The battle for "bling" could be heating up - Prudential ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
A N A LY S I S
iStock 458591871
The battle for “bling”
could be heating up
Kaitlin Byrne
PORTFOLIO MANAGER
i KEY TAKE-AWAYS T owards the end of 2019, the
world’s high-end jewellery investors
were given a reason to be excited about
the coming year with the announcement
The combination of Tiffany and
of the proposed buyout of Tiffany & Co,
LVMH could create even stronger
the US’s number-one jewellery brand,
competition for Richemont and other
by European luxury group LVMH. What
top global jewellery brands, given
kind of shake-up could materialise in
the two companies’ complementary
this exclusive market of historic brands,
market presence.
and what innovations could it spur in
The merged LVMH-Tiffany group the competition for the wallets of the
will overtake the more successful rich and famous? Here we take a look
Richemont in size, and key will be at what the transaction could mean
Prudential Investment Managers ©
whether LVMH is able to turn around for the global jewellery market and for
Tiffany’s slumping revenues. investors in LVMH and Richemont, one
of South Africa’s larger listed global
corporates and a keen competitor of
LVMH and Tiffany.
Consider this QUARTER 01 2020 Page 1
A N A LY S I S The battle for “bling” could be heating up
As equity analysts, we are able to at a lower margin than jewellery,
have a glimpse into the world of the margin they earn from jewellery
branded jewellery because three of alone is even higher.
the globe’s most popular jewellery
brands are all currently owned by Yet Richemont’s overall success has
publicly listed companies – Cartier masked some difficult periods. The
(owned by Richemont), and Tiffany group used to be more famously
and Bvlgari (owned by LVMH). Apart known for its numerous luxury watch
from these three large brands and a brands including Cartier, IWC and
few other big branded names, the Panerai, which, along with the rest of
jewellery market globally is highly the global watch market, experienced
fragmented. This market includes a major expansion until 2013. At
engagement rings, high-end jewellery this point, the Chinese government
and jewellery collections along a wide clamped down on “gifting” in the
range of price points, and usually public sector, resulting in pressure on
excludes luxury watches. However, watch sales. After years of high growth,
here we include them as key parts of the sudden slowdown in sales resulted
the businesses. in an oversupply in the market that is
taking years to correct. As investors
Richemont has pulled ahead in
focused on the declining watch margins
recent years
within Richemont and the continuous
Richemont, which owns Cartier
buybacks of stock from wholesalers to
(jewellery and watches) and Van Cleef
reduce the excess watch stocks, global
& Arpels within its jewellery Maison,
jewellery sales continued to rise. And
is a good example of a company
because jewellery has margins nearly
which has made a major success of
double those of watches, jewellery
its jewellery brands and managed
to continue to grow these year after became by far the largest source of
year – across revenue and operating the group’s operating profit.
profits. In fact, they have managed to Graph 1 shows this change in the
expand the margins in their jewellery composition of Richemont’s operating
division from 20% to 30%. And because profit over nearly 25 years, with its
Prudential Investment Managers ©
this figure includes Cartier watches jewellery business now accounting
Consider this QUARTER 01 2020 Page 2A N A LY S I S The battle for “bling” could be heating up
for the majority of the value of the growth within the jewellery business.
company. At the same time, Graph 3 Prudential’s portfolios have benefitted
details the strong revenue growth and from this overweight position, as the
high margins Richemont has generated share delivered a 20.1% return in 2019.
from its jewellery business relative to
LVMH in recent years. Has LVMH simply been lucky?
LVMH, which is predominantly known
Prudential has held an overweight for its leather bags and clothing (Louis
position in Richemont over the last few Vuitton, Christian Dior) as well as its
years as we felt the value of its strong champagne (Moet & Chandon) and
jewellery business and brands was not cognac (Hennessy), has been selling
fully appreciated by the market, as watches and jewellery since the mid-
concerns around the declining watch 1990s, but watches and jewellery make
business masked the compounding up only 9% of LVMH’s total revenue.
Graph 1: Richemont operating profit* shows strong growth
(Euro millions)
3 000
2 500
2 000
1 500
1 000
500
0
-500
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Jewellery OP Leather and accessories OP Head office and unallocated costs OP Watches OP
YNAP OP Operating profit Writing instruments, leather, clothing OP
*Split of Richemont’s operating profit between the different divisions. Richemont includes Cartier Watches within its jewellery
Prudential Investment Managers ©
division, therefore pure jewellery profit excluding all watches is slightly less than shown above.
SOURCE: Prudential & Company reports
Consider this QUARTER 01 2020 Page 3A N A LY S I S The battle for “bling” could be heating up
Investor interest in LVMH’s jewellery Tiffany’s revenue growth has been
really only gained traction post its pedestrian, and stifled by shareholders
acquisition of Bvlgari in 2011, when who have focused on cash flows. This
it demonstrated its ability to double has restricted its ability to invest for
Bulgari’s revenue and expand margins long-term growth.
from an estimated 9% to 24%. The
key question is whether LVMH really Following the news of the acquisition,
has found the secret to creating a there was mixed reaction and
highly profitable jewellery business, speculation by the market as to why
or whether it was exceptionally lucky LVMH would go after a company such
in its timing of the acquisition, which as Tiffany, especially given its high
followed on the heels of the Global proportion of engagement jewellery
Financial Crisis (GFC) -- hence Bvlgari’s (almost one-third of its product mix),
margins had plummeted and then which is considered to be a fairly low-
benefitted from the good growth in growth market segment. Equally,
the jewellery market post 2011. Tiffany does not craft “distinguishable”
jewellery pieces, a key selling point
The answer is probably somewhere in
which rivals Bvlgari and Cartier have
between the two. We would suggest
kept core to their brands.
that the company’s ability to make a
success of Tiffany & Co, their largest
acquisition to date, will get us closer Table 1: Global iconic jewellery
to the real answer. LVMH announced houses
the planned US$16.9 billion purchase
(some R236 billion) in late 2019, and is Jewellery Brand Parent Founded
acquiring Tiffany at margins that are
Cartier Richemont 1847
fairly close to their long-term average.
Van Cleef & Arpels Richemont 1906
Buccellati Richemont 1919
“Tiffany’s revenue growth has
Bvlgari LVMH 1884
been pedestrian, and stifled by
Chaumet LVMH 1780
shareholders who have focused Fred LVMH 1936
on cash flows”
Prudential Investment Managers ©
Tiffany Tiffany & Co 1837
SOURCE: Company Reports
Consider this QUARTER 01 2020 Page 4A N A LY S I S The battle for “bling” could be heating up
What’s the deal? the company. Over the past few
years, Tiffany has generated between
As detailed in Table 2, LVMH US$500-700 million free cash flow (FCF)
has made an all-cash offer every year after all capital investments
to acquire Tiffany for a total for a 3.5% FCF yield. This indicates
value of $16.9bn and an equity value that for LVMH to generate a decent
of $16.2bn, equivalent to US$135 per
return on their investment, they will
share, a 50% premium to the share
need to ensure that Tiffany returns to
price at which Tiffany was trading prior
revenue growth and margins can be
to the offer. Based on Tiffany’s 2018
improved further, to realise at least
results, the multiple paid is a 16.6x
5% growth per annum in order to
EV/EBITDA, and a 3.8x EV/Sales, which
get to an 8.5% return (3.5% free cash
is comparable to its previous Bvlgari
flow yield + 5% cash flow growth).
and Christian Dior acquisitions on an
EV/Sales basis, but seemingly cheaper
Given the number of successful deals
than their Bvlgari acquisition on an
that LVMH has done over the years,
EV/EBITDA basis. However, the latter
especially its turnaround of Bvlgari,
is due to the depressed margins in
the market is clearly optimistic that
Bvlgari at the time of that acquisition
LVMH can work its magic on Tiffany
compared to Tiffany’s more normalised
margins now. in the same way. The share price
of Tiffany has shot up some 46%
The deal will take LVMH from a since the deal was announced, while
net debt/EBITDA of 0.5x to around LVMH’s share price has gained 16%.
1.6x, which is still a fairly low debt The transaction is expected to close
level, posing little financial risk to in mid-2020.
Table 2: Recent LVMH Deal Multiples
Enterprise Year
Acquisition EV/ EBITDA EV/Sales
Value Acquired
Tiffany & Co $16.9bn 16.6x 3.8x 2020
Bvlgari $5.2bn 22x 3.6x 2011
Christian Dior Couture (Leather & fashion) $7bn 15.6x 3.5x 2017
Prudential Investment Managers ©
SOURCE: Prudential and company reports
Consider this QUARTER 01 2020 Page 5A N A LY S I S The battle for “bling” could be heating up
Graph 2: Tiffany and LVMH revenue split by geography
Tiffany Total Revenue LVMH Watches & Jewellery Revenue
Other
Europe 2% Other markets
11% 15%
Rest of Asia
35%
France
6%
Japan
15%
Americas
44%
Rest of Europe
Asia-Pacific 23%
28%
Japan
United States 12%
9%
SOURCE: Prudential & Refinitiv, LVMH website
Why would LVMH spend such a huge attractive jewellery designs is also
sum to acquire Tiffany rather than important, they can be easily replicated,
expanding their own jewellery lines and new designs can be introduced
organically? First, LVMH has always by competitors. Meanwhile, a strong
acquired brands and is essentially a brand name and what that brand
conglomerate of numerous acquisitions. represents keeps consumers from
The brands they have purchased in the switching out of the brand, creating
past, including Tiffany, were in fact a high barrier to entry.
founded a few hundred years ago --
this type of history simply cannot be Tiffany: An iconic US brand
replicated. Just for interest, we have Tiffany has always had an exceptionally
strong brand in the US, being the
listed the founding dates of some
country’s number-one preferred
of the world’s best known jewellery
jewellery brand. The company was
brands in Table 1. Maintaining or established in 1837 by Charles Lewis
improving on the brands’ strength is Tiffany and is known for its diamond
the number-one priority for luxury
Prudential Investment Managers ©
rings and iconic Blue Box, which has
goods companies. Although having been used since Tiffany first started
Consider this QUARTER 01 2020 Page 6A N A LY S I S The battle for “bling” could be heating up
Graph 3: Richemont overtakes LVMH in most key financial measures
Combined revenue (Euro millions)
5 000 40%
4 500
35%
4 000
30%
3 500
25%
3 000
2 500 20%
2 000
15%
1 500
10%
1 000
5%
500
0 0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
LVMH watches and jewellery TIF revenue Richemont Jewellery (excl Cartier watches)
LVMH watches and jewellery margin TIF revenue margin Richemont Jewellery (excl Cartier watches)
SOURCE: Prudential and company reports
selling its diamond rings in 1886. Over in the US has remained largely stable,
the past few years their presence while its Asia-Pacific numbers have
and brand image in China has been grown by 23%, indicating Tiffany’s
growing strongly, elevating it now to strong focus on the higher-growth
the number-two preferred brand in Asian market. LVMH has an even bigger
China after Cartier, according to an reach, with 428 watch and jewellery
HSBC survey. This is Tiffany’s largest stores globally. Tiffany management
attraction for LVMH -- its strong brand believes that being within the LVMH
name and history. stable will allow them to leverage off
LVMH’s expertise in the very important
The second attractive attribute that Asian market. In the same way, LVMH
Tiffany has is its broad retail footprint. can leverage off Tiffany’s experience
It has 321 company-operated stores in the American market. As shown in
globally, 93 of which are in the United Graph 2, the United States accounts
States, its home market, and 90 in Asia for only 9% of LVMH’s jewellery sales,
Pacific, the fastest-growing region.
Prudential Investment Managers ©
compared to Tiffany’s 44% in the
Over the past five years, its store count Americas region.
Consider this QUARTER 01 2020 Page 7A N A LY S I S The battle for “bling” could be heating up
Turning around subdued revenue Within LVMH, jewellery and watch
growth sales currently make up 9% of LVMH’s
One big challenge for LVMH as a revenue, but once the transaction is
new parent company will be tackling completed, this will almost double in
Tiffany’s sluggish revenue growth euro terms to 16% of group revenue.
over the last five years, which has Once combined, LVMH’s jewellery
allowed Richemont to overtake it, division revenue will exceed that of
as shown in Graph 3. In 2017 Tiffany Richemont.
tried to revive growth itself through a
transformation strategy that included Looking ahead, Richemont will be
renewing its product offerings and closely watching developments at
in-store presentations; strengthening the bigger, combined LVMH-Tiffany.
its brand message and committing to The threat posed to Richemont will
higher investment spending. In not be significant if LVMH can return
resisting the buyout, the company Tiffany to growth and, in so doing,
is tacitly admitting that it has not take market share from Richemont,
achieved its goals, and is therefore
after years of market share loss by
leaving it to LVMH to work its magic.
Tiffany. The increasingly competitive
LVMH’s acquisition of Tiffany, currently environment may in turn prompt
a standalone listed company, will Richemont to boost investment in its
result in Tiffany’s financial results own brands. Consumers are likely to
being reported within the larger LVMH be the real winners of any heightened
group, therefore allowing LVMH to rivalry, given that it could very well
increase investment into the brand, spur the creation of many new and
but without the same degree of wonderous pieces of jewellery to
investor scrutiny or publicly available ignite the consumer imagination and
financial information as currently. add bling to any occasion.
Kaitlin joined Prudential in 2015 as an Equity Analyst and was appointed as joint-Portfolio
Manager of the Prudential Dividend Maximiser Fund in January 2020. Prior to joining Prudential,
Kaitlin completed her articles at Ernst & Young, where she was responsible for auditing companies
in the Finance, Gaming and Leisure, Real Estate and Manufacturing sectors. With five years’
industry experience, Kaitlin holds a Bachelor of Accountancy degree from Stellenbosch University
Prudential Investment Managers ©
and is a qualified CA (SA) as well as a CFA charterholder.
Consider this QUARTER 01 2020 Page 8You can also read
