1) If BurberrY Sells, It's A BIG Tell on The Cycle
Burberry (BRBY) is a company that has picked its spot at the high end, and largely stayed there. It has stiff armed suitors in the past. Why now, would it say yes to the tarnished brand that is Coach? It is, for the most part, a mono brand company that has stuck to its knitting. The CEO is also the creative Director (kind of like we have seen at other creative companies with heavy-handed CEOs like RH, Ralph, and Nike).
This is in stark contrast to other European lux companies like LVMH and PPR that have each diversified into portfolios of product at multiple price points. If this deal were to happen – regardless if it financially could be stomached, it would be a dramatic (negative) turn of strategic direction for Burberry.
2) Luxury Mergers DOn'T WORK!
We’ve never really seen a merger in the luxury space that made any sense. Keep in mind that there are virtually no Brand synergies. No real estate synergies. And no buying synergies. As equity investors, do we want to buy a luxury merger for cost cuts? We’d run for the door (i.e. the short call) if that was the pitch.
3) let’s spend a minute on timing
The reality is that we’re a lot closer to the end of the economic cycle than we are at the beginning. We always see two things picking up at the end – bankruptcies, and deals. Consider the bankruptcy trends alone (which goes hand in hand w trends in M&A). With three months (of reported data) left to go in the year, we’re already within spitting distance of the highest bankruptcy rate in 20 years. Only 2008 was worse, but not by much. Keep this in mind if you think that we’re not late cycle.
Source: Factset, Census.gov, Hedgeye
Editor's note
This is a brief excerpt from an insititutional research note written by Hedgeye Retail analysts Brian McGough and Alexander Richards. To learn more about their institutional research ping sales@hedgeye.com.
