(Macquarie) Global Luxury Goods : Time to price in the New Normal

Slower growth is here to stay
Over the past five years the global luxury goods sector delivered 8% CAGR. We
now expect this to fall to c4% from here due to four headwinds:
1. In HK/China, the anti-corruption campaign and slower GDP growth.
2. Consumer spending growth is anaemic across the EU.
3. Demand growth is softening in the US.
4. Weaker growth in commodity driven markets: Russia, Middle East and Latam
We are very cautious on Watches and expect a decline in Swiss shipments in
FY16 to rebalance HK inventories. The latest KOF survey suggests negative
sentiment for key 4Q. We are also growing slightly more cautious on jewellery.

Shift to a new normal will bring margin pressure
The global luxury goods industry needs c2% organic growth to match cost
inflation and protect margins. Furthermore, we do not believe market appreciates
the increase in operational leverage, a result of 10 years of expansion in retail
distribution. This increase in capital intensity does not show on the balance sheet
but in a significant increase in operating leases: Rent/Sales went from 5% to 8%
FY10 to FY15E. Any sales decline will likely to result in material margin declines.

Key Recommendations: Stick with quality and self help
Negative operating leverage has already manifested in profit warnings in HK
jewellery retailers where we remain negative on Chow Tai Fook (U/P;
PT:HK$4.10). The persistently weak luxury environment means we remain
negative on Prada (U/P; PT:HK$25) and Samsonite (U/P; PT:HK$19.10). We
initiate Richemont with a non-consensus U/P (PT: CHF65), and are similarly
negative on Swatch (U/P; PT: CHF325) as they struggle the most given the
Swiss watch trends. Our EPS is 7%/9% below cons for Richemont/Swatch.

We initiate LVMH as an O/P (PT:€184) as we believe it deserves a meaningful
premium to sector, given its diversity of products/geography and highest FCF
yield of 5% that our Quant analysis identifies as the key driver of returns.

There is nonetheless only one name in Europe which we expect to see earnings
upgrades in FY16: Kering, our top pick (O/P; PT:€198). We believe the market
undervalues: 1) Gucci turnaround; 2) the second phase of Bottega Veneta
growth; and 3) the growing importance of “Other Luxury Brands” where little
disclosure exists. Our EPS is 3%/4% higher than consensus for 2016/17,
respectively. Upgrades and re-rating should deliver 20% upside.

We reiterate our long term O/P ratings on Tiffany (PT:US$103) and Ralph
Lauren (PT:US$155). In 1Q16, we lap the meaningful strength of the US$, which
reduces a key headwind for US companies. For Tiffany, we will start to see the
benefit from lower precious metal costs. Ralph Lauren's restructuring is
proceeding as planned, and we believe it potentially benefits significantly from
the Trans-Pacific Partnership next year.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: RAS -25.9%, OUTR -20.3%, UNFI -14.1%, TOL -4.3%, HQY -3%, CASY -2.5%, HRB -1.1%, GWPH -0.9%, HD -0.6%

Select EU financial related names showing weakness: DB -2.5%, ING -2.3%, HSBC -2.3%, SAN -2.1%

Select metals/mining stocks trading lower: MT -7.7%, VALE -7.1%, RIO -6.9%, BBL -6.4%, BHP -5.6%, CLF -4.2%, FCX -3.2%, AKS -2.9%, X -2.8%, AA -2%

Select oil/gas related names showing early weakness: SDRL -11.1%, CHK -4%, KMI -3.9%, PBR -3.7%, MRO -3.6%, RDS.A -2.6%, TOT -2.1%, BP -1.8%

Other news: GEVO -36% (announced a public offering of common stock and warrants), FELP -12.2% (provided update on bondholder litigation; discussions with bondholders and secured credit facility lenders; says 'discussions with the bondholders are unsuccessful, it could result in an adverse judgment being rendered'), KBIO -6.1% (still checking), CMG -4.5% (following report that Several basketball players are sick of E Coli after eating at CMG, CMG issued statement to CNBC said 'safety of customers a priority -Cleveland Circle store temp closed -no evidence yet to suggest e-coli'), VRX -3.6% (mulling a sale of its specialty contact lens manufacturing unit, according to Reuters), QCOM -3.1% (The EU sends two Statements of Objections on exclusivity payments and predatory pricing to Qualcomm), NFLX -3% (likely down with futures), WYNN -2.5% (Gaming stocks weak in HK trade), LVS -2.1% (Gaming stocks weak in HK trade), BABA -1.5% (likely down with futures), M -1.4% (likely down with futures)

Analyst comments: ODP -4.1% (target lowered to $7.50 from $11 at Telsey Advisory Group), PKI -3.9% (downgraded to Sell from Neutral at Goldman ), CG -3% (downgraded to Neutral from Buy at BofA/Merrill), CBOE -1.8% (downgraded to Underweight from Equal Weight at Barclays), APO -1.7% (downgraded to Neutral from Buy at BofA/Merrill), CUK -1.6% (downgraded to Hold at Numis ), IHG -1.3% (downgraded to Hold from Buy at Berenberg)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance: ORIG +15.9%, PLCE +8.7%, DRYS +5.5%, ENZ +1.8%

M&A news: FCS +7.8% (acknowledges receipt of an unsolicited proposal to be acquired for $21.70/share in cash, says Board will review and consider the proposal)

Other news: ONTX +43.5% (presents positive data from Phase 2 combination trial of oral Rigosertib and Azacitidine), TXMD +38.7% (announced positive top-line results from its pivotal Phase 3 Rejoice Trial of TX-004HR), ANAD +17.6% (announced end of 'go-shop period'), GLPG +17.4% (announced that its 200 mg filgotinib product has been shown to be effective and safe as once-daily, oral induction treatment in moderate to severe Crohn's disease), PIRS +16.5% (announces research collaboration and license agreement with Roche (RHHBY) in cancer immunotherapy), EFUT +9.5% ( raises active stake to 56.49% (Prior 50.51%)), ICLD +7.8% (commences a review of its strategic alternatives in response to the receipt of multiple unsolicited offers to purchase certain of its key assets), BSI +7.7% (announced that Mega Retail has agreed to sell six supermarket branches to Rami Levi Chain Stores Hashikma Marketing; consideration will be NIS 26 mln), CUR +7.5% reports that NSI-189 molecule data has been published in Molecular Psychiatry), CPXX +7.3% (reports positive data for Vyxeos, showing induced high rates of response in patients with AML), CTRV +6.8% (reports positive results for CMX157; results from head-to-head studies support CMX157's), ZIOP +5% (announced presentation of data from CD19-specific car+ T-cell therapy programs; results demonstrate survival benefit in long-term follow-up infusing autologous genetically modified T cells after hsct), SYN +4.7% (positive topline results from the four week Phase 2 clinical trial of SYN-010 for the treatment of irritable bowel syndrome with constipation), GALE +2.6% (reports final data for its GALE-401 Phase 2 proof-of-concept clinical trial), CSRA +1.8% (awarded an IDIQ contract from the Dept of Homeland Security for support of its Data Center 1), EGRX+1.7% (Eagle Pharma and Teva Pharma announce that the FDA has approved BENDEKA), DBVT +1.3% (announced the initiation of a pivotal Phase III study designed to evaluate the safety and efficacy of Viaskin)

Analyst comments: FEYE +3.3% (upgraded to Buy from Neutral at Citigroup), MESO +2.5% (initiated with a Overweight at JP Morgan), ARES +1% (upgraded to Buy from Neutral at BofA/Merrill)

FT : M&A in the UK: Dearth of local deals

Global M&A is booming, but tie-ups between UK companies are running at the slowest pace since at least 1969.

UK domestic M&A (UK companies buying other UK companies) amounted to just 31 deals in the third quarter, according to data from the Office for National Statistics. That's the lowest quarterly tally since the ONS began compiling data more than four decades ago, writes Joel Lewin.

In the first three quarters, the number of deals edged up from last year to 98. However, that is far shy of the 222 deals struck in the same period of 2011, and is well behind the level of activity seen in 2010 and 2009.

The value of deals has fallen 22 per cent year-on-year to £5bn.

But it's not just UK companies that have been overcome by a bout of home-grown M&A aversion in Blighty. Acquisitions of UK companies by overseas partners fell 53 per cent year-to-date to £15bn, the lowest volume since 2003.

But while UK companies have turned their noses up at their fellow countrymen, they have been snapping up overseas companies at the fastest pace in five years.

Acquisitions of overseas companies by UK companies in the first three quarters surged 150 per cent to £22.1bn, the largest volume since 2010.

Globally, M&A volume stood at $4.57tn at the end of November, and looks set to surpass the record $4.61tn set in 2007.