Pausing for breath
■ Cutting our rating on Ferragamo to Neutral (from Outperform). The
shares are up 40% YTD and have reached our target price. We still like
Ferragamo for its margin expansion story, successful diversification strategy
into handbags, outperformance in China, rising RNOA and best-in-class
TSR at +16% in the next three years. We still believe Ferragamo is amongst
the few stocks in luxury for which we see earnings upgrades in 2015.
However, we feel more meaningful revisions are required to drive the shares
higher at the current valuation level.
■ Preference for Ferragamo over Tod's. We continue to see downside risk
to margin expectations for Tod's as strongly negative LFL poses some risk
of further cost deleverage. We feel management has not yet given enough
confidence that the negative momentum for Tod's brand is about to turn and
diversification into handbags has not worked in the past two years. We are
cutting our earnings estimates by 10% placing us 5% below consensus.
■ Still negative on Cucinelli. Management has started guiding the market
hence producing the first sizeable downgrade since IPO due to pressure on
margin from escalating rental costs. We still struggle to justify a valuation
similar to Hermes given a sharp contrast in margins, RNOA and cash
generation which we do not expect to change in the next few years. Liquidity
is low marking the stock difficult to short. We hence maintain our
Underperform rating.
■ All Italian stocks screening as relatively expensive. Ferragamo appears
to be fairly valued on traditional metrics trading at a 1.6x PE/TSR broadly in
line with the sector at 1.5x. Tod's and Ferragamo trade at 1.8x an d 4.3x
PE/TSR respectively. Finally, none of the stocks look cheap on our EV/IC
framework which takes into account RNOA momentum.