Looking for the next brand turnaround
* Assessing turnaround potential at six US/European luxury goods companies: With the success of Coach, Gucci and Calvin Klein, investors are looking for the next turnaround story in the soft-luxury universe. We believe companies that have seen declining sales, margin pressure and falling CFROI® largely as a result of brand fatigue and lack of cost discipline could qualify. In this report, we identify Burberry and Ralph Lauren as our top premium/luxury turnaround picks, while we remain positive on Tod's Group and cautious on Ferragamo, Hugo Boss, and Michael Kors.
* We look at seven factors: (1) the health of the underlying market, (2) brand value/equity currently discounted in the stock price, (3) the existing price/value proposition, (4) changes to management and creative teams, (5) the progress made so far regarding cleaning up distribution, (6) cost cutting potential, and (7) potential margin upside.
* We upgrade Burberry to Outperform (new TP 2,000p from 1,650p): We note Burberry has undergone the biggest management reshuffle since its 2002 IPO and we believe the brand is well placed to capitalise on the need for newness in luxury thanks to its apparel exposure. Margins are close to historical lows and the cost cutting plan in place should alleviate concerns about further earnings downgrades. With sell-side positioning the most negative it has been since 2009, we think this creates a buying opportunity.
* We upgrade Ralph Lauren to Outperform (new TP $111 from $91): We believe the company is on track to return to meaningful growth and margin expansion from FY19. This follows significant changes to management, visible efforts to reinvigorate the brand/products, cleaning up distribution and rightsizing of the cost structure.
* We remain Neutral on Hugo Boss, Ferragamo and Michael Kors: We believe Hugo Boss (new TP €65) still faces a challenging suit market and we think its current price/value proposition may not yet be adequate. We like Ferragamo in the long term but the transition phase is likely to hurt margins and trigger further earnings downgrades. We remain concerned about Michael Kors’ underlying brand health which is necessitating store and wholesale distribution rationalisation and a re-focus on pricing discipline. Moreover, we find cost savings targets relatively underwhelming.