FT Lex : Lindt: chocs away

Lindt: chocs away
As sales plateau in more mature markets, investors could be left with indigestion

Rich, sweet and gooey, Lindt chocolates never last long after Christmas. But, appetising as they are, eat too many and indigestion may follow. The same rule applies to investment in the shares of the premium Swiss chocolatier.

For decades, Lindt stock has enjoyed steep earnings valuation multiples. Its price-to-earnings ratio of 36 times compares with 20 for Nestlé and 24 for Barry Callebaut. For a long time, this could be justified by organic growth of between 6 and 8 per cent. But as chocolate sales plateau in more mature markets, it is no longer clear this target will be met. Hard as this is to believe in the wake of Christmas overconsumption, not everyone wants to stuff themselves silly with chocolate. 

People are eating more healthily. Consider North America, Lindt’s biggest market, worth about one-third of its SFr4.3bn ($4.3bn) in annual sales. There, Russell Stover, the US chocolate group Lindt bought in 2014, has been pinning its hopes on sugar-free chocolate.

However, that may not be enough to stop sales slipping. A note from UBS estimates US sales growth for Lindt in recent months has been just 1.3 per cent. This compares with 4 per cent in the Nafta region in the first half. It is part of a longer term shift. Lindt’s US market share has slipped from 9.3 per cent in 2014 to 8.7 per cent this year. Unsurprisingly, Lindt is looking for growth elsewhere.

Sales in China doubled in the half year, it said. But per capita chocolate consumption there works out at just 10g, against more than 4kg in America and almost 9kg in Switzerland. There is some way to go before China’s $3bn sales rise to a more alluring level.

There is some hope for Lindt. Higher cocoa prices, from an expected El Niño weather phase, could sooth any potential dyspepsia. If higher prices ensued due to poor harvests, Lindt could later pass these on to consumers, protecting margins. That, however, is a big “if”. Lindt, for the time being, remains an expensive treat.

WSJ : Luxury-Goods Industry Has a China Problem

Luxury-Goods Industry Has a China Problem
Top brands grow more dependent on Chinese shoppers, and fear volatility lies ahead

Luxury-goods makers’ overreliance on China became a problem in 2018—again. Investors have little choice but to get used to it.

Chinese consumers account for roughly one-third of sales and the lion’s share of growth for brands like Louis Vuitton, Chanel and Burberry . This has fueled extraordinary returns for their owners over the past decade.

But investors saw the downside toward the end of 2018. Stocks got whacked on the flimsiest of pretexts as worries about a spending slowdown spread. In October, social-media reports of customs checks on Chinese tourists bringing home shopping hauls wiped $21 billion from the valuations of Europe’s three biggest luxury companies, LVMH , Hermès and Kering, in a single day.

So far, the numbers don’t back up the worries. But investors haven’t heard from companies since third-quarter results in October, and demand for other big-ticket items, such as cars, has collapsed. LVMH warned that the Chinese habit of spending a higher proportion of income on luxury goods than Americans or Europeans could lead to more volatile growth. Fourth-quarter updates in January will be more closely watched than usual.

The market skew to China causes other problems, too. The Chinese make most of their purchases overseas, where prices are lower than at home. And they are more sensitive to exchange rates than other nationalities, according to Cartier owner Richemont. That makes it tough to predict where demand will crop up, meaning luxury companies have to be everywhere.

One solution is to target Chinese spenders as they travel through airports, where luxury sales are growing at a 7% clip. But competition for space in hubs like Hong Kong International and Paris-Charles de Gaulle is intense. Kering, which has a dedicated travel retail team, has opened four Gucci stores in London’s Heathrow Airport alone.

Courting Chinese tourists too assiduously can also annoy locals. Parisian department store Galeries Lafayette set up a separate shop to cater specifically to busloads of Chinese tour groups after overcrowding caused domestic shoppers to stay away. This helps explain why spending by European consumers, once the bedrock of French and Italian luxury brands, has stagnated.
The last time luxury growth ground to a halt was in 2015, after a fall in the Chinese currency. Within a year, sales were recovering strongly. Whatever happens this time around, the industry’s overreliance on Chinese spending seems likely to get worse in the long term. By 2025, sales to Chinese citizens will account for close to half of all purchases, according to estimates by consulting firm Bain & Co.

Companies can manage the problem with airport boutiques and tour-group-only outlets, but they can’t overcome it.

>>> US After Hours Summary:


After Hours Summary:

After Hours Gainers:

Companies trading higher in after hours in reaction to news: WIN +7.7% (sells legacy EarthLink consumer internet business for $330 mln to Trive Capital), PTI +2.8% (completed ph 1 study of PTI-428 as add on to subjects on Kalydeco; study met objectives), PTLA +2.2% (following late surge higher on FDA approval for Prior Approval Supplement for its large-scale, second generation Andexxa; also Chief Medical Officer John Lawrence resigned effective immediately), ADMP +1.3% (submits New Drug Application to FDA for naloxone pre-filled single dose syringe product candidate), EPD +0.6% (CEO disclosed the purchase of 10K shares worth ~$250K)

After Hours Losers:

Companies trading lower in after hours in reaction to news: NVAX -3.3% (filed prospectus supplement for the sale of up to $100 mln shares of common stock from time to time in at-the-market offerings), PFMT -3.2% (after seeing late move higher - closed the day up 50%)

>>> US Close Dow +1.15% S&P +0.85% Nasdaq +0.77% Russell +0.79%


Closing Market Summary: Stocks End Tumultuous 2018 on Positive Note

The trading session is over and so is the tumultuous 2018 that gripped the stock market. The S&P 500 (+0.9%), Dow Jones Industrial Average (+1.2%), Nasdaq Composite (+0.8%) pared yearly losses to 6.2%, 5.6%, 3.9%. The Russell 2000 (+0.8%), for its part, reduced its yearly loss to a disappointing 12.2%.

Thin trading conditions for most of the day contributed to another volatile session on Monday, though all 11 S&P 500 sectors did finish in the green. The health care (+1.4%) and consumer discretionary (+1.1%) sectors remained constant leaders, while the real estate (unch) and utilities (+0.2%) sectors underperformed.

Stocks jumped out to a gain of 1.0%, helped by another hopeful trade tweet from President Trump, but the early advance provided another excuse to sell into strength. The benchmark index would slip into negative territory (-0.1%) at around 11:30 a.m. ET.

The S&P 500 quickly recovered and traded in positive territory for the rest of the day, but not with the same confidence that contributed to its strong start.

Buying conviction was reserved with no news catalysts or economic data to sway investors -- until a last minute swarm of buyers pushed the indices to near session highs. 

The CBOE Volatility Index (VIX) decreased 2.9 points to 25.42, ending the year well above its low from early August (10.17).

U.S. Treasuries ended the abbreviated bond market session with gains across the curve, despite the positive disposition in the stock market. The 2-yr yield decreased two basis points to 2.50%, and the 10-yr yield decreased five basis points to 2.69%, reaching its lowest level since February. 

As a reminder, the stock market will be closed Tuesday, Jan. 1.

  • Nasdaq Composite -3.9% YTD
  • Dow Jones Industrial Average -5.6% YTD
  • S&P 500 -6.2% YTD
  • Russell 2000 -12.2% YTD

>>> APRIL announces entry into exclusive negotiations by Evolem and CVC regardin

APRIL announces entry into exclusive negotiations by Evolem and CVC regarding majority shareholding followed by public tender offer at EUR 22 per share
31 DEC 2018
Following an analysis of various strategic options regarding the future of its equity interest in APRIL [EPA:APR], Evolem, which holds a 65.13% equity stake in APRIL, launched a competitive bidding process resulting in a number of offers being handed out.
At the end of this process, Evolem entered into exclusive negotiations with CVC Capital Partners regarding the transfer by Evolem of its majority shareholding in the Company to a takeover company controlled by funds managed by CVC in which Evolem would hold a minority stake alongside the funds controlled by CVC and APRIL's management.
The transfer of the majority block would be carried out at a price of EUR 22 per APRIL share, entailing a 27.2% premium over the last closing price before the announcement of the offer (on 28 December 2018), 36.9% and 40.4% over the weighted average share price for the last 3 and 6 months, respectively, and 75.3% over the undisturbed closing share price (before April's October 22, 2018 press release announcing the review of strategic options by Evolem regarding its majority stake in APRIL).
This price could be subject to an adjustment equal to the cost (on a cost per share basis) incurred by APRIL (or its best estimate) at the date of transfer of the controlling block held by Evolem, subject to a EUR 10m deductible, in connection with the proposed tax reassessment from the French tax administration, following investigations on the territoriality of the reinsurance business conducted by Axeria Re, its subsidiary in Malta (see the APRIL press release dated 24 December 2018)1. The price could also be reduced by any distribution which would occur prior to the completion of the block transfer.
APRIL’s Board of Directors, who met on 28 December 2018, favourably welcomed the principle of CVC Fund VII’s offer and appointed Associés en Finance as independent expert to issue a report on the financial conditions and fairness of the simplified public tender offer.
In accordance with applicable regulations, upon completion of the block transfer, the takeover company controlled by funds managed by CVC will file a simplified public tender offer for the remainder of APRIL’s share capital at the same price as paid to Evolem.
Definitive agreements relating to the bloc transfer could be entered into following the completion of the relevant legal obligation procedure with respect to the employees. The completion of the block transfer would also be subject to regulatory approvals in France and abroad and is expected to be completed during the second quarter of 2019.
Link to press release

>>> US Gapping Down

Gapping Down:

  • AMID -7.39% (Amends Credit Agreement, is not permitted to declare or pay any cash distributions until its Consolidated Total Leverage Ratio is reduced to less than 5.00:1.00; does not expect to make any cash distributions on its common units or preferred units with respect to the fourth quarter of 2018.)
  • APHA -7.35% (Skepticism towards Green Growth hostile bid)
  • UNG -6.02% (Nat gas futures down 5% on mild weather forecasts)
  • TRXC -5.71% (Enters into $75 mln at-the-market equity offering with Stifel)
  • PCG -4.35% (Headlines that the company could face murder charges if found to be responsible for California wildfires)
  • OCUL -2.18% (Files $200 mln mixed shelf offering)