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.

PPR

Stock price: €103.9
Conclusion: PPR almost reached our previous valuation range €105-€110 per share. Following Q1 sales, we are raising our EPS estimates and our valuation range up to €115-€120 to account for improved sales in general retail, accelerating momentum at Gucci and positive forex impact.

Q1 sales: up 1.3% to €4.1bn (+1.3% organic). Guidance 2010: management looking for “a healthy progression in operating and financial performances”.

Numbers better than they look at first sight.
-General retail (62% of sales) returning to growth. Fnac and Conforama were positive, while Redcats was almost flat. Fnac grew by 1.6% in Q1, showing a sequential improvement with March up double digit. Conforama was up 2.6%, accelerating growth throughout the quarter. According to PPR, Conforama turnaround looks sustainable. Recovery at Redcats is driven by la Redoute expected to return to positive growth in 2010 after years of decline.
-Gucci group increased sales by 6% in Q1, thanks to 9% growth in retail (66% of sales) more than offsetting flat wholesale revenues. In addition growth in the US retail business was held back by inventory shortfalls.
-Puma was still disappointing with sales down 2.7% in Q1 partly due to store closures but also weak demand in Europe and destocking in China.

According to PPR sales growth should accelerate in H2
-Management is looking for high single digit growth in wholesale in H2, based on orders booked for the Autumn/Winter collections.
-Retail sales in luxury could also expand double digit, boosted by the opening of 40 new stores in the coming quarters. End of March, Gucci group had 615 stores.
-Puma should rebound in H2 based on promising order levels in most regions. Management confirmed low to mid single digit growth for the year, in line with our numbers.
We are now looking for €17.2bn sales and EPS up 16% to €6.55 (+5% upgrade).

PPR trades at 15.9xP/E and 8.8xEV/EBITDA on our revised 2010 estimates. Our revised valuation range suggests 15% upside potential.

Long PPR at time of writing.

PPR

Stock price: €85.5
Conclusion: We upgrade our valuation range to €105-€110 per share in light of excellent margin resilience combined with some recovery in sales expected in 2010. Portfolio restructuring will help to rerate PPR.

2009 results: Sales down 4% to €16.5bn (-5.6% organic), down 2.3% organic in Q4. Net earnings down 0.8% to €712m. EPS down 1.2% to €5.63.

Surprisingly good margin in a tough retail environment bode well for 2010.
Gross margin gained 20bp to 47.1% , while EBIT margin remained stable at 8.4% leading to only 4% decline in operating earnings to €1383m. EBITDA stable, implying +20bp gain in margin (10.8%).
-Notwithstanding lower sales, Redcat, Fnac and Conforama reported higher operating margins in 2009 (3.9%), while Gucci group lost 120bp (20.4%).
-Restructuring costs almost doubled to €321m, concerning Puma, la Redoute, Conforama, Fnac and Gucci group.
-Cost cutting measures put in place in 2009 will have a full impact in 2010. Recurring operating expenses were reduced by 3.7% as reported and 4.7% at comparable rates. In particular, payroll expenses decreased by 2% reported and 3% at comparable rates, notably at Redcats and Conforama. The group headcount was reduced by 4.4% in 2009.
- We expect margins in retail to improve by 30bp in 2010 to 4.2% while Gucci group could benefit from positive leverage helping to restore profitability to 20.9% (+50bp). Additional savings, estimated at around €70m for 2010, should also help Puma. Group operating earnings could reach €1483m, up 7%.

Top line could start to recover in 2010
-Despite reduced marketing budgets in 2009, Gucci group has maintained its share of voice last year in order to be well prepared for the recovery. Management expects to spend more this year.
-Gucci continues to invest in the network expansion, as stores increased from 560 to 609 in 2009 in the luxury goods division. 2/3 of the openings take place in Asia. The network offers significant growth opportunities, notably for Gucci, Bottega Veneta and Yves Saint Laurent.
-Gucci group is well positioned in Emerging markets accounting for 33% of the luxury goods division sales. Assuming 12% growth in 2010, emerging markets could boost Gucci group sales by 4%.
-Wholesale business (30% of Gucci group-80% of Puma) should benefit from reduced inventory levels in the US and in Europe.
- PPR indicated that the year started in line with Q4 (+4%) on the retail side of the business in luxury.Visibility is lower in the general retail division, where we expect sales growth to remain below 1% in 2010, affected by structurally declining sales at Redcats and too much exposure to mature markets.
-The current weakness of the Euro could enhance reported sales by 1-2%.
All in all, sales could reach €16.8bn, EBIT achieve €1.48bn, EPS increase by 10% to €6.23 per share.

PPR confirmed its intention to further restructure its portfolio.
-Balance sheet looks stronger today with net debt down to €4.4bn (€5.5bn end of 2008) representing 2.2x EBITDA. We project FCF to remain stable this year around €800m, due to increased capex spending. Net debt could be further reduced to €4bn by the end of 2010.
-Following CFAO listing, management wants to dispose retail operations within the next 2-3 years depending on market conditions. Based on 5xEBITDA (€650m on our 2010 estimates) retail could be worth €3bn, on our estimates.
-CEO FH Pinault reiterated his intention to migrate the portfolio towards international luxury and lifestyle brands, following retail disposals.

PPR trades at 13.7xP/E, 7.8xEV/EBITDA based on 2010 estimates,implying 25% discount to the luxury sector. FCF yield exceeds 7%. Our DCF suggests a valuation close to €110 per share. We think the stock offers 20%+ upside potential.

Long PPR at time of writing.

PPR

Stock price: €82.2
Conclusion: Recent stock weakness offers a good entry point. The discount to luxury peers has widened to 30%. Notwithstanding the dilution related to CFAO listing, we expect further portfolio restructuring.

CFAO launches its IPO- Entreprise value range €1750-2050m

CFAO valued between 7x and 8.1x EBITDA estimates for 2009.
PPR is selling 31m shares representing 50.39% of the capital of CFAO.
The price range (€24.8-€29 per share) implies an equity value of €1.5bn-€1.8bn and an entreprise value of €1750-2050m, including $250m of net debt.
CFAO management is looking for €210-220m EBIT this year, which implies around €250m EBITDA.
We think that management has been conservative, as according to forecast EBIT should deteriorate at a much faster rate in H2 (-32%) than in the first six months of the year (-12%).
As to the valuation, we feel that the high end of the range looks probable in light of the strong fundamentals of CFAO and the expected return to double digit growth next year.

Implications for PPR.
Net debt should decrease from €5.4bn in 2009 to around €4.3bn by the end of 2009 (2.2x EBITDA).
We estimate that the listing will dilute PPR’s EPS by around -4.5% in 2010 (based on the high end of the CFAO valuation range).
However, we believe that it should help PPR to regain some room for manoeuvre and possibly take the full control of Puma.

PPR trades at a 30% discount to peers (12.3x 2010) in the luxury sector, based on 2010 estimates (post CFAO IPO), which provides a a good entry point. We raise our valuation range to €92-€95 per share.

PPR

Stock Price: €81.9
Conclusion: Notwhistanding recent weakness, PPR remains fully priced based on our €80-85 valuation range. The risk of dilution related to the CFAO spin off needs to be clarified.

Q3 sales down 7.6% reported, down 8% like for like (9m sales down 5% to €13.8bn, down 6.6% like for like) No guidance given for 2009.

Except for Fnac and Conforama, PPR reported deteriorating sales in Q3, notably for Gucci group.
Gucci sales declined 10% in Q3, as a result of falling revenues at Gucci brand (-7%), Bottega Venetta (-11.6%) and Yves Saint Laurent (-20%). Gucci suffered from its huge exposure to wholesale at a time when distributors keep reducing inventories levels.
Despite improved sales in September and early October, we feel that visibility remains poor for the end of the year.

Since the announcement on October 7th that PPR would list a majority stake in CFAO by the end of the year (view our recent comment), the stock lost almost 9%. We question the timing of the spin off at a time when CFAO is impacted by poor sales in its automotive business. We think that the dilutive impact will be significant in the absence of a quick reinvestment. We also believe that other retail assets, less exposed to emerging markets, will be more difficult to sell.
As result, PPR’s earnings outlook should remain the key drivers of our valuation. We expect EPS to fall by 9% this year. 2010 will depend on the CFAO listing. EPS growth (+3+4%) should be held back by the expected dilutive impact of the CFAO spin off.

PPR

Stock price: €89.6

Conclusion: We have mixed feelings related to the CFAO spin off. On the one hand, focus on lifestyle brands should help to rerate the stock. On the other hand, we think that CFAO should have been the last on the list given its growth profile. However, Conforama, Redcats or Fnac are probably more difficult to dispose in the current environment. Although the dilutive impact of the spin off does not leave much room for rerating, it could help PPR to gain the full control of Puma.

PPR intends to list the shares of CFAO, its African automotive and pharmaceutical distribution business, by the end of the year depending on market conditions.

-Strategically, it should help the group to focus on lifestyle brands in broader consumer and luxury markets which offer both superior growth and higher margins.

-At what price ? nothing compares with CFAO. However, CAGR in sales and profit reached 11% and 15% respectively between 2004 and 2008. We feel that the contraction visible in 2009 should not hide strong medium term growth potential. Assuming 8x multiple of EBITDA (in line with PPR valuation) suggests an entreprise value of €2.4bn, based on our 2010 estimates.

-What would be the impact on earnings and net debt ? Assuming the sale of 60% to investors, net earnings would be diluted by around 6% from €7 per share to €6.6 per share estimated for 2010. Net debt would decrease to €4bn, representing 2.2x EBITDA.

-We believe that using the bulk of the proceeds to buy back the minority shareholders of Puma (at a 20% premium) would reduce the dilutive impact at around 2-3% based on our F10 estimates.

Where do we end from a valuation standpoint ?
PPR trades today at 12.8x P/E and 8.1x EV/EBITDA based on F10 estimates.
Following the sale of 60% of CFAO, PPR would trade at 13.7 P/E and 8.6x EV/EBITDA, on our estimates.
Assuming the buy back of Puma shareholders, PPR would trade at 13.1x P/E and 9.2x EV/EBITDA.
Compared with LVMH (17.2x P/E, 9.1x EV/EBITDA based on F10 estimates), we find the EV/EBITDA discount not attractive enough to buy PPR. We think that a further rerating would require the disposal of its other retail businesses which offer lower growth and profits.

PPR

Stock price: €86.5
Conclusion: We missed the rerating of the stock fully justified by surprisingly solid results in H1. We think it is fairly priced today, based on our revised fair value of €85-90 per share.

H1 results: Sales down 3.6% reported (down 5.9% like for like), EBIT fell by 4.8% and EPS declined by 19% to €2.22 ( earnings increased 3% adjusted for the non cash accounting adjustments). No guidance given for the year

We expect PPR to continue to face a weak economic environment in H2 in its retail business (Fnac, Conforama, Redcats, even CFAO). Lower consumer spending in France in July and August do not bode well for Q3. In spite of a 10% decline in sales expected for the luxury goods industry in 2009, we think that the Gucci division should continue to outperform peers. Gucci can rely on its increasing exposure to emerging markets, which account today for 31% of sales. We expect sales at Gucci to fall by around 4% in H2, vs -3.7% in H1, reflecting additional gains in market share. Gucci is also relatively less dependant than peers on “hard” luxury goods (watches and jewellery), which tend to be more cyclical than apparels. In addition, comparison will start to be easier by the end of the third quarter.

We were positively surprised by H1 results. In such a difficult context, PPR’s management succeeded in preserving gross margin (up 10bp), EBIT margin (stable) and EBITDA margin (up 20bp) in the first half of the year. As a result, operating income declined by 4.8%, while EBITDA eroded by less than 2%. Early February, both Conforama and Fnac announced cost reduction plans targeting savings of €50m and €35m respectively. Puma followed with a plan which should allow it to save €150m on an annual basis through to 2011. The luxury division is also making substantial savings responsible for the remarkable resistance of its margin (EBIT margin down only 70bp in H1, EBITDA margin almost stable).
According to management, cost focus should help to weather the storm and protect the bottom line. We are looking for a 40bp decline in EBIT margin this year to 8.1%. Adjusted net earnings could decrease by around 8% to €805m. From a cash standpoint, net cash outflow was €143m, representing an improvement of €169m compared with first half of last year, helped by lower capex and tighter inventories.

PPR trades at 13.5x and 12.3x our 2009 and 2010 estimates which implies a 27% discount to LVMH, in line with historical average. In order to bridge the gap, PPR will have to refocus the portfolio away from retail (Conforama, Redcats…) to luxury and life style. However, PPR might have to wait to get the right valuation for these assets. Our DCF confirms a valuation range between €85-90 per share.

PPR

Stock price: €59,5
Conclusion: Stock might consolidate until the release of poor H1 figures.

Q1 sales down almost 5% like for like, low visibility

Sales went down as expected by 4,9% like for like and 2,6% reported helped by positive forex. Management did not give guidance for 2009 but outlined the “deterioration of its operating environment”.

Gucci group (-3,4%) seems to resist better than Conforama (-10%), Redcats (-7%) or Fnac (-4%). Luxury sales growth in emerging markets, Asia ex Japan, helped to offset mid single digit decline in Western Europe and in the US.
The Gucci brand performed better than Bottega Veneta or YSL illustrating that bigger name have a better capacity to withstand an adverse environment.

It is too early to predict a rebound in sales this year and management is clearly focusing on the cost side in order to limit the damages to the bottom-line. Early February, both Fnac and Conforama announced plans to reduce costs by €35m and €50m respectively. However, it should not be enough to compensate for lower sales and it is reasonable to forecast operating income to fall by 16% in retail this year and 10% in the luxury sector leading to a 24% decline in EPS this year.

The stock is up almost 60% in 3 months as investors went too far on the downside last year. PE remain modest at 11.4x 2009 estimates. Our fair value based on DCF is closer to €67 per share, but poor anticipations for the first half should prevent investors from buying it now. In addition, it might take time before management regains some room for manoeuvre to dispose the retail assets of the group. As a result, short term rerating should be exclusively based on improved earnings visibility.