Trading Meets Fundamentals: How to invest in Luxury Goods after the Rally
* Stick to the “top pick” winner – LVMH (+), while Kering (=) faces tough expectations
LVMH FY16 results were very solid and driven by deep, broad-based, self-help and better
environment. Conversely, Kering faces tough expectations and is likely to experience short-term
downside, unless Gucci achieves organic growth well-above Q416 sell-side expectations.
* High quality self-help stories: Richemont (+) and Luxottica (=)
We see possible positive one-offs for CFR: 1) distribution of its YNAP shares; 2) downsizing /
divestment of loss-making soft luxury brands; 3) a special dividend. On LUX, we see significant
long-term value from the merger with Essilor. We would take advantage of any further weakness.
* Bank on early self-help stories – Ferragamo (+) and Prada (raised to +) look promising
If you are not confident about 2H17, then seeking alpha with pair trades could be a preferred
option. On the long side, we see both SFER (Waking the sleeping beauty) and Prada (raised to
OP, TP 35HKD) playing out in the next 12–18 months. On the short side, we see Hermès.
* Higher risk self-help – Tod’s (raised to =) and Swatch (-)
We raise Tod’s (TP raised to EUR61), anticipating an improvement in organic growth with positive
effects on margins, but remaining cautious on the long term (Footwear category disruption). UHR is
enjoying improving momentum in watches but smartwatches might be a threat in the mid/long term.
* Close pure "high-beta rebound bets" – Burberry (=) & Hugo Boss (downgraded to =)
With BRBY up over 10% in the past three months, the risk/reward profile is no longer positive. We
downgrade HB to Neutral (TP EUR64), as we believe it is suffering from being a traditional
company in a mature category (formalwear) and disruption from new entrants. We see a less
compelling risk / reward, and would encourage investors to top slice.