Replay for our Deep Dive on Luxury Goods/Handbags CLICK HERE. We’re net positive, but have multiple longs and shorts. Here’s detail on our key calls.
CPRI Holdings (Best Idea Long) | Still near the top of our list long side. We think the CPRI earnings model has plenty of juice over a TRADE, TREND and TAIL duration. What we like most about the model (aside from the fact that we’re 15% ahead of consensus next year) is that over a TAIL duration we have EBITDA from the luxury Jimmy Choo and Versace brands going up four-fold due to outsized top line and margin expansion. Could there be a hiccup (slower growth) in 1H23? Yes. But we think that the earnings upside is dramatic longer term. This is a name where over a 4-5-year time period we should see EBITDA from the luxury brands (instead of the Accessible Luxury Kors brand – which is perennially worth a mid-high single-digit EBITDA multiple) account for half of the portfolio – and that excludes our view that there’s likely to be another addition made to the portfolio – think upscale like Dolce & Gabbana – over a 2-3 year time period. For now, excess capital is being used to fuel growth in the luxury assets, and buying back stock. We think you’re paying for the TAIL value of Kors today, and are getting the much higher multiple assets for free. We think this stock is a triple over a TAIL duration.
Kering (KER-PAR/PPRUY ADR) | Pivoting Kering from Short To Long. This one is a big change for us. We came out positive on LVMH and short Kering last month, though the big change since then is that Gucci, which is ~75% of cash flow for Kering, has fired its creative designer – the one responsible for going too far over his skis with collaborations with lesser brands like North Face and Addidas among several other ‘mistakes’. While we don’t know who the new creative director at Gucci will be, we think the CEO is going with a ‘back to luxury basics’ strategy in elevating the Gucci brand, cutting SKUs by 30-40% and taking up price points. Let’s not forget that this name is a major China reopening play, which is not fully backed in our above-consensus numbers. If we’re right and the Gucci brand is elevated and China recovers, this name could trade at 25x a higher earnings number vs 14x today. Strong downside support with this name, and big upside if we’re right on the new brand strategy. Let’s also not forget that the 40% of revenue that’s not Gucci is performing extremely well – Saint Laurent and Bottega Venetta, Alexander McQueen, and others. We’re conservatively assuming 140% return over a TAIL duration – but if the company makes the right moves, this stock could triple.
Moet Hennessey Louis Vuitton | LVMH (MC-PAR/LVMUY ADR). Moving Higher On Long List. Owner of 76 luxury houses, this is the most diversified personal luxury company in the world. The company took a hit in the Great Recession, but still comped positive. We think it’s approaching this recession with extreme scarcity value in its product, and is taking up price accordingly. This is the only company – as serial acquirer – where we have €2bn in acquisition embedded in our model annually. Its portfolio is not yet done growing. We’re assuming 4x EV/Sales multiples for an incremental €500mm in annual sales, which is likely conservative given the company’s past. This is another one where organic growth may slow in 1H23, but should still comp positive and push peak margins. We think this name is a 2-year double. Trading at 25x Earnings today, and you rarely get a shot to buy this name sub 20x. Definitely a Best Idea candidate if it feels pressure in the last two quarters of Quad 4 and the ultra-rich curb spending.
Hermès (RMS-PAR/HESAY ADR) | Going Long Hermès. HESAY is the most expensive name in the group – trading at 45x earnings. But for good reason. It has the ultimate scarcity value in all of personal luxury. If you want a Kelly or Birkin bag – opening price points at $10,000 going up to $500,000 – the company will likely choose not to sell it to you for years (if ever) unless you’re a preferred high-end customer. This, ironically, is a good Quad 4 stock given how incredibly defendable its’ top line, pricing margins and cash flow all are. Will this name make you rich over a TAIL duration? Not like CPRI, Kering or LVMH, but we think it’s good for 20% upside during Quad 4, and get to 75% upside over a TAIL duration. Bears point to the multiple, but shorting great companies (this is basically the Ferrari of Handbags and luxury goods) on valuation is usually a very lousy idea. We like this name -- particularly in the depths of Quad 4.
Burberry (BRBY-LON/BURBY ADR) | Going Short BRBY. This brand has been in a secular downtrend since 2010, and we see no reason for that to reverse itself anytime soon. We don’t see major downside risk over a TAIL duration, and at a mid-teens multiple it’s hardly expensive. But the catalyst calendar to accelerate growth is not apparent to us. BRBY is over 50% apparel, which we are increasingly bearish on as enter 2023 in Quad 4, post holiday when consumers were stretching their wallet to give this season. Designer apparel is more at risk than designer handbags. But in terms of handbags, people are not waiting in lines to purchase Burberry bags like they are for Louis Vuitton or Chanel or Gucci. This isn’t an extraordinary player in the Lux space. Pre-COVID revenue had been trending down and it was just a beneficiary of COVID spending and some re-opening, but that is over now. We don’t expect the consumer to be fighting over Burberry purses, or any product for that matter, any time soon. There will be major reversion to the mean on revenue and margins in the coming quarters and year. Consensus earnings expectations for 2023 are still below pre-pandemic levels. We’re below on Sales across durations, and are (borderline uncomfortable) with the 19% EBIT margin we’re underwriting over the next several years.
Prada (1913-HKG/PRDSY ADR) | Going Short Prada…keep this on a tight leash. We have nothing against the Prada portfolio – except for the fact that it’s not a portfolio. Just the Prada brand. Very big ready-to-wear apparel presence, which is a segment of the market that’s not as defendable as leathergoods (50% of total). Prada has had a resurgence in popularity over the last few years, but lately the “newness” factor has been slowing down along with interest in the product. There are only so many “re Edition” purses people can buy. Margins are at peaky levels and we do not believe they can be maintained. There are a portion of luxury brands that still discount, and Prada is one of them. This company has the most volatile top line growth stream in this group – with flat years in 2014 and 2015, and down years in the GFC, ’16 and ’17. The biggest plus here is ~40% exposure to China, which likely takes this stock higher on a full reopening. Though the product assortment lacks the scarcity value and pricing power that we see in the group of luxury goods companies that we’re long. We’re moderately below consensus over the next two years – which likely takes the multiple lower, though upon a full China recovery the stock is likely higher than where it is today (TAIL duration). We initially didn’t make a call on this name as we thought near-term downside and long term upside was kind of a push. But now we’re taking it short side – at least through the duration of Quad 4) and are keeping it on a short leash.
Tapestry (TPR) | Pivoting form Long to Short. We’re got to give credit to Coach management – it’s brought the ‘coolness’ factor back to this brand over the past 2-years and has brought a new customer to the brand at the accessible end of the luxury spectrum. It’s taken the average age of the consumer down by a good 20-years, which is near impossible to do. We give them a ton of credit for that. But at the weaker end of the price point spectrum, it (along with KORS) will likely see a hiccup in 2023. But unlike CPRI, the portfolio here rests entirely on Coach (90% of cash flow) – while Choo and Versace are driving CPRI higher. Kate Spade is broken – been a $1.3bn brand for 7-years, and likely to stay there. Stuart Weitzman is relevant with the consumer, but accounts for less than 5% of EBITDA. Ultimately EVERYTHING rests on the Coach brand – and we can’t underwrite continued strength in the brand in this Macro environment – especially when it’s trading at a 20% premium to CPRI, which has a better portfolio.
We’re Punting the Following From Our Short List
- Hanesbrands (HBI) | HBI is one of the longest standing shorts on our list, having been short it since over $30, but with the stock at $7, you need to be playing for it to go out of business to make a lot of money on the short side here. And it’s highly likely that won’t happen. The company is in a world of hurt right now at WalMart, and in other mass channels. It’s losing share at the higher end, and getting clipped by private label. All it’s got going for it is Champion, but demand there is waning. This is all now squarely in the consensus. In 2H23, we’re likely to see the benefit of at least decent rate of change in restocking in mass channels after the inventory blow out we’ve already seen in basics. Ultimately, both EPS and the stock are pricing in a lot of bad news here. And we think the call has largely played out.
- Advance Auto Parts (AAP) | We shorted this name on 10/9 at $161, taking off the short list today at $143. Not a huge victory, but decent enough. Alpha (+23%) over 3 months in a flat tape. We’re a fan of the auto aftermarket space, but would still much rather own ORLY (best in the space) or AZO (gaining share in commercial). The perennial bull case around AAP is that it can close the margin gap with ORLY. We don’t think that will EVER happen – its network density just does not lend itself to ORLY’s efficiency. But the car Parc is inflecting to the upside over a TREND and TAIL duration, which might be good for 100-200bps in margin. That’s not in the consensus (Street has straight-lined 9.6% EBIT margin). Even though AAP is losing share, with the fleet aging and the call option on even a slight margin kicker, we don’t want to be greedy in outliving our welcome on this call.
- Rent the Runway (RENT) | We shorted this stock on the IPO at $20 due to our view that it is one of the most unscalable models in all of retail. The company’s results have proven it out, and the stock now sits at $3. Make no mistake, this company is sitting on $100mm in debt on just $200mm in market cap. Yes, it could go bankrupt, and it probably should. But we also can’t rule out a takeout here. Upside downside is fairly balanced today, and we’ve had a massive win on his one. Booking the gain.
