Business Of Fashion : Why an LVMH-Ralph Lauren Deal Is Unlikely

Why an LVMH-Ralph Lauren Deal Is Unlikely
The American brand is too far removed from LVMH’s core luxury business model.

Could LVMH really be thinking about acquiring Ralph Lauren?

This week, an Axios report, based on anonymous sourcing, speculated that the French luxury conglomerate and American brand, whose eponymous founder remains its largest shareholder, have recently been in talks. (A representative for LVMH declined to comment on the report. A representative for Ralph Lauren said that the company does not comment on rumours.)

The story generated plenty of conversation: the luxury industry remains in rapid consolidation mode, and LVMH has shown that it is keen on buying billion-dollar-plus businesses to further cement its dominant position as the global market leader. (At the end of 2019, it scooped up the American jeweller Tiffany for $16.2 billion, the largest deal in its history.)

Ralph Lauren, which generated $4.4 billion in the fiscal year ending March 27, 2021, has seen sales soar as pent-up demand benefitted fashion brands across the board. Last spring, sales in North America, its largest market, were up 301 percent year over year.

This isn’t the first time there’s been speculation about a potential Ralph Lauren sale. LVMH rival Kering has also been rumoured to have looked at the company.

The reasons why are clear: the Ralph Lauren brand itself remains strong, even in the US, where it is heavily distributed.

“When asked to name ‘luxury clothing brands,’ Ralph Lauren is always in the top-10, usually in the top five,” said Robert Passikoff, founder and president of Brand Keys, which surveys consumers about brand sentiment. A February 2022 Prosper Insights survey of almost 8,000 American consumers also found that nearly 11 percent had purchased something from Ralph Lauren over the past six months, up from 9.5 percent in 2021. Among 1,500 “fashion forward” customers, 19 percent bought something from the brand over the past half year.

LVMH has had plenty of success in the US market with its European heritage brands like Louis Vuitton and Dior, but not with more accessible, American-born brands including Donna Karan International, which it bought in 2000 and sold 16 years later after failing to turn it into a powerhouse. Its other major American fashion label, Marc Jacobs, was once on its way to billion-dollar status — pegged at the next Michael Kors, with talks of a potential IPO spin off. But after shutting down the contemporary, department store-reliant Marc by Marc Jacobs label in 2015, it underwent a major reset, only recently experiencing a new wave of success thanks, in part, to the popularity of its lower-priced Heaven collection.

But there are also some curious particularities that make a Ralph Lauren deal with a major French luxury conglomerate unlikely. For one, Ralph Lauren, the company’s 82-year-old executive chairman and chief creative officer, has never communicated a clear succession plan, nor has he ever communicated any interest in selling.

Another problem is that Ralph Lauren is fundamentally a different fashion business than the ones LVMH currently operates.

It starts with history. American fashion brands were built in a different way than European ones. Instead of being rooted in couture — which is all about originality, attention to detail and quality — they stem from the 7th Avenue rag trade, where the main business was making clothes cheaply and quickly, with a heavy sheen of marketing.

Ralph Lauren’s genius is in his cinematic world-building abilities, which he began in 1967 with a rack of ties. His aesthetic draws as much from New England preppiness as it does the English countryside and French aristocratic style, and now encompasses everything from home goods to kid’s clothing. But a significant amount of its products are sold in the off-price market. Out of 239 directly owned stores in North America, 195 — or 81.6 percent — are Polo Factory stores. In Europe, 63 percent are outlets.

Why is this such a sticking point? You can certainly find LVMH products at stores like TJ Maxx on occasion, and the group runs its own network of outlet stores. But most Ralph Lauren clothes, home goods and accessories are priced in the mid-range, not at the high end, which means the profit margins are often far lower no matter if they are discounted or not.

What’s more, despite its strong reputation, Ralph Lauren has not managed to play seriously in luxury fashion outside of men’s suiting. Its leather goods in particular — bread and butter for most big houses — are not held in the same regard as Dior, Gucci or Saint Laurent. While a large swath of consumers are happy to buy a $95 polo shirt from the brand — especially when it’s on sale — it is not a go-to label for four-figure handbags.

The company has made strides on these fronts over the past few years while enacting its turnaround effort, exiting lower-brow retailers like Kohl’s and decreasing its reliance on the off-price market. Still, Ralph Lauren might be a better target for Capri, which owns Michael Kors, or PVH, which owns Calvin Klein and Tommy Hilfiger. They have a more similar distribution strategy and pricing architecture.

However, these might not be as attractive acquirers to Lauren. Selling to a prestigious group like Kering or LVMH would be seen as a “crowning achievement,” as Axios put it, and secure his family’s fortune.

He can, after all, choose to do nothing, as long as he continues to satisfy shareholders.

Barrons : SPACs Are Scrambling to Find Mergers. What That Means for Investors.

SPACs Are Scrambling to Find Mergers. What That Means for Investors.

The clock is ticking for many special-purpose acquisition companies, or SPACs, formed in 2020, including the biggest, Bill Ackman’s $4 billion Pershing Square Tontine Holdings . They all have just months to find a deal or risk having to give investors back their money.

Some 602 SPACs, also known as blank-check companies, with a combined $162.4 billion in funds, are currently out hunting for acquisitions, according to data from SPAC Research.

“A number of SPACs will likely not find merger targets and will expire and return the cash in trust to investors because there are too many SPACs chasing deals right now,” says Justin Kotzin, a managing director and head of capital markets at growth-equity firm General Atlantic. “They can’t all find attractive deals.”

A SPAC raises money in an initial public offering with the goal of finding a private company and merging with it. The money raised in the IPO sits in a trust earning interest until a merger is closed. If there is no deal in a period—typically two years—investors get their money back.

If hundreds of SPACs have to return money, that would be a significant shakeout, says Evan Ratner, president of Levin Capital Strategies, a New York money-management firm that has invested in SPACs. “This would be good for surviving SPACs, because there will be less competition for them to find acquisitions,” he says.

Pershing Square Tontine (ticker: PSTH) called off its plan to buy 10% of Universal Music Group in July 2021. As a result, it now faces a July 24 deadline to close another merger. That can be extended to Jan. 24, 2023, if it has a letter of intent, an agreement in principle, or a definitive agreement with a business, according to regulatory filings. A spokesman for Pershing Square Tontine declined to comment.

Social Capital Hedosophia VI (IPOF) is another big SPAC from 2020 that has yet to clinch a deal. One of the blank-check companies from venture capitalist Chamath Palihapitiya, it raised $1.15 billion and has until Oct. 14 to find and close a business combination, according to filings. Palihapitiya has another SPAC from that year, the $460 million Social Capital Hedosophia IV (IPOD), which has the same deadline and hasn’t closed a deal yet, either. Social Capital declined to comment.

All three are part of the SPAC class of 2020—the 247 blank-check companies that listed their shares that year, according to Refinitiv data.

A little more than half, or 58%, of those SPACs have found and closed acquisitions, an analysis by Barron’s has found. That means that 105 SPACs, including 33 that have deals pending and 72 that have yet to find a target, haven’t been able to complete a merger.

SPACs became wildly popular during the second half of 2020—the 247 SPACs that went public that year was, at the time, the most ever. That record was toppled in 2021 when 613 blank-check companies began trading, according to Dealogic.

Don’t expect records to get broken this year. Broad market volatility and inflation fears have caused the pace of new issues—both SPACs and traditional IPOs—to slow considerably. Forty-one SPACs have filed to list their shares as of Feb. 4, down nearly 76% from 171 SPACs for the same period in 2021.

Blank-check companies are promoted as a way for retail investors to participate in buyouts that are usually reserved for private equity or venture capital. Retail investors can buy shares of a shell-company SPAC once they begin trading, usually at a price of $10 a share.

Many SPACs, however, haven’t done well after going public. While predeal SPACs would often trade at a premium, for several dollars above $10 a share, that is now rarely the case. Of the class of 2020, about 75%, or 187 SPACs, are trading at or below $10 as of Feb. 23, according to Renaissance Capital, which counted 248 SPACs listing in 2020.

The SPAC & New Issue exchange-traded fund (SPCX) is down more than 13% over the past 12 months. Healthcare-services firm MultiPlan (MPLN) is off 62% from its $10 offer price, while Grab Holdings (GRAB), the food-delivery company, is down 47%.

An outlier has been Lucid Group (LCID), an electric-vehicle start-up, which is up 140% from its $10 offer price.

About 59% of the SPACs that have listed their shares since 2020 and have not found deals are trading below $10, Renaissance says.

The fact that so many predeal SPACs are now trading below $10 presents an opportunity for investors.

SPAC shareholders can redeem their shares for the $10 a share trust value at the time of a vote on a potential merger, if they don’t favor the deal. That is also the case if the SPAC doesn’t find a partner by its deadline.

“We think this is a terrific way to enhance returns,” John Levin, CEO of Levin Capital, tells Barron’s. “If you buy a SPAC at $9.85 and you get $10, a yield of 1.5% in a short period is still very desirable.”

Once the SPAC completes a merger, investors can no longer redeem, and the shares trade like any other stock.

So, after a frothy boom, SPACs are suffering through some rough times. They may emerge stronger, but for now, investors can get many of these once-hot issues on the cheap.

Barrons : Movie Theaters Are Making a Comeback. That’s Boosting This Laser Proje

Movie Theaters Are Making a Comeback. That’s Boosting This Laser Projection Company.

Shares in Belgian digital imaging and projection company Barco have fallen off a cliff since the beginning of the pandemic because many businesses it sells to were staggered by Covid-19 related problems.

But Barco’s fundamentals remain strong. And the collapse of its shares (ticker: BAR.Belgium), which plunged from a high of 33.86 euros ($38.50) in February 2020 to €13.46 last year, offered a buying opportunity. It continues, even though they’ve recovered to €21.30.

Barco’s entertainment division, accounting for 38% of revenue, produces projection equipment for cinemas, festivals, and live events. Prior to the pandemic, Barco appeared likely to benefit from theaters that were replacing old Xenon lamp projectors with its digital laser equipment. Instead, consumers streamed films at home, and there were concerns whether some heavily indebted movie-theater groups would survive, which weighed on Barco’s stock.

Those fears proved unfounded, and the ranks of movie theaters are actually growing again. New builds in the Middle East and China could increase the number of global screens to 240,000 from 200,000, according to Berenberg analyst Trion Reid, citing Barco management in a December note. Barco has up to a 60% market share in Chinese cinemas.

That should boost earnings. In a February note, Reid forecasted that revenue for the first half of 2022 could increase 20%. The company’s earnings before interest, taxes, depreciation, and amortization, or Ebitda, margin is expected to exceed the 7.3% generated in full-year 2021. Reid estimates that Barco shares could rise about 27%, to €27, while KBC Securities has a more modest €23.50 price target.

As Reid wrote, the postpandemic outlook for Kortrijk, Belgium-based Barco is bright because of the larger opportunities in cinema, and because of a new videoconferencing product that’s well-suited to hybrid work.

Reid was referring to ClickShare, Barco’s line of wireless equipment that automatically connects laptops and mobile phones to audiovisual displays in offices, enabling individuals to easily participate in meetings in person or remotely.

Barco, which has a market value of €2.18 billion, began in 1934 assembling radios with components from the United States. Its name is short for Belgium American Radio.

Today, the company employs more than 3,000 workers. It fetches 32.4 times this year’s expected earnings, and is valued in line with its peers. Despite a profit warning in December that was largely due to supply-chain issues, sales for 2021 hit €804 million, up 4% from 2020’s. Barco’s Ebitda for 2021 was €58.5 million, up from €53.6 million in 2020, but well off 2019’s €153 million.

“While still dealing with uncertainties, we start the year with a strong order book, solid balance sheet, and believe we are in a good position to resume executing toward our long-term financial objectives,” said co-CEOs An Steegen and Charles Beauduin in a statement when earnings were posted in February.

Entertainment is only a part of the business. Barco has a healthcare arm that produces high-definition screens that surgeons use during operations to live- stream audio and video to specialists and record content. Other screens are used in diagnostics devices for radiography, dental procedures, and pathology.

During the pandemic, health authorities diverted funds to deal with Covid. But investments to upgrade operating- room technology are expected to return. Barco says that its healthcare group will expand to a third of sales and almost half of earnings before Ebitda.

FT : Berkshire Hathaway profits soar but Warren Buffett bemoans lack of good dea

Berkshire Hathaway profits soar but Warren Buffett bemoans lack of good deals
Sage of Omaha warns low interest rates have inflated valuations across financial markets

Warren Buffett on Saturday lamented the few attractive investments available to his sprawling $713bn Berkshire Hathaway conglomerate, warning that low interest rates over the past two years had inflated valuations across financial markets.

The musings, in Buffett’s long-anticipated annual letter, accompanied results that showed Berkshire’s operating profits had soared 45 per cent from a year before to $7.3bn in the final three months of the year. The gains were propelled by strong results from its BNSF Railway and the string of electric utilities it owns.

Buffett, 91, told Berkshire investors that both he and his longtime right-hand man Charlie Munger had found “little that excites us” as they sought out investments with which to plough some of the group’s gargantuan $146.7bn cash pile into.

“Charlie and I have endured similar cash-heavy positions from time to time in the past,” he said. “These periods are never pleasant; they are also never permanent. And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital.”

Buffett, who has been criticised for not using more of the company’s available cash to buy up companies to add to its portfolio, has instead turned heavily to buying back Berkshire stock. The company spent $27.1bn on share repurchases last year, and Buffett noted in his letter that it had already bought a further $1.2bn of Berkshire stock in 2022.

The view from the doyen of the investment industry comes after a turbulent three months in financial markets, with investors dumping the shares of lossmaking companies as they race out of riskier corners of the stock market.

“Speaking less politely, I would say that bull markets breed bloviated bull,” Buffett said, before trailing off.

The moves have been spurred largely by a shift from the Federal Reserve, which is readying to raise interest rates for the first time since 2018 as it works to tame inflation and curb excesses it sees in markets.

“Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever,” Buffett wrote. “Other factors influence valuations as well, but interest rates will always be important.”

Conditions in the market have started to favour old-line industrial conglomerates, financial behemoths, energy giants and utilities — all Berkshire business lines. The company’s stock has advanced 6.4 per cent so far this year, far ahead of the 8 per cent slide by the S&P 500.

Many of the excesses that Buffett and Munger have warned about in recent years have started to seep out of the market. The average company in the Russell 3000, which captures both large and small businesses, is down more than 30 per cent from their 52-week highs, Financial Times calculations show.

Data from Finra, Wall Street’s watchdog, also signal that some of the speculation that dominated trading activity in 2021 has been washed out. The amount of borrowed money being used to fund stock positions has dropped by more than a tenth since October.

“People who are comfortable with their investments will, on average, achieve better results than those who are motivated by ever-changing headlines, chatter and promises,” Buffett said.

>>> US Close Dow +2,51% S&P +2,24% Nasdaq +1,64% Russell +2,25%

Closing Stock Market Summary

The S&P 500 rose 2.2% on Friday in a continuation of yesterday's rebound rally, as the market hoped that the deadly Russia-Ukraine situation would soon be over with minimal economic impact to the U.S. 

The Dow Jones Industrial Average (+2.5%) and Russell 2000 (+2.3%) also gained more than 2.0% while the Nasdaq Composite (+1.6%) was the relative underperformer with a 1.6% gain after outperforming yesterday. 

Prior to the open, futures turned positive after reports indicated that Russia was ready to seek diplomatic solutions with Ukraine in Minsk, Belarus. Presumably, that would happen after Russia gets what it wants since Russian troops were reportedly closing in on Ukraine's capital. 

Since no sanctions were placed on Russia's oil and gas exports, there was optimism that the situation wouldn't exacerbate inflation pressures as initially feared. WTI crude ($91.59/bbl, -1.21, -1.3%), natural gas ($4.51/MMBtu, -0.16, -3.3%), and wheat ($859.60/bu, -$75.00, -8.0%) futures each settled lower.

The advance in equities was steady and broad-based with all 11 S&P 500 sectors closing higher between 1.4% (information technology) and 3.6% (materials). Interestingly, the defensive-oriented consumer staples (+3.1%), utilities (+3.1%), and health care (+3.0%) sectors were among the leaders, as investors respected the possibility for a negative-sounding update over the weekend. 

There was a slight hiccup on news that the U.S. will join the EU with its own sanctions on President Putin, but stocks still closed at session highs.

Despite the improved geopolitical perspective, investors (and the Fed) were reminded that inflation is still a sticky situation. The Fed's preferred inflation gauge -- the PCE Price Index -- continued to run hot in January. 

Specifically, the PCE Price Index rose 0.6% (Briefing.com consensus 0.5%), taking the year-over-year growth rate to 6.1% from 5.8%. The core PCE Price Index, which excludes food and energy, rose 0.5% (Briefing.com consensus 0.5%), taking the year-over-year rate to 5.2% from 4.9%.

The 2-yr Treasury note yield increased five basis points to 1.57%, although that was below the level it was trading prior to the PCE inflation data. The 10-yr yield increased two basis points to 1.99%. The U.S. Dollar Index fell 0.6% to 96.54. The CBOE Volatility Index fell 9.0% to 27.59. 

Reviewing Friday's economic data:

  • Personal income was unchanged month-over-month in January (Briefing.com consensus -0.3%), but real disposable personal income was down 0.5%. Personal spending was up a robust 2.1% (Briefing.com consensus 1.5%), but clearly, consumers were spending out of savings as the personal savings rate, as a percentage of disposable personal income, fell to 6.4% from 8.2%. The PCE Price Index was up 0.6% (Briefing.com consensus 0.5%), taking the year-over-year rate to 6.1% from 5.8%. The core PCE Price Index, which excludes food and energy, was up 0.5% for the fourth straight month  consensus 0.5%), taking the year-over-year growth rate to 5.2% from 4.9%.
    • The key takeaway from the report is that the Fed still has an acute inflation problem on its hands with, or without, the Ukraine situation.
  • Durable Goods Orders jumped 1.6% month-over-month January (consensus 0.6%) following a 1.2% increase in December. Excluding transportation, durable goods orders were up 0.7% (consensus 0.3%) on the heels of a 0.9% increase in December.
    • The key takeaway from the report was the recognition that business spending picked up in January, evidenced by the 0.9% increase in nondefense capital goods orders excluding aircraft that followed a 0.4% increase in December.
  • The final reading for the University of Michigan Consumer Sentiment Index for February was revised up to 62.8 (consensus 61.6) from the preliminary reading of 61.7. The final reading for January was 67.2.
    • The key takeaway from the report is that the decline in sentiment in February was driven entirely by households with incomes of $100,000 or more, demonstrating the growing concerns about inflation, rising interest rates, and loss of purchasing power that could eventually manifest itself in weaker levels of consumer spending in coming months.
  • Pending home sales fell 5.7% m/m in January following a revised 2.3% decline (from -3.8%) in December.

Looking ahead, investors will receive the Chicago PMI for February and the Advance readings for International Trade in Goods, Retail Inventories, and Wholesale Inventories for January on Monday. 

  • Dow Jones Industrial Average -6.3% YTD
  • S&P 500 -8.0% YTD
  • Russell 2000 -9.1% YTD
  • Nasdaq Composite -12.5% YTD

WSJ : SEC Proposes Rules for More Disclosure from Short Sellers

SEC Proposes Rules for More Disclosure from Short Sellers

WASHINGTON—Investors who make big bets against company stocks could soon have to report more information about their positions to the Securities and Exchange Commission.

The SEC proposed rules Friday aiming to increase transparency around “short selling,” whereby traders borrow company shares and then sell them in hopes of buying the stocks back at a lower price in the future. The commissioners, three Democrats and one Republican, voted unanimously in favor of the plan. The rules could be finalized after the agency receives and analyzes feedback from the public.

Under the proposed rules, market participants that hold large short positions in stocks would be required to report those positions and related short-sale activity to the SEC on a monthly basis. The agency would then aggregate and publish that data for each security, while keeping the identities of money managers and individual short positions confidential.

“The raw data reported to the Commission…would help us to better oversee the markets and understand the role short selling may play in market events,” SEC Chairman Gary Gensler said. Mr. Gensler was nominated by President Biden.

Friday’s proposal comes as regulators continue to grapple with the implications of the January 2021 trading frenzy in GameStop Corp. and other so-called meme stocks.