Bulgari

Stock price: €6,3
Conclusion: Bulgari continues to trade above our revised valuation range of €5.80-€6.10. Our slight upgrade derives from better sales than expected combined with improved cost control.

Q1 results: Revenues up 11.8% reported to €199m (+12.6% organic). EBIT at breakeven-€8m losses. Guidance 2010: mid single digit growth in sales-6-7% EBIT margin.

Although Q1 and April (+15%) were strong, we feel that the rest of the year could slightly decelerate.
-Low double digit growth in jewelry looks concevable given the comps in 2009. Conversely, we think that Q1 growth reported in perfumes (+30%) and accessories (+25%) might not be sustainable for the rest of the year. As to watches, sales should continue to impacted by the withdrawal of Daniel Roth and Gerald Genta products.
-By region, we think that Europe could slowdown as a result of fiscal tightening. The US and the Rest of Asia should continue to drive growth albeit at a lesser rate than in Q1.
-We look for +9% organic for the year, compounded by +2% forex impact.

Costs seems to be under control
-Cost of good improved 60bp in Q1
-Variable selling expenses decreased 1.4%, while personnel costs fell 13.8%. Other general expenses were down 7% excluding renting expenses.
-Marketing expenses decreased 9%, but should rebound and even increase as a percentage of sales for the whole year.
-We forecast 7.4% EBIT margin for the year (€76 m EBIT).
-Net earnings estimates (€40m) remain unchanged due to higher financial expenses.

Bulgari continues to be seen and valued as a take over target, which explains 54x and 29x P/E based on 2010 and 2011 estimates. We think the stock looks fully priced.

Bulgari

Stock price: €6.27
Conclusion: Bulgari’s cost structure might prevent the group from returning to 15% margin within the next two years. We think that the stock looks fully priced based on our valuation range of €5.50-€5.80 per share.

2009 results: Sales down 5% to €297m (-2.7% like for like). €47m losses, including €37m one-off charges. Guidance: mid single digit growth in sales-6-7% EBIT margin.

Management guidance for sales is in line with our forecast (+6% in 2010).
The first two months were up high single digit, benefiting from easy comps. Both Asia (23%) and the US perform strongly, but sales growth could be held back by continuing sluggish demand in Europe (38% of sales) coupled with flat sales sales in Japan (19%). In addition, Bugari’s visibility is weakened by its relatively high exposure to wholesale, combined with a high pricing positioning, notably in watches and accessories.

A return to 15% margin seems unprobable within the next two years.
-Cost of sales is impacted by higher gold prices. Bulgari forecasts a partial recovery to 63% gross margin, helped by price increases (+3%) and easier comps with last year wich has been impacted by SKU’s clearance in watches for Daniel Roth and Gerald Genta.
-Rental expenses went up sharply over the last 5 years accounting for close to 10% of sales vs 4% in 2004.
-Depreciation charges almost doubled during the same period, representing 7% of sales vs 4.3% previously.
-Productivity of the store network needs to be improved. In addition, the pay back period of stores specialised in accessories is 2-3 years longer than for jewellery.
Bulgari made it clear that its priority was to restore margins by cutting G&A expenses, optimizing the supply chain and stopping network expansion. Bulgari’s CEO believes it “has the right network” with 166 owned stores and 107 third party units, except Greater China where the group could further expand. The cleaning of the brand portfolio is also good news and should enable it to focus ressources on the Bulgari brand name.
As a result, we expect margins to rise to 7% in 2010 and 11% in 2011, while net earnings could achieve €40m and €84m respectively.

Bulgari continues to be seen as an obvious potential take over target in the luxury industry. Bulgari trades at 26xP/E and 13.3xEV/EBITDA based on 2011 estimates. Our DCF suggests a valuation closer to €5.60 per share, leading us to view the stock as fully priced.

Bulgari

Stock price: €5,80
Conclusion: Earnings recovery following a disastrous 2009 year looks largely priced in. Our valuation suggests some downside risk based on €5.3-€5.5 per share.

Q4 sales: down 5% reported to € 297m, down 2.7% like for like. Full year sales down 13.8% reported to €926m, down 18% like for like. Results will be reported on March 15th.

The reasons behind the worst performance in the luxury goods sector:
-a product portfolio skewed towards cyclical hard luxury goods, jewellery and watches
-relatively high pricing positioning at a time of down trading
-overexposure to Japan, underexposure to emerging Asia
-Wholesale business affected by destocking.
Unlike its competitors Bulgari did not bounce back in Q4, as a result of a double digit decline in wholesale more than compensating for 12% growth in direct sales.

2010 turnaround could be held back by:
-continuing depressed demand in Japan despite the planned adaptation of product assortment to consumer needs
-smaller exposure than competitors to Greater China (15% of sales)
-durable destocking in watches and jewellery where retailers seem committed to further reduce working capital.
We are looking for 6% increase in sales to €983m.

Following €7m losses (9m 2009), we expect Bulgari to report positive €25m EBIT for the full year, as a result of savings in personnel costs, variable selling expenses and administrative spending. Net earnings could be in the red (around €10m) impacted by increased financial expenses and restructuring charges.
We think it might take time to get back to 15% margin:
-2010 sales could remain 10% below 2008 level
-Management is working on lowering the break-even point by reducing SG&A, cutting overheads, optimizing the supply chain. Some stores will be closed while Gerald Genta and Daniel Roth watches will be marketed under the Bulgari umbrella. We expect a return to 9% EBIT margin and $60m profit in 2010.

Bulgari looks expensive even based on a return to 2008 earnings in two years (23xP/E based on 2011 estimates). DCF does not provide much support, suggesting a valuation closer to €5.5 per share. We feel that the key reason behind the resistance of the stock price is M&A related, as Bugari remains an obvious potential takeover target for larger groups.

Bulgari

Stock price: €6.25
Conclusion: We think that the stock looks fully priced against peers and close to the high end of its valuation range, based on our revised DCF (€6.7 per share).

Q3: sales down 9% reported to €233m, down 14% like for like. EBIT down 36%, net profit down 69%..but returning to €7m profit. 9months down 17% reported to €629m, €33m losses vs €77m profit last year.

Two good news:
-the decline in top line is decelerating (-31% Q1, -28% Q2 and -14% Q3). DOS retail sales decreased by only 4% in jewelry and 6% in watches in Q3, with accessories up 10% in dedicated stores. According to management, Q4 should benefit from the end of destocking in perfumes and in accessories, while visibility remains limited in watches and in jewelry.
Although 2010 will benefit from an easy comparison base, notably in H1, management does not expect a strong rebound in wholesale (around 50% of sales), as retailers are now used to work with low inventory.

-Operating costs have started to come down, by 10% in Q3. Importantly, the decrease was not purely driven by communication expenses (-9%) but broad based with savings in personnel costs, variable selling expenses and other administratives. The retail network (up by 5 stores to 169 units) is expected to remain fairly stable in the next 12 months as store openings in Asia should be offset by closures of non profitable units. On the balance sheet front, net debt remained unchanged at €330m, helped by lower capex and working capital inflow.
We expect Bulgari to end the year at break-even excluding restructuring charges. We forecast mid single digit growth in sales next year and around €60m profits.

Bulgari strongly rerated since March and is now trading 14xEV/EBITDA based on 2010 estimates, implying little upside potential.

Bulgari

Stock Price: €4,0
Conclusion: Still expensive

Q1 2009 results: sales down 30,6% like for like, down 23% reported. €29m loss vs 22,8m profit last year. No guidance for the rest of the year.

Bulgari numbers illustrate the cyclicality of the hard luxury market (jewellery and watches) with sales down 30% vs -10-15% average decline for peers.
Sales suffered from a sharp de-stocking in the wholesale channel. Going forward, although management believes that de-stocking could end in Q2, visibility remains limited. Bulgari highlighted that the performance of its directly operated store (DOS) network was better with a “mid single digit” decline in sales in Q1, based on current rates. However, adjusted for currency and store opening, we estimate the real decline in comparable store sales at around 22%. April seemed slightly better with a “mid to high single digit growth” in DOS sales, which again translates into 8-10% decline in comparable sales. We project revenues to further decline in the rest of the year, but at a slower pace (-12% vs 30% in Q1), leading to €960m sales in 2009 (down 11%).
On the cost front, we assume that management will stick to its road map (modest reduction in personel expenses, stable G&A expenses and marketing spending around 11% of sales) leading to €56m EBIT and a €19m profit down 77% vs last year. Free cash flow should be negative by around €12m despite working capital turning cash neutral. Net debt might slightly increase to account for 2,7x EBITDA.

Bulgari is down 10% YTD and 50% in a year. The stock price (20x P/E 2010) should be even lower based on fundamental earnings outlook. It is still to early to predict a sharp rebound in sales next year. We value the stock based on a return to 5% growth in sales and €45m profit. Although we think that M&A speculation should continue to support the stock price, we feel the timing should be the worst for the family.