watches where Richemont needs to invest in stores, notably in China. We expect square footage to boost retail sales by 5% pa.
-Very solid balance sheet with a net cash position of €1.9bn.

Richemont trades at 18xP/E based on 2010 calendar estimates. Our DCF suggests SF48 per share. We look for 25%+ potential return.

Long Richemont at time of writing.

Tiffany

Stock price: $46.9
Conclusion: Q1 numbers, even better than expected, confirm a strong momentum in sales and positive leverage on fixed costs. Tiffany belongs to our investment list. We stick tour valuation range target of $54-$55 per share.

Q1 10 results: Sales up 22% (+18% organic). Net earnings more than doubled to $0.50. Guidance 2010 upgraded to $2.55-$2.60 EPS from $2.45-$2.50 previously.

Looking for +26% EPS growth this year, helped by strong Q1
-A strong start helped by easy comps. Sales jumped 18% (-22% last year) with excellent growth in all regions except Japan (Asia +37%-America+20%-Europe+19%). Comparable store sales increased 10% worlwide, mid teens in America and in Europe and low twenties in Asia. Operating earnings almost doubled reflecting positive leverage on fixed costs.
-We forecast sales to increase 11.7% to $3026m for the year, EBIT to reach $548m (18% margin) and net earnings to achieve $323m (+22%). Our sales growth assumes $1.23/€ for the rest of the year. Tiffany’s store base will expand by 7% in 2010 to 236 stores, notably in Asia Pacific, in the US and in Europe. Gross margin could gain more than a full point while SG&A should increase by around 10%, notably advertising (+24%).

Medium term outlook points to double digit growth
-Pricing points is well balanced to get traffic in the stores
-Strong potential for retail expansion in the US but also in the Rest of the World (cf previous comment). Asia Pacific accounted for only 16% of sales last year, while Europe was still underpenetrated (11% of sales).
-Improved store productivity
-Right classic image well adapted to the current environment.

Tiffany trades at 18xP/E and 16xP/E based on our 2010 and 2011 estimates. Our DCF points to $55 per share, suggesting 17% potential return.

Long Tiffany at time of writing.

Burberry

Stock price: p659
Conclusion: Great management, attractive growth story in luxury goods . We reiterate our valuation target of p790-p800 per share.

FY10: Sales up 7% to £1280m (+1% organic-5% H1 +6% H2). EPS +17% to 35.1p
Guidance F11 confirmed: +10% space in retail +10% wholesale including Spain.

Burberry has weathered the recession particularly well
-Sales have resisted thanks to retail (up 15% organic). Same store sales grew 7% (H1+2% H2+10%), combined with 8% new space. Wholesale and licencing were more affected, declining by 15% and 6% respectively.
-Retail/Wholesale margin bounced back 180bp to 11.6%, driven by a sharp upturn in gross margin (+760bp) partly offset by higher operating expenses. Gross margin benefited from improved pricing, less clearance, cost efficiency and the switch from wholesale to retail.
-Net cash position at 31 March was £262m, vs £8m a year ago. FCF reached £300m (£120m F09) helped by improved working capital (+184m inflow) and lower capex.
-EPS exceeded expectations, increasing by 17% in F10.

F11: Accelerating Investment-Fixing Spain
-Increasing investment. Capex will almost double to £170m, with 20-30 new mainline stores (131 currently) in Americas and Asia. Start up losses in Latam, India and Japan will increase £5m. Operating expenses in marketing, sales and distribution will be up as a percentage to sales ( around 50% vs 48.1% F10). Termination of licences and wholesale accounts should cost the group £5-10m.
-The negative impact on margin will be partly compensated by improved gross margin thanks to higher full price sell-throughs and sourcing benefits.
-The restructuring in Spain should lead to 50% fall in revenues and a trading loss of £10m, as retail and wholesale move from local to global collection.
-Looking for double digit growth top line and mid single digit bottom line. Sales could reach £1450m in F11 (up 13%, +9% organic), margin in retail/wholesale should slightly erode (40bp to 11.2%) as a result of growth initiatives taken this year, EPS could increase 6% to 37p (we include trading loss in Spain) and return to mid teens growth in F12.

Longer term: mid teens growth prospect
-New retail space should add 10% growth for the next three years.
-Wholesale remains underpenetrated in the US (7% of sales) and in Asia.
-Non apparel gaining share (35% of sales)
-Menswear to benefit from the first global collection following the non renewal of licences.
-Childrenswear (4% of sales) could represent 10% of revenues over time.

Burberry trades at 18xP/E and 9xEV/EBITDA based on 2010 calendar estimates. We expect the stock to further re-rate based on its superior EPS growth potential. Our valuation suggests 20%+potential return.

Tod’s

Stock price: €54.7
Conclusion: Q1 confirms a relatively slow start. We reiterate that Tod’s looks fairly priced based on our valuation range of €56-€58 per share.

Q1 results: Sales up 3.4% to €208m (+3% organic). EBITDA +9%.EBIT +11%. Guidance 2010: Tod’s “confident to post further growth of sales and profits”.

A slow start, as expected
Tod’s posted only 3% growth in Q1 vs mid single digit to double digit growth reported by peers. However, the good news came from margins, up vs last year.
-First, comps are much easier for peers in H1, as Tod’s has been remarkably resilient last year.
-Second, Tod’s is less present than peers in Asia and in the US and still heavily exposed to Italy (57% of sales) and Europe (21%) which should be under pressure this year.
-Third, visibility is weaker in wholesale which still account for almost 2/3 of the business.
-Fourth, Tod’s performs well in shoes (+7% in Q1), but is still looking for the right formula in leather goods and accessories (-10% Q1), where it lacks pricing power.
-Last, Tod’s retail network was stable at the end of March, reflecting a more prudent investment strategy. Net cash position achieved €180m end of March.

Comparable store growth is accelerating to +4% (January-March) implying +8% in Q2, which is encouraging . We look for €760m sales (+6.4%) and €95m earnings (+11%) in 2010.

Tod’s trades at 17.8xP/E and 8.4xEV/EBITDA based on 2010 estimates. Tod’s slight discount to peers seems justified by a slower growth momentum. In the absence of acquisition, we expect management to increase pay out this year. We think the stock is fairly priced.