Worst-case scenario – impact from November attacks more significant than from
January attacks
The targets involved in the terrorist attacks in Paris last January appear
to have been more specific than the targets attacked in November. We believe that the
random nature of the November events and the subsequent exercising of emergency
powers by the French government have had a significant impact on consumer sentiment
and demand. Moreover, comments by multiple industry players point to a Europe-wide
effect, reflecting the lock-down in Brussels, an attack in London, ongoing Geneva police
action, and the downing of a Russian plane. Thus, while our initial comments in the wake of
the November attacks focused on the risk to revenues in Paris (5% of sector sales), we
believe that sales across Europe are actually at risk (average 37% of sales covered by SG).
* Estimate cuts We do not have access to luxury companies’ data points apart from the 4%
sales decline registered by Hugo Boss in Europe the week following the attacks, including -
12% in France. But the latter is a worrying trend as it: a) implies a c.3% decline in the rest
of Europe as well; b) affects a player with only c.15% of European sales to tourists vs about
half for the sector. The other data we have is that high-end hotel occupancy fell at a
double-digit pace in Paris for over two weeks after the attacks, and it is still down,
representing a longer and deeper impact than in January, despite the COP 21 meeting.
Overall, we have cut our sales and EBIT estimates by 2-3% for soft luxury players and by
5-10% for hard luxury players (after the double-digit drop in Swiss watch exports), leading
us to cut our target prices. We also downgrade our Swatch recommendation to Hold from
Buy given the uncertainty surrounding Swiss watch demand.
* Sector recommendation & catalysts We maintain our Neutral stance on the Luxury Goods
sector given: a) the ongoing erosion of KPIs (cc sales growth, EBIT margin, ROCE) since
the FY 2013 post-recession peak; b) a low 1.2-1.3x relative P/E vs the market, compared
with the 1.4x LT average; c) company feedback pointing to higher estimated risk in the
context of erratic, though mostly negative, newsflow. Against this backdrop, we believe
that the best investors can do is take advantage of the high sector beta (LT 1.2-1.3) to
benefit from trading opportunities.
* Main stock picks We avoid: a) high valuations, at risk given the current sector trends
(Hermès, Tod’s, Cucinelli); b) monobrands when the company’s segment/geographic
specialisation put it at risk of missing out on the sector’s elusive and unpredictable growth
(Ferragamo, Burberry, Hugo Boss); c) firms whose business models are unfavourable when
sector growth is slow (Hugo Boss, Burberry). We prefer: a) sufficient TP upside; b)
diversified groups with dominant/resilient brands in tough sector conditions and stronger
share volatility than asset value volatility (LVMH, Kering). Richemont and Swatch fit into this
category, but the short-term earnings downgrades are too steep for now, leading us to
downgrade Swatch to Hold.