EQUITIES

LUXURY GOODS

Best Of: Brand Trivialisation

30 JUNE 2015 For the convenience of our clients, we are re-publishing and updating the most significant research insights lest they were lost in the flow of big reports. Luca Solca (+44) 203 430 8503 Brand trivialisation risk is not something you can anticipate from sales and profit trends [email protected] You will eventually see an impact on sales and profits – by which time it is too late. Yet, the seeds Paola Bertini of brand equity destruction are sown long before one sees the pernicious results. (+44) 207 039 9521 [email protected] We think that analysing brand perception, brand distribution and product range architecture Hui Fan can help in anticipating and detecting trivialisation risk before it materialises: (+44) 203 430 8507 [email protected] 1. Is the brand obvious to all? Or is it ‘hiding in plain sight’? Hard luxury brands offer a better scale vs visibility ratio. We use Google and Baidu hits as well as website traffic statistics as proxies

of brand ubiquity.

2. Is distribution directly controlled? Brand exclusivity as perceived by consumers rests heavily on their building the equation Price = Value. Direct retail maximises price discipline.

3. Is the ratio of full-price stores to factory outlets high or low? If luxury is about perceived exclusivity, then in the ideal world factory outlets would not exist. The more products there are ‘walking’ on the street – bought at full price or not – the greater the impression of ubiquity.

4. Is the brand identified with a few specific products? The narrower the sales mix and the stronger the brand association with a specific product, the higher the risk of brand trivialisation.

5. What is the ratio of spontaneous top-of-mind recognition to volumes in circulation? Spontaneous top-of-mind recognition correlates with intention to buy = desirability. At equal top-of- mind recognition levels, we prefer brands with a smaller ‘installed base’ / higher average price.

When we bring all this together, we discover that the Burberry, Marc Jacobs, Gucci and Moncler brands could be more vulnerable to brand trivialization. Louis Vuitton, by contrast, looks less at risk, especially on distribution grip.

Key valuation metrics

Rating Mkt cap Price TP Upside P/E (x) EV/EBITA (x) (EURm) (LC) (LC) 15e 16e 15e 16e Burberry (=) 9,856 15.9 19 20% 19.8 18.3 13.4 11.9 Hermès Int. (=) 36,702 352.0 300 -15% 35.6 32.1 22.6 20.0 Hugo Boss (+) 7,040 102.0 130 27% 17.4 15.0 12.9 11.0 Kering (+) 20,462 162.5 200 23% 16.6 14.4 14.3 12.3 Luxottica (=) 28,771 60.5 59 -2% 30.1 26.8 18.8 16.8 Available on LVMH (+) 82,014 163.6 180 10% 20.5 18.6 13.5 12.2 Prada (=) 11,163 37.7 45 20% 21.2 19.9 14.4 13.2 Richemont (+) 42,205 77.7 90 16% 19.0 17.4 13.7 12.3 Swatch Group B (+) 19,557 373.7 485 30% 14.8 13.2 11.2 9.5 * Prices at 29 June 2015

See Appendix (on p11) for Analyst Certification, Important Disclosures and Non-US Research Analyst disclosures.

The art of managing luxury brands is to navigate the paradox of selling exclusivity by the thousands – or millions – depending how successful one is. If you accept our definition of luxury – luxury is being cool by having something other people don't – maintaining the perception / illusion of exclusivity is vital for brand equity resilience. In this report we bring together a number of ideas on how to assess and measure brand trivialisation risk. We apply these ideas to score the companies and brands we cover. Finally, we draw investment conclusions from these scores and the risk profiles we ascertained.

Brand trivialisation risk is not something you can anticipate from sales and profit trends. Of course, you will eventually see brand trivialisation’s impact on sales and profits – by which time it is too late. We are convinced that the seeds of brand equity destruction are sown long before one sees the pernicious results. When brands take steps to grow their top lines and expand their margins, they need to be mindful of the impact on their brand equity. This is the period and process we want to focus on in this report.

We think that analysing brand perception, brand distribution and product range architecture can help in anticipating and detecting trivialisation risk before it materialises:

1. Is the brand obvious to all? Or is it ‘hiding in plain sight’? We like big brands that are not obvious to consumers. Scale brings competitive advantage in a fixed cost business. But high visibility and ubiquity bring high brand trivialisation risk. We use Google hits, Baidu hits and website traffic statistics as proxies of brand ubiquity; we conclude that hard luxury brands offer a better scale vs. visibility ratio.

2. Is distribution directly controlled? Or is it largely dependent on wholesale? Brand exclusivity as perceived by consumers rests heavily on their building the equation Price = Value. That is why when you ask the price of something in a well- managed store – try LV or Chanel – the typical reply is “the value of this product is…” Direct retail maximises price discipline. The end-of-season sales habitually held by multi-brand wholesale customers destroys brand equity.

3. Is the ratio of full-price stores to factory outlets high or low? If luxury is about perceived exclusivity, then in the ideal world factory outlets would not exist. In fact, they bring brands to a broader audience, offering them at a fraction of their full price. The notion that these are products from the past season – if they are indeed so – is a weak excuse: the more products there are ‘walking’ on the street – bought at full price or not – the greater the impression of ubiquity. 4. Is the brand identified with a few specific products? The narrower the sales mix and the stronger the brand association with a specific product, the higher the risk of brand trivialisation. This is the reason behind the demise of many premium brands – Crocs, Timberland, Locman, etc. It is also the key to the ‘mystery’ of why Hermes does not increase the availability of its Birkin and Kelly handbags, even as it produces new models. 5. What is the ratio of spontaneous top-of-mind recognition to volumes in circulation? We like top-of-mind brands as spontaneous top-of-mind recognition correlates with intention to buy = desirability. At equal top-of-mind recognition levels, we prefer brands that have the smaller ‘installed base’ / higher average price. This, we think, bodes well for future full-price volume development. When we bring all this together, we discover that the Burberry, Marc Jacobs, Gucci and Moncler brands could be more vulnerable to brand trivialization. Louis Vuitton by contrast, looks less at risk, especially on distribution grip.

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 2

Figure 1: Luxury is about selling a promise of exclusivity – Commercial success risks undermining brand equity

Source: Exane BNP Paribas

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 3

Figure 2: When we bring all this together, we discover that the Burberry, Marc Jacobs, Gucci and Moncler brands could be more vulnerable to brand trivialization. Louis Vuitton, by contrast, looks less vulnerable, especially on distribution grip

Source: Exane BNP Paribas Analysis

Exane BNP Paribas Research Luxury Goods

Figure 3: Hard luxury brands are better at 'hiding in plain sight’ Retail Equivalent Brand Footprint (EUR bn) Brand exposure as measured by Google hits

Ralph Lauren Chanel Chanel Louis Vuitton Rolex Coach Louis Vuitton Gucci Cartier Ralph Lauren Calvin Klein Hermès Gucci Prada Hermès Armani Armani Burberry Burberry Calvin Klein Omega Cartier Coach Rolex Prada Tiffany Tiffany Omega

024681012 0 100 200 300 400 500

Retail-Equivalent Sales (EUR bn) Google Hits (m)

Note: “brand footprint” calculated on the basis of retail equivalent sales: 1 retail = 2.5X wholesale = 10X license Source: Company reports, Google (20/06/2013), Exane BNP Paribas estimates

Figure 4: Off-price engagement at lowest risk would entail choosing options that offer a combination of high brand control and low full-price contamination

Brand Control Low High 3. Multi-brand in-store 1. Mono-brand in- end-of-season store end-of-season "explicit" discounting "explicit" discounting

High 2. Mono-brand in- store end-of-season "soft" discounting

7. Multi-brand online pure-play discounters

6a. Multi-brand physical discounters /

Full-Price Contamination Full-Price chains

Low 6b. Multi-brand 5. Mono-brand 4. Mono-brand physical discounters / physical off-price physical off-price independents store / franchised- store / concession wholesale

Source: Exane BNP Paribas

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 5

Figure 5: Chanel, Hermès, LV and Loro Piana are probably the most ‘virtuous’ in off-price engagement. Moncler, Burberry, Hugo Boss, Prada and Gucci seem more exposed to off-price risk

Physical Mono-brand In-Store Multi-Brand In-Store Sales Multi-brand Online Discounters Stockists Outlet Sale s Off 5th Bergdorf Goodman Yoox Century 21 TK Maxx Gucci √√ √ √ √ √√ Bottega Veneta √√ √ √ Saint Laurent √√ √ √ √ √√ Ke r ing Balenciaga √√ √√√ A McQueen √√ √ √ √ Stella McCartney √√ √ √ √ √√ Brioni √√ √ √ √ √ LV √ Fendi √√ √ √ √ √√ Celine √√ √√ Kenzo √√ √ √ √ √√ Mar c Jac obs √√ √ √ √ √√ LVMH Givenchy √√ √ √ √ √ Puc c i √√√ √ √ DKNY √√ √ √ √ √√ Chris tian Dior √√ √ √ √√ Loro Piana √√ √ He r m è s Hermès √ Chanel Chanel √ √ Bur be r r y Burberry √√ √ √ √ √ Hugo Bos s Hugo Boss √√ √ √ √ √√ Pr ada √√ √ √ √ Miu Miu √√ √ √ √ Prada Chloe √√ √ √ √√ Dunhill √√ √ √√ Richemont Tod's √√ √ √ √ √√ Cucinelli √√ √ √ √ √ Ferragamo √√ √ √ √ √ Monc ler √√√√ Armani √√ √ √ √ √√ Corneliani √√ √ √ √ √ brands Dolce & Gabbana √√ √ √ √ √ Italian Valentino √√ √ √ √ √√

Versace √√ √ √ √ √√ Zegna √√ √ √ √ Furla √√ √ √ √ Tory Burch √√ √ √ √ Kate Spade √√ √ √ √ Mic hael Kor s √√ √ √ √ √ Ralph Lauren √√ √ √ √√ Coac h √√ √ √ American Source: Exane BNP brands Paribas Luxury POS Database, Retailers’ websites, Exane BNP Paribas Industry Experience

Exane BNP Paribas Research Luxury Goods

Figure 6: US luxury players tend to rely more on physical outlet stores to deal with unsold merchandise Soft Luxury brands - # Physical Factory Outlets

Coach Calvin Klein Ralph Lauren Michael Kors Hugo Boss Armani Kate Spade DKNY Burberry Furla Zegna Ferragamo Gucci Versace Valentino Dunhill Tod's Prada Tory Burch Dolce & Gabbana Marc Jacobs Moncler Loro Piana Pinko Bottega Veneta Zadig & Voltaire Sandro Patrizia Pepe Saint Laurent Maje Church's Chloe Longchamp Gerald Darel Fendi Givenchy Loewe Cucinelli Christian Dior Corneliani Coccinelle Kooples Celine Brioni A McQueen Kenzo Miu Miu Lancel Kiton Stella McCartney Balenciaga Tang Pucci LV Isabelle Marant Hermès Chanel 0 50 100 150 200 250

Survey of 360 outlet centers in 30 countries. Source: Exane BNP Paribas Proprietary Luxury POS database (updated as of June 2015).

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 7

Figure 7: US luxury players tend to rely more on outlet stores: Kors and Coach at c.3–4 POS / Outlet Outlet Stores (#) Mono-brand POS (#) POS / Outlet Store (x)

Kors 142 483 3.4 Coach 231 1024 4.4 Versace 28 134 4.8 Dunhill 22 125 5.7 Tory Burch 20 123 6.2 Moncler 16 107 6.7 Burberry 52 409 7.9 Hugo Boss 94 935 9.9 Pinko 13 140 10.8 Hour Passion 4 44 11.0 Patrizia Pepe 11 133 12.1 Dolce & Gabbana 20 254 12.7 Prada 21 269 12.8 Marc Jacobs 19 257 13.5 Saint Laurent Paris 9 122 13.6 Gucci 30 422 14.1 Kiton 3 45 15.0 Chloe 9 144 16.0 Br ioni 5 84 16.8 Cucinelli 6 108 18.0 Bottega Veneta 13 239 18.4 Fe ndi 8 193 24.1 Loewe 6 149 24.8 Maje 9 227 25.2 Celine 5 142 28.4 Lancel 3 92 30.7 Sandro 12 378 31.5 Christian Dior 6 203 33.8 Bulgari 6 255 42.5 Longines 2 85 42.5 Miu Miu 3 163 54.3 Tissot 3 165 55.0 The Kooples 5 283 56.6 Sw atch 11 713 64.8 Balenciaga 1 97 97.0 Tiffany 3 301 100.3 Blancpain 0 37 - Breguet 0 34 - Cartier 0 292 - Chanel 0 307 - Hermès 0 305 - Isabelle Marant 0 18 - IWC 0 64 - JLC 0 65 - LV 0 453 - Omega 0 348 - Patek Philippe 0 3 - Piaget 0 85 - Pucci 0 51 - Rolex 0 97 - Shanghai Tang 0 43 - Stefano Ricci 0 43 - VCA 0 125 - TOTAL 851 11,417 13.4

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 8

Figure 8: The relative weight of off-price vs full-price stores at Marc Jacobs and Dunhill has shrunk significantly since our last check

POS / Outlet Store Apr-13 Jun-15 Marc Jacobs 30 14 Dunhill 9 6 Gucci 19 14 Chloe 21 16 Celine 35 28 Lancel 36 31 Bottega Veneta 21 18 Burberry 9 8 Fendi 25 24 Chris tian Dior 29 34 Prada 11 13 Kors 3 3 Coac h 3 4 Saint Laurent Paris 8 14 Tory Burch 4 6 Miu Miu 24 54 Balenciaga 27 97 Survey of 360 outlet centers in 30 countries. Source: Exane BNP Paribas Proprietary Luxury POS database (updated as of June 2015)

Figure 9: The narrower the sales mix and the stronger the brand association with a specific blockbuster product, the higher the brand trivialisation risk Product Category Concentration - % Sales

Leather RTW Footwear Watches Jewelry Other Moncler 0% 100% 0% 0% 0% 0% Omega 0% 0% 0% 100% 0% 0% Bottega Veneta 86% 6% 6% 0% 1% 2% Cucinelli 9% 85% 4% 0% 2% 0% Louis Vuitton 80% 5% 10% 1% 2% 2% Tod's 25% 0% 75% 0% 0% 0% Prada 69% 16% 14% 0% 1% 0% Celine 69% 16% 14% 0% 1% 0% Burberry 32% 58% 3% 1% 0% 6% Cartier 4%0%0%52% 35% 9% Miu Miu 60% 20% 18% 0% 0% 2% Marc Jacobs 53% 25% 15% 1% 2% 5% Gucci 58% 16% 14% 5% 2% 5% Fendi 58% 16% 14% 5% 2% 5% Hermès 44% 24% 4% 4% 10% 14% Saint Laurent 44% 24% 22% 0% 1% 9% Ferragamo 33% 13% 43% 0% 2% 8% Chanel 32% 14% 3% 3% 5% 43% Source: Company reports, Exane BNP Paribas estimates

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 9

Figure 10: The higher the GM%, the higher the trivialisation risk for a brand – were it to be perceived as expensive, rather than precious Average Retail Price (EUR) vs. Gross Margin (%) – by brand

85% Bottega Veneta Louis Vuitton 80%

Prada 75% Gucci

Moncler Burberry Tod's Celine 70% M. Jacobs Cartier Miu Miu Hermès

65% Saint Laurent Fendi

Ferragamo Achieved Gross Margin % Margin Gross Achieved 60% Cucinelli Tiffany

55% Omega

50% 0 1000 2000 3000 4000 5000 6000 Avge Retail Price (EUR)

Source: Company reports, Exane BNP Paribas Analysis & Estimates

Exane BNP Paribas Research Luxury Goods 30 June 2015 page 10

DISCLOSURE APPENDIX

Analyst Certification We, Paola Bertini, Hui Fan, Luca Solca, (authors of or contributors to the report) hereby certify that all of the views expressed in this report accurately reflect our personal view(s) about the company or companies and securities discussed in this report. No part of our compensation was, is, or will be, directly, or indirectly, related to the specific recommendations or views expressed in this research report.

Non-US Research Analyst Disclosure The research analysts named below were involved in preparing this research report. Research analysts at Exane Ltd and Exane SA are not associated persons of Exane Inc. and thus are not registered or qualified in the U.S. as research analysts with the Financial Industry Regulatory Authority (FINRA) or the New York Stock Exchange (NYSE). These non-U.S. analysts are not subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Paola Bertini Exane Ltd Hui Fan Exane Ltd Luca Solca Exane SA

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