INDEPENDENT RESEARCH Luxury & Consumer Goods 31st August 2017 Time to be more cautious after the rally Luxury & Consumer Goods

Finalised on 31st August 2017 is likely to be a two-part year with a very solid H1 and a slightly more

BURBERRY SELL FV 1490p challenging H2 with a likely momentum slowdown. Furthermore, the Last Price 1778p Market Cap. GBP7,662m

FV EUR442 current sector and group valuations are beginning to be quite demanding. HERMES Intl BUY vs. 445 We are more cautious on LVMH (Neutral vs Buy), mainly on valuation Last Price EUR443.95 Market Cap. EUR46,867m concerns, hence our recommendation downgrade. We favour Richemont HUGO BOSS NEUTRAL FV EUR74 Last Price EUR70.67 Market Cap. EUR4,975m (Buy), Moncler (Buy) and Hermès (Buy).

FV EUR296 KERING NEUTRAL vs. 300  H1 2017 has been quite robust for luxury goods groups which have been Last Price EUR312.1499 Market Cap. EUR39,415m showing clear recoveries, even if the situation has been very contrasting

NEUTRAL FV EUR227 LVMH amongst the luxury groups we follow for many reasons. Actually, on vs .BUY vs. 230 Last Price EUR218.85 Market Cap. EUR110,953m average, our sample has achieved 7% organic sales growth and a 70bp EBIT MONCLER BUY FV EUR24 margin gain, with Kering being, by far, the best performer and Tod’s Last Price EUR23.49 Market Cap. EUR5,972m Group and Salvatore Ferragamo the worst performers. FV CHF88 RICHEMONT BUY vs. 83 Last Price CHF85.05 Market Cap. CHF44,396m  This good first half year has been especially driven by positive forex impacts,

NEUTRAL a significant rebound in Greater China (mainly in Mainland China), and SALVATORE FERRAGAMO FV EUR23 vs. SELL Last Price EUR23.91 Market Cap. EUR4,036m undemanding comps, particularly in Europe. Nevertheless, we argue that H2

FV CHF332 17 will be more challenging for some groups (but not all). The comparison THE SWATCH GROUP NEUTRAL vs. 305 Last Price CHF377.8 Market Cap. CHF20,738m basis will be far more demanding especially for Kering and LVMH

FV EUR57 (although to a lesser extent) which will be even more true for 2018. TOD'S GROUP SELL vs. 58 Last Price EUR60.2 Market Cap. EUR1,992m Furthermore, the USD recent weakness will not help at all!  For 2017, we expect organic sales growth of 7% (including Moncler), a 31/08/17 slight slowdown vs H1, especially at LVMH and even more so for Kering, 115 while other groups (particularly Richemont and Hermès) will not have to 110 face the same issues. At first sight, we expect sales to grow by 6% in 2018, 105 which will face very demanding comps but should benefit from e-commerce 100 expansion.

95  Given luxury groups’ share price rally YTD (+19% on average for our 90 luxury sample after +13% last year), the current sector valuation appears

Source Thomson Reuters STOXX EUROPE 600 PERS & H/H GDS E STOXX EUROPE 600 quite demanding with a 24% premium versus the historical average, which leads us to be more cautious in the short term for some stocks (despite strong fundamentals) such as LVMH (Neutral vs Buy). We still favour Richemont (Buy), Moncler (Buy) and Hermès Intl (Buy). Furthermore, following the recent Salvatore Ferragamo share price weakness (-20% since May 2017), we upgrade the stock from Sell to Neutral.

Analysts: Loïc Morvan Cédric Rossi 33(0) 1 70 36 57 24 33(0) 1 70 36 57 25 [email protected] [email protected]

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Table of contents

1. Luxury sector rebounds in 2017 ...... 3 1.1. Luxury industry should be up close to 4% in 2017… ...... 3 1.2. ... Thanks to Chinese clientele! ...... 4 1.3. Luxury apparel: a dual-speed category ...... 5 1.3.1. Generational shift in consumer habits ...... 6 1.3.2. Hugo Boss’s strategic realignment to address this new paradigm ...... 7 1.3.3. “Niche brands” are relatively immune to the crisis ...... 9 1.3.4. Apparel category rebounds in 2017 ...... 11 2. Strong fundamentals and positive momentum in 2017 ...... 12 2.1. A recovery initiated in Q3 16 … ...... 12 2.2. … but not for everyone! ...... 14 2.2.1. Distribution mix ...... 14 2.2.2. Product mix ...... 14 2.2.3. Transition and change of management ...... 15 2.3. Asia-Pacific and Europe very robust ...... 16 2.4. E-Commerce sales up double-digit! ...... 18 2.5. Huge operating leverage impact ...... 20 3. But the best is likely behind us ...... 23 3.1. Tougher comp in coming quarters for a few luxury groups ...... 23 3.2. Negative FX impact expected in H2 17 ...... 24 3.3. 2018 should be a more normalised year ...... 25 4. Valuation & recommendation ...... 26 4.1. Luxury groups stocks did very well ...... 26 4.2. Valuation comparison...... 26 4.3. Recommendation ...... 28 Price Chart and Rating History ...... 31 Bryan Garnier stock rating system ...... 35 Luxury & Consumer Goods 1. Luxury sector rebounds in 2017 2017 is to be the first year since 2012 of significant recovery for the luxury goods industry with an estimated 7% growth, based on our Luxury goods groups sample.

Rebound of the Luxury industry in 2017 with 4% 1.1. Luxury industry should be up close to 4% in growth 2017… After two years (2015 and 2016) of almost no growth for the world-wide luxury goods market (estimated at EUR249bn last year), Bain & Co and Altagamma both expect a slight rebound in 2017 (+4%) at EUR259bn. This move, according to Bain & Co, will be driven by Mainland China (+6 to 8%) and Europe (+7% to 9%), while Japan and the Americas will both remain almost stable. For 2020, Bain & Co expects the market to reach EUR285bn, or a 4% CAGR between 2017 and 2020. We can add that the worldwide GDP growth expected in 2017by IMF (+3.5%) should also help as, in 2016, the momentum was less dynamic (+3%). Global economic growth is an important driver for the luxury goods industry.

Fig. 1: Global luxury goods market (EURbn, %)

300 16

275 259 251 12 13 249 250 12 218 224 8 225 212 8 192 7 4 200 5 170 173 175 167 3 3 0 153 1 1 0 150 -4 125 -8 100 75 -11 -12 50 -16 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e

World Luxury market (EURbn) Growth at constant FX (%)

Source: Bain & Cie; Bryan, Garnier & Co ests.

While Europe accounts for 33% of the worldwide luxury goods market, Europe only accounts for no more than 19%, as a significant portion of sales in Europe (close to 50%) is achieved by tourists.

Fig. 2: Luxury goods sector breakdown

By region (%): By nationality (%):

Others RoW Japan 5% 8% 9% Other Asian Europe 10% Chinese 33% 30% Japanese Asia-Pacific 10% 20%

European 19% American Americas 23% 33%

Source: Company Data; Bryan, Garnier & Co ests.

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1.2. ... Thanks to Chinese clientele! According to Bain & Co and Altagamma, Chinese consumers are, by far, the first clientele for the worldwide luxury goods market taking two third of the market (followed by the Americans with 23%), while the Japanese account for no more than 11%. Clearly, amongst the luxury goods industry, the Chinese have replaced the Japanese (11% of sales in 2016 versus around 25% in 2005). Mainland China’s weight is nevertheless less than 10%.

Chinese clientele accounts Furthermore, as a reminder, given the current oil price weakness and political issues (especially for one third of global luxury between Qatar and Saudi Arabia), clientele from the Middle East accounts for around 4% of the sales and 40% in the medium term luxury market. In 2016, according to the WTO, Chinese tourists numbered 135m, up 6% vs 2015. We argue that one third of luxury goods sales achieved with the Chinese are made only by Chinese tourists. Furthermore, according to a BGC report, 16% of Chinese luxury consumers purchased luxury products online in 2016.

In 2017, we expect sales with Chinese consumers to be up 14% after +8% in 2016 and only +6% in 2015 and +5% in 2014. The expected 2017 growth should be the highest since 2013, a sign of a clear recovery with this group of clientele. According to Bain & Co, Chinese consumers should account for 40% of the luxury goods market by 2025, and Asian consumers should reach more than 50% of total market. But for the medium term, in our view, there is clearly no new China (nor new Chinese) approaching soon (neither in India, nor in Africa). Therefore, China will remain, without doubt, the sector’s main growth driver in the coming years.

Fig. 3: Luxury market with Chinese clientele

90 84 45 80 74 40 68 70 63 35 60 60 30 50 50 25 40 40 20 28 30 15 20 22 20 10 10 5 0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016e 2017e

Luxury market with Chinese (EURbn) chge (%) Source: Company Data; Bryan, Garnier & Co ests.

On top of the above comments on the luxury goods sector, we can add that tourists, especially American, Chinese and Russian, account for globally 47% of luxury goods sales (of which 35% are extra regional tourists?), mainly located in Western Europe such as France, the UK and Italy. And after a negative trend in 2016 (low single-digit decline), we assume that 2017 should be a year of rebound (we assume a mid single-digit increase).

Although Apparel is the biggest market in the personal luxury goods industry (23% of total sales), the momentum of this segment remained negative with a 4% decline in 2016, as highlighted in Fig. 4: on the next page. On the other hand, Beauty (+4% in 2016) and Leather goods (+2% in 2016) were clearly more dynamic categories. Unsurprisingly, in 2016, Watches posted the worse performance (- 8%), and, in 2017, we assume a stable trend (YTD:+0.7%) given the tough comp and the rebound in

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Greater China. The Jewellery segment outperformed Watches with a 2% increase in 2016 and we anticipate 4% growth in 2017, driven by Greater China (Mainland China especially).

Fig. 4: Luxury goods market by category

Breakdown by Category (%) 2016 Trends by Category (%) 6 Others 4 10% 4 Apparel Jewelry 2 2 2 23% 2 6% Shoes 0 6% -2

Watches -4 15% -4 Beauty -6 21% -8 Leather goods -8 -10 19% Beauty Jewelry Leather goods Shoes Apparel Watches

Source: Bain & Co; Bryan, Garnier & Co ests. Swiss watch industry has recovered recently, especially The table below illustrates the slight but still relatively volatile recovery (only three consecutive since March 2017 growing months for Swiss watch exports) of the Swiss watch industry on a very undemanding comparison basis. Even if Swiss watch exports were up 5% in June and almost 4% in July, this has to be compared with the 9% increase in May, following a 6% decline in April. This is the first time that we have seen three consecutive months of growth. YTD, exports are up 0.7% versus a 10% decline in 2016.

Fig. 5: Monthly Swiss watch exports (chge in %)

15

9 10 7 6 5 5 3 4

0

-1 -2 -5 -4 -3 -4 -6 -6 -6 -6 -6 -10 -8 -8 -9 -9 -9 -10 -10 -11 -15 -12 -14 -16 -16 -16 -20

Source: Company Data; Bryan, Garnier & Co ests.

Since March 2017, the high-end segment of the Swiss watch industry is clearly outperforming the industry (+5.9% in July and +5.6% in June for instance), as has been already highlighted by The Swatch Group. 1.3. Luxury apparel: a dual-speed category Last year, the apparel category (-4%) was one of the worst-performing segments in the luxury market, alongside watches (-8%), as shown in the graph below. However, this turmoil masks a substantial

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dichotomy between struggling large and premium brands (Ralph Lauren, Hugo Boss, Michael Kors, etc.) and dynamic specialised brands, which operate in niche markets such as Moncler or Brunello Cucinelli. The latter are relatively immune to this crisis thanks to their upscale positioning and the ongoing retail expansion explains their higher growth profile.

Fig. 6: Not all brands were equal in apparel market turmoil

Luxury Apparel Market Growth (2013-16, %) BOSS and RL FX-n growth (2013-16, %) BC and MONC FX-n growth (2013-16, %)

8 2 2 2 MONC BC 6 6 25 4 3 21 19 1 17 18

-2 11 10 10

-4 BOSS RL -10

2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016 Source: Bain & Co, Company Data; Bryan, Garnier & Co ests.

1.3.1. Generational shift in consumer habits The reasons for this turmoil are well-documented but they can be summed up by an abrupt generational shift in consumer habits which has led to unprecedented challenges occurring at the same time:

(i) Discount culture: Consumer spending data in the US and Europe show that consumers spend less of their budgets on apparel in favour of categories such as beauty and home. As an illustration, approximately 5% of US consumer spending was dedicated to apparel in 2000 but this number fell to around 3% in 2016. Struggling retailers overreacted by stepping up promotional activity: the NPD Group has pointed out that off-price buyers now represent 75% of apparel purchases across all retail channels in the US! This deflationary spiral has particularly impacted the premium segment (Ralph Lauren, Hugo Boss, Michael Kors, etc.) and cleared some space for fast-growing brands operating in the affordable luxury segment such as Sandro, Maje or Kate Spade. Growth in sales (2016, %) (ii) Casualisation and athleisure trends: The Millennial generation is clearly driving the rise of 8,5% casualisation in businesswear, which is gradually moving away from strict shirts and suits to make room for more casual items. The fashion industry is also being transformed by “athleisure”, as people are now focused on eating the right foods and living a healthy lifestyle. This is particularly true in emerging countries, notably China where sports 1,5% participation rates have significantly increased in recent years. According to Euromonitor, the Chinese sportswear market could reach ~EUR39bn by 2020 and surpass the luxury Athletic/casual Apparel goods market (~EUR27bn). It is no accident that adidas Group’s sales have been wear growing in double-digits since 2014 (+28% FX-n in 2016 and +29% in H1 17). It is Source: McKinsey & Co worth noting that even luxury brands have embraced athleisure.

(iii) Digital disrupting traditional retailers: multi-brand stores such as department stores were the hardest hit by consumers’ accelerating shift to online shopping, all the more since online penetration of the apparel & accessories category now exceeds 20%. This trend has suddenly accelerated thanks to the boom in mobile internet (smartphones), new digital

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technologies (virtual mirrors, real-time inventory management software, etc.) and pure online players which have launched new services (“Free returns”, “Same-day delivery”, “Try before you buy”, etc.) aimed at improving the customer experience and boosting online sales.

1.3.2. Hugo Boss’s strategic realignment to address this new paradigm In addition to these industry pressures, the German group faced company-specific challenges such as an unclear positioning, an insufficient online/digital presence and a go-to-market which became inadequate in the current retail crisis. In our view, the swift top management transition and the appointment of Mark Langer as CEO has enabled Hugo Boss to implement rapidly a turnaround strategy consistent with the new market conditions. This involves:

1/ Two-brand strategy for a clear positioning The four Hugo Boss brands cover the main ready-to-wear segments (from casual to fashion), with a mainly premium positioning. But as shown in the lhs graph below, the brand DNAs and differentiation were insufficiently clear for consumers and it implied a high level of product complexity internally (development, inventory management, etc.) and externally, as multi-brand wholesalers struggled to display the four brands at the same time. The channel differentiation (i.e. BOSS Orange mainly for the wholesale channel, BOSS almost exclusively present in own retail) meant that customers had a different shopping journey across the channels, which is inconsistent with the objective of offering a seamless customer experience.

Fig. 7: Two brands with distinctives cores and price positioning

Before: a portfolio composed of 4 independent brands Now: focus on two complementary brands

Source: Company Data; Bryan, Garnier & Co ests.

Hugo Boss’s entire strategy is now centred around the BOSS core brand, which has absorbed BOSS Orange and BOSS Green, and the HUGO brand. Both brands have distinctive cores:

(i) In terms of price positioning: BOSS mainly operates in the upper premium segment whilst HUGO is a premium brand, with a price positioning 25-30% lower than BOSS’s. Management has emphasised several times that HUGO would not be a BOSS's accessible sub-brand, but that it will be independent with a distinctive customer target (see next page) and communication channels.

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(ii) In terms of customer target: whilst BOSS will continue to aim at quality-seeking customers (in both business-wear and casual-wear), HUGO certainly targets a younger customer base, helped by its more affordable pricing strategy and a communication strategy The BOSS suit offer by price focused on social media. point In % of total number of styles offered 2/ Reconquest of entry-level price ranges in France Last November, the CEO of Hugo Boss USA, Tony Lucia, stressed that the BOSS core brand had lost part of its US core customer target following the exit of these crucial entry-level price segments, resulting from a too aggressive premiumisation strategy. Consequently, BOSS will re-enter them through the S/S 18 collection, as shown in the lhs graph. In our view, HUGO’s presence in the premium segment and BOSS’s reconquest of entry-level price ranges have two main advantages: 1/ wholesalers are less tempted to discount if they have access to a more affordable product offering (=> risk of brand dilution is limited), and 2/ the Millennial generation, who has favoured the casualisation in business-wear, can be addressed more easily.

Source: Company Data 3/ Expansion in casualwear As can be seen in the lhs graph, the BOSS core brand generates 59% of its revenues in Breakdown of BOSS brand casualwear, which is higher than what one may initially think. This category achieved a sales CAGR sales by category (EURbn) 2010-16 of ~8% vs. ~3% for formalwear. This significant outperformance confirms that casualisation and athleisure trends have also boosted growth in the premium and upper premium price segments.

We believe that this momentum at Hugo Boss could accelerate further thanks to the reduction in brand complexity: future collections in casualwear will resonate better with consumers thanks to the clear positioning and the faster go-to-market approach will reduce the risk of markdowns as products will be more aligned with current consumers’ tastes. At the CMD on 2nd August, management confirmed that the S/S 2018 collection had received positive feedbacks from wholesalers. Source: Company Data 4/ Achieve the digital transformation In our opinion, this strategic initiative would probably take longer than the above-mentioned initiatives since: (i) Hugo Boss was missing an expertise in this field; the appointment of Richard Lloyd-Williams, who spent seven years at Net-A-Porter as Director of Digital Transformation, will fill this gap, (ii) this digitalisation impacts the entire group (i.e. development, production, distribution) and will take time before all functions are fully aligned, and (iii) Hugo Boss faces pure online players which are naturally experts in selling clothing online. Some of them (ASOS, Zalando, etc.) are Hugo Boss’s customers as well (online wholesale).

Online sales only account for ~5% of own retail revenue. Following a disappointing start to the year (-27% in Q1) due to insourcing initiatives that led to disruptions, online sales have rebounded to 9% in Q2. Even if this growth remains fragile and below the industry average, the website benefited from technological improvements (i.e. mobile-friendly website, enhanced search engine, etc.) and an integrated CRM should drive traffic and conversation rates going forward. A stronger presence in social media will be a good opportunity to target younger customers, display new collections in casualwear and improve the brand attractiveness.

This digital transformation is a prerequisite for the omnichannel strategy. Hugo Boss is about to roll-out a new store concept for each brand, with the introduction of digital tools (smart mirrors, interactive screens, etc.) to link both offline and online worlds. Of course, the online platform must be fully operational to succeed the omnichannel approach.

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1.3.3. “Niche brands” are relatively immune to the crisis In our view, this resilience can be explained by three main reasons:

(i) Strong legitimacy: unlike “generalist” brands which are involved in many product categories, “specialised brands” only operate in niche markets where they have a strong legitimacy and reputation. Moncler and Canada Goose are famous for their down jackets, whilst Brunello Cucinelli is expert in cashmere clothing and other natural fabrics. Hence, consumers are still ready to pay a premium because of the high product differentiation.

(ii) Luxury positioning: luxury brands proved to be more resilient in weathering the 2008-09 crisis than the affordable and premium brands. Besides their strong brand equity, these brands also have a less volatile clientele who is less impacted by financial crises, whereas the “aspirational” clientele tends to pull back and economise as soon as macro uncertainties occur. We view Moncler and Brunello Cucinelli as luxury brands whilst Canada Goose is more a premium brand but enjoys the booming outerwear category.

(iii) Distribution footprint still limited: Moncler, Canada Goose and Brunello Cucinelli continue to enlarge their distribution networks (both DOS and wholesale) since underlying trends in their respective categories continue to be robust. They are not affected by overdistribution like many soft luxury groups which are rationalising their distribution network, particularly in the US department store channel.

Moncler is well positioned in a fast-growing luxury outerwear market According to Euromonitor, the global outerwear market was ~EUR700bn in 2016 and expected to grow at a 3.6% CAGR over the 2016-20 period. Asia-Pacific, which already accounts for 40% of Moncler’s sales, should be the fastest-growing region with a CAGR of 4.5% (see lhs graph below). Building on its background and heritage, Moncler mainly operates in a niche market of luxury outerwear, valued at around EUR12bn (see rhs graph below), which is growing at around 5% per year, driven by its fashion image, frequent innovations and a rising appeal with clients across the globe.

Moncler’s upscale positioning and strong legitimacy in outerwear leave it well placed to withstand competition from "affordable luxury" brands and even the fast-fashion “heavyweights” (Uniqlo, Zara, etc.). This strong legitimacy lies in Moncler’s heritage and its mountain universe, thereby providing technical functionalities to its collections of down jackets and knitwear. The brand embraced fashion in 2003 after Remo Ruffini acquired Moncler, which enabled the brand to carry out a premiumisation towards a luxury positioning.

Fig. 8: Attractive growth prospects for the global outerwear market

Outerwear market: CAGR 2016-20e by region (EURbn, %) Luxury outerwear market: geographical breakdown (%) +4.5% EUR12bn 340 31% 10% +2.6% 285 +3.3% 250 225 3% 215 18% 190

38% North America Europe Asia-Pacific 2016 2020e Europe Asia Japan Americas ROW Source: Canada Goose, Moncler; Bryan, Garnier & Co ests.

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Healthy comparable growth! One may argue that the top-line growth of these “niche brands” is fuelled by store openings whereas the larger luxury brands are, conversely, optimising their store networks. As far as Moncler is concerned, the lhs graph below shows that this statement was particularly true in 2014-15, as the new space contribution amounted to 75-80% of the total growth in the retail channel.

However, we also notice a gradual rebalancing between the contribution from new stores and comparable growth. In H1 17, Moncler’s comparable growth (+14%) was even higher than the new space contribution (~11%) and was certainly amongst the highest in the industry, as shown in the rhs graph below.

Fig. 9: Attractive growth prospects for the global outerwear market

Breakdown of Moncler’s growth in the retail channel (%) Comparable growth of soft luxury groups (%) 20

15 14

10 8 6 7 23 26 11 5 15 0

14 -5 8 6 7 - 10 2014 2015 2016 H1 2017 2014 2015 2016 H1 17 SSSG New space contribution

B. Cucinelli Burberry Ferragamo Hugo Boss Moncler Tod's Source: Company Data; Bryan, Garnier & Co ests.

This best-in-class SSSG illustrates that the Italian group was well on track to achieve the main objectives of its “Retail Excellence project” launched in 2016:

(i) Redesigning the client experience: as the new space contribution is forecast to decrease in the coming years, the focus on an enhanced shopping experience is crucial since the latter will ultimately fuel store productivity and comparable growth. The initiatives are multiform: 1/ the store “atmosphere” follows the premiumisation of the brand, with the use of the finest materials (vs. “ski-resort format” previously) and extended store size (on average: ~130-140sqm vs. ~110sqm); 2/ a “consumer-centric” approach supported by the in-store “Mon Client” app and enhanced CRM initiatives to engage customers more effectively; and 3/ training programmes for sales people to provide tailored services.

(ii) Diversifying its business across seasons: the expansion of Moncler’s spring/summer collections could be considered as a challenging goal in light of its mountain heritage, but they now represent between 25-30% of total sales. The diversification was carried out through an expansion into new categories such as knitwear, shoes and accessories (knitwear has grown overproportionally), and they benefited from a higher space allocation in own- retail. An illustration of this successful diversification: S/S collections represent ~95% of Q2 sales, which grew by 21% FX-n and ~16% LFL. As a comparison, S/S collections account for less than 2-3% of Canada Goose’s revenue.

(iii) Improving retail KPIs: this enhanced customer experience and the successful diversification have naturally driven Moncler’s KPIs. Although it already enjoys one of the

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Sales/m² (EURk) and Adj. highest sales/sqm ratios in the industry, the Italian group has improved this ratio further EBIT margin (2016, %): to ~EUR32k/sqm (from ~EUR30k the previous year), as shown in the lhs graph. Other KPIs such as the Unit Per Transaction and the conversation rate have also increased thanks to the 35 35 initiatives of the “Retail Excellence” project. 30 30

25 25 20 20 1.3.4. Apparel category rebounds in 2017 15 15

10 10 After its “annus horribilis”, the apparel market is projected to recover slightly in 2017 to a point where

5 5 experts such as Altagamma/Bain & Co and McKinsey forecast 1.5-2.5% growth this year (see lhs chart

0 0 below). This gradual recovery will be supported by a slightly more favourable world GDP growth MONC BRBY MK BOSS (+3.5%e vs. +3% in 2016), although it is worth highlighting that the fashion industry would not Sales Density Adj. EBIT margin outpace GDP growth because of the continuing challenges in the industry, see section 1.3.1. Source: Company Data; Bryan, Garnier & Co ests By segment, an improvement in growth is expected for all segments in the upper range of the market, (see rhs chart below), especially for premium which was particularly affected by the apparel market crisis. More supportive macro conditions could encourage aspirational/middle-class customers to trade up in favour of premium and affordable premium categories. Moreover, many brands/groups have implemented key initiatives to adapt to the fast-changing environment and they will probably reap fruits quicker than most retailers, as evidenced by the ongoing turmoil for US department stores.

By category, athletic wear will remain the clear winner in 2017 (+6.5-7.5%e), boosted again by the athleisure and casualisation trends. The other product categories are not expected to accelerate materially, with 1-2% growth in line with the prior year.

Interestingly, most of the brands focused on revitalising organic growth over cost cutting, which would only deliver results in the near term but would not ease investors’ concerns about the medium- term growth profile. The Hugo Bos example illustrates this statement: even if the German group closes about 20 underperforming stores (cost-cutting measure), all the other initiatives related to the strategic realignment have been aimed at achieving sustainable growth in the coming years.

The outerwear category, which is at the crossroads between athletic wear and casualwear, enjoys robust drivers, implying a favourable market environment for Moncler. Reassuringly, its new categories are outperforming the growth in down jackets, albeit the latter is still growing over 10%. We believe that knitwear will remain Moncler’s second most important growth pillar, although the category will be more crowded as Canada Goose has recently unveiled its first knitwear collection.

Fig. 10: Gradual recovery expected in most segments and categories:

Luxury apparel market outlook 2017-22 (chge in %) Fashion industry outlook 2017 by segment and category ( in%)

2016 2017e 3-4 8 2 1,5-2,5 6,5- 7,5

3 3-4 3-4 2 1,5-2,5 1 1 1-2 1 1-2

-4 Luxury Affordable Premium Clothing Footwear Alhletic 2015 2016 2017e 2018-22e luxury wear

Source: McKinsey, Altagamma, Bain & Co; Bryan, Garnier & Co ests.

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2. Strong fundamentals and positive momentum in 2017 We expect that 2017 should be a strong year for the industry, at both the top line and profitability. Nevertheless, the situation is contrasting amongst luxury brands and luxury groups.

2.1. A recovery initiated in Q3 16 … In H1, on average, luxury Luxury groups’ performance has been terrific in H1 2017 with an average 7% organic sales growth of groups’ sales were up 7% which +7% in Q2 (+8% including Moncler), following +7% in Q1 alone. As highlighted in the graph below, Q1 dynamic momentum has been its strongest since 2013 for our luxury groups sample average, despite no clear recovery for the Swiss watch industry. Nevertheless, it seems that all planets were aligned during the period and this has continued in Q2. This was not a huge surprise for us as highlighted in our report of October 2016 (lien). Actually, forex was well oriented with a low EUR level versus most other currencies including the USD; only the GBP was lower vs the EUR, which was a consequence of Brexit. An undemanding comparison basis (except in Japan), a sales rebound, particularly in Europe and Greater China, stronger tourist flows especially in Europe (from Russia, China and the US) and better macro indicators in Mainland China were the drivers of this growth.

As shown in the chart below, this positive move was initiated in Q3 16 with a clear acceleration in Q4 16, followed by an historic Q1 17. Even if this trend continued in Q2, we do not see any further acceleration (but more of a stabilisation) during the last quarter which leads us to believe that summer 2017 is a turning point and the coming quarters are likely to show some gradual slowdown.

Fig. 11: Quarterly organic sales growth luxury groups average (chge in %) 26 24 22 20 19 14 11 10 9 8 7 7 7 6 7 7 4 4 5 3 2 1 1 1

-1 -1

Source: Company Data; Bryan, Garnier & Co ests.

Some stellar performances this year Moncler and Kering During Q1 2017, most luxury groups achieved very strong sales momentum. On average, luxury achieved the best groups enjoyed a 7% revenue increase during this period. Q2 also remained very well oriented with a performances during the 7% average growth excluding Moncler and +8% including the Italian group, which confirms the clear period… recovery of the luxury industry during the first part of the year. Amongst our luxury goods groups sample, Kering and Moncler achieved the best performance. Thanks to a 48% sales increase, the Gucci brand (Kering Group) enjoyed the highest growth in Q1, followed again by a stellar +39% in Q2, amongst our luxury brands/groups sample.

Gucci brand (Kering) was, by far, the winner in H1 17 with a rocketing 43% organic revenue increase (EUR2.8bn), of which +39% in Q2 vs +48% in Q1, following +21% in Q4 16 and +13% in 2016, as

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Luxury & Consumer Goods a consequence of the successful strategy initiated by the new designer Alessandro Michele since Q1 2015 in order to regain its appeal to historical consumers, more importantly, to attract new consumers including Millennials who account for around 40% of sales. But other brands of Kering also achieved a very positive trend. Among these, it is worth noting YSL (+28% in H1) and even Puma (+16%), while Bottega Veneta disappointed slightly with a limited 2% increase, of which +4% for retail.

The 21% organic growth done by Moncler in Q2 demonstrated: (i) a successful seasonal rebalancing since the S/S collection represents 95% of Q2 sales, (ii) that the “Retail Excellence” project yielded positive results in terms of store sales density (~EUR32k, one of the highest in the industry), as highlighted by the robust 14% comparable growth and (iii) Moncler’s core markets grew above 20%, such as Asia and America (+29% FX-n and +22% FX-n respectively) despite demanding comps.

LVMH has reported very healthy H1 with a 12% organic sales increase, o/w +12% in Q2, following +13% in Q1. The trend has been especially positive for the Fashion & Leather division thanks to a 14% growth in H1 including +13% in Q2 alone (+15% in Q1), thanks to Louis Vuitton’s and Celine’s strong gains. The Wines & Spirits business also did very well in H1 (+10%) despite some expected slowdown in Q2 (+7%). All LVMH’s divisions reported a double-digit revenue increase. By region, LVMH’s H1 growth was driven by Asia-Pacific (+18%) and by Europe (+11%). Q2 sales momentum remained very well oriented in APAC (+17%) and Europe (+11%), while it was still robust in the US with an 8% increase. Thanks to undemanding comps, Japan rebounded in Q2 (+11% vs +2% in Q1).

Hermès enjoyed dynamic sales momentum in H1 with a 9.7% increase, of which +8.3% in Q2. The unsurprising Q2 slight slowdown versus Q1 (+11%) came from the Americas (a clear contrasting market for the luxury industry) and, more importantly, from Leather goods sales (50% of group sales) which grew by around 10% after an exceptional Q1 (+15%). The French brand’s figures confirmed its resilient status with a very regular momentum.

The Swatch Group’s H1 17 sales remained almost stable (+1.2% at same FX to CHF3.7bn), of which +2.9% for Watches & Jewellery (excluding the production business) at same forex. Production sales were likely to be down during the first six months. The group does not disclose quarterly sales, hence only a half year performance, nevertheless, we argue that Q2 was very likely better than Q1.

Fig. 12: Quarterly organic sales growth of luxury groups (in %)

% Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Burberry 13 8 -4 1 -1 0 4 4 2 4 Hermès 8 10 8 7 6 8 8 7 11 8 Hugo Boss 3 7 -1 5 -3 -1 -3 -1 1 3 LVMH 3 9 7 5 3 4 6 8 13 12 o/w F& L div 1 10 3 3 0 1 5 9 15 13 Kering -1 8 3 8 4 7 11 10 28 25 Kering Luxury -3 8 3 7 2,7 5 11 11 32 25 o/w Gucci brand -8 5 0 5 3,1 7 17 21 48 39 Moncler 30 20 9 20 17 17 10 25 15 21 Richemont 2 2 3 -4 -7 -10 -11 5 4 9 Ferragamo 2 3 0 2 -2 -3 -6 1 0 0 Swatch Group 4 4 -5 -5 -12 -12 -9 -6 1 1 Tod's Group -3 8 -2 2 -4 -4 -4 -1 -5 0

Luxury average 6 8 2 4 0 0 1 5 8 8 Luxury average excl. Moncler 3 7 1 2 -2 -1 0 3 7 7 Source: Company Data; Bryan, Garnier & Co.

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…Tod’s and Salvatore The two Luxury Italian groups, Tod’s Group and Salvatore Ferragamo, reported disappointing H1 Ferragamo were the worst 17 revenues with respectively a 3% sales decline and almost no growth (0%), despite some ones improvement at Tod’s Group in Q2 (0% versus -5% in Q1) but far behind the industry’s average of 7%, following an underperformance in 2016. Ferragamo did not release any figures for Q1 17. Both groups were particularly affected by negative wholesales in H1 (-6% for Ferragamo and -8% for Tod’s) and negative comparable stores growth. Therefore, we see these underperformances as more structural than only punctual and these should continue in H2 but to a lesser extent. The Tod’s and Salvatore Ferragamo brands are losing market shares and it will take time for them (and especially for the Florentine brand in our view) to make up for lost ground. 2.2. … but not for everyone! Beyond the very strong H1 results, we highlight that some brands enjoyed very positive momentum while others disappointed with low growth or, in some cases, revenue declines (as shown in the above table)! How can we explain such contrasting trends between brands in the same luxury goods industry on such a short period during which the industry clearly recovered? Beyond the specific Swiss watch industry, which has not recovered fully yet (YTD:0.7%) and explains the almost stability of The Swatch Group’s sales in H1, we see three main reasons which could justify these contrasting trends.

2.2.1. Distribution mix The “winners” amongst our luxury goods groups sample during this first half were massively exposed more to retail and less to wholesale, mainly due to the situation in the US where departments stores are currently struggling against a clear decline of traffic, a consequence of Amazon’s successful expansion into the fashion industry. Amazon now controls 10% of the US fashion market according to Euromonitor (19% in 2020). Tod’s and Salvatore Ferragamo, which still achieve more than 30% of their respective sales in the wholesale channel, saw a between 5% and 10% revenue decline in this distribution segment. Conversely, Louis Vuitton, 100% retail exposed, Hermès (82% of sales in retail) and Gucci (also above 80% of sales) achieved tremendous performances in H1. We do not see any reason why this trend should change in the coming months, at least until normalisation in the US and also in Greater China.

2.2.2. Product mix Another reason is the product mix as apparel has clearly outperformed the accessories and leather goods segments during the first six months but this is not really a new trend. This explains partly why Burberry has underperformed peers during the period (the British brand achieves 52% of its sales in apparel). Meanwhile, Hermès has enjoyed a strong revenue increase (+9.7%), partly driven by leather goods (+11%), and Louis Vuitton (two thirds of the French brand’s sales are made in leather goods) registered a terrific 15% sales increase in H1. This also could be one of the reasons why Italian brands such as Ferragamo and especially Tod’s achieved relatively poor performances (respectively sales almost stable and down 4%) in H1 as leather goods make up only 37% and 14% of their respective sales.

Furthermore, and beyond the pure product mix, we see that the winning brands are the ones with a strong heritage positioning such as Hermès or Louis Vuitton or have a much more fashion vision (Gucci for instance), but some in the middle, such as Burberry and the two Italian brands already mentioned, have underperformed peers as, in our view, their positioning is not clear enough for luxury consumers. Moreover, in our view, the brands that have been the most innovative but nevertheless still in line with their respective DNA have won market shares.

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2.2.3. Transition and change of management Significant management What is also interesting in our view is the fact that groups with a relative poor performance are the changes recently among ones that have changed their strategy recently (Tod’s), or ones with new management teams luxury groups with positive and negative impacts. (Ferragamo), or in a period of transition (Burberry). On the other hand, brands with strong management teams who have been in place for a long time (for instance at LVMH) or have a long- term strategy (Hermès) have performed the best during the period. Consistent strategies and managements in the long term are paying off in the luxury industry, in our view. Be clear, we don’t view management change as a bad thing (it is even necessary on certain occasions), implying only a period (long or short) of transition and uncertainty.

For instance, Salvatore Ferragamo’s new CEO since August 2016, Mr Eraldo Poletto, has implemented a new strategy focused on product and brand rejuvenation with much more strict control of brand equity (hence the clean-up of inventories in H1 2017), implying strict control of distribution. Even if we argue that this strategy is the right one, it is likely to take some time before bearing fruit and does not prevent it from execution issues; hence, a much more cautious view for sales and earnings 2017 expectations after a poor H1 (EBITDA margin down 440bp to 19%). Mr Poletto has, by the way, admitted that 2017 will be a transition year.

We can make the same kind of comments on Burberry which is in an executive transition period as the new CEO, Marco Gobetti (ex-Céline CEO), has been in charge since last July, after a period (2014-2016) during which Christopher Bailey cumulated the role of CEO and Chief Creative Officer with variable results. Burberry retail sales were up 3% in Q2 2017, below industry level.

Lastly, concerning Tod’s Group, the strategy changed last year with the departure of Alessandra Facchinetti as Artistic Director of Tod’s brand (who failed to transform the brand into a more fashion one despite heavy investments). Group CEO and main shareholder, Diego Della Valle has now adopted a view that is much more oriented on iconic and classic products with no fashion vision any longer (which had not been very successful anyway). This change will also take some time to bear fruit as both Tod’s and Hogan brands have lost market shares recently.

Richemont has made a lot of top management changes (since November 2016) with the retirement of the former CEO, Mr Richard Lepeu and the departure of the Group CFO, Gary Saage. Meanwhile, Mr Georges Kern had been appointed as Head of Watchmaking, Marketing and Digital and Mr Jérôme Lambert COO, Head of Maisons other than watchmaking and Jewellery. However, on 14th July 2017, Georges Kern surprisingly resigned to become a minority shareholder and CEO of the Breitling brand, recently bought by CVC Partners in April 2017. Moreover, in 2017, new CEOs were appointed at numerous watch brands such as IWC, Piaget, Vacheron Constantin and also Montblanc brand. Nevertheless, the brands and group strategy remained almost unchanged and remain under the control of the group Executive Chairman, Johann Rupert whose son, Anton Rupert, will become a member of the Board at the next AGM (September 13th).

The same thing has happened at Tiffany (three CEOs in succession in 18 months) with the very recent departure of Mr Frédéric Cumenal as CEO (he was appointed in 2014) and the appointment of Alessandro Bogliolo (ex-Bulgari COO, Sephora US CEO and Diesel US CEO) to take up his role from October 2017.

It could be argued that Gucci has been very successful in a very short period of time after management changes effective in 2016, but in our view it is more a counter example.

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2.3. Asia-Pacific and Europe very robust Very quick recovery in By geographical area, we highlight the strong rebound in sales momentum especially in Asia-Pacific APAC and especially in and Europe (particularly Western Europe), while the trend in Japan, a structurally mature market for Greater China... the luxury goods industry for some years mainly explained by demographic issues, is very poor (-3% in Q3 16, followed by -1% in Q4 16 and -3% in Q1 17). In the Americas (+2% in Q3 16, then +3% in Q4 16 and +2% in Q1 17), the situation appears to be much more varied (particularly in US) with much more modest growth for most luxury groups and brands, significantly affected by the turmoil at US department stores with the strong decline in wholesale sales and the strong USD, limiting tourist flows despite some recent weakness. Furthermore, the first few months of the new US President are not that convincing and bring little visibility for US consumers (e.g. the Obamacare issue which is not fixed yet) and more uncertainties.

In APAC (a third of the luxury goods industry), the sector’s sales rebound came mainly from Mainland China (10% of luxury sales) which enjoyed a very strong double-digit revenue increase (for some brands a more than 30% increase) and Hong Kong (8% of the sector’s sales) to a lesser extent, (except for Ferragamo which reported a sales decline in the former British colony). The rebound in Mainland China is due to several factors in our view: i/ repatriation at home of purchases made previously overseas; ii/ a lower pricing difference between Europe and China (close to 40% versus 55% in Q2 15); iii/ tighter control at borders by the Chinese authorities to prevent purchases abroad; and iv/ more positive macro indicators in Mainland China (GDP up 6.9% in Q2).

The charts below highlight the strong recovery in recent months (especially since January 2017) for the Swiss watch industry in Mainland China and the more contrasting situation in Hong Kong. Actually, Swiss watch exports to Mainland China are up 22% YTD with a very strong increase in March, April and June. On the other hand, watch exports to Hong Kong are only slightly up (YTD +3%) with very volatile trends in recent months, despite some improvement versus the 2015 and 2016 strong negative trends (almost 24 months of sales double digit decline). In June 2017, exports to HK grew 5% (but +17% in July) after +18% in May. Swiss watch exports to Mainland China grew 12% in June and 22% in July after an impressive +34% in May and +39% in April.

Fig. 13: Swiss watch exports to Hong Kong and Mainland China

Swiss Watch Exports to Hong Kong (chge in %) Swiss Watches Exports to Mainland China (chge in %)

50,3 18 18 17 38 39 34 5 5 29 27 22 17 12 7,1 7,9 8 7 -1 5,2 5,5 2,8 -4 -5 1 0

-14 -12 -17-16 -15 -2,3 -1,9 -18-18 -5 -6,8 -6 -21 -21 -23 -21 -8,9-9,2 -25 -13 -14 -30 -29 -28 -29 -29 -19 -33 -33 -33 -38 -38 -40 -39-38 -36

Source: FHS; Bryan, Garnier & Co ests.

Furthermore, the gradual recovery in Hong Kong is clearly confirmed, coming from both better traffic and a higher average basket, even if the weak CNY vs the HKD does not help business with Chinese clientele, not mentioning political issues. In our view, only Salvatore Ferragamo has highlighted that sales in Hong Kong remained negative in H1.

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The next graph shows that overnight visitors to Hong Kong from Mainland China are slightly better oriented in the last few months, even if the trend remains not very clear and needs to be confirmed in the coming months. But, at least, we can argue that the worse is behind and the coming months should confirm the gradual improvement in the environment and this should clearly help sales of luxury brands in the former British colony.

Fig. 14: Mainland Chinese overnight visitors in Hong Kong (chge in %)

14 13 10 5 3 3 3 1 1 1

-1 -3 -3 -6 -7 -8 -9

-23

Source: Company Data; Bryan, Garnier & Co ests.

The positive trend in APAC that began in Q2 16 (+2% after -1% in Q1) was consistent for each of the 2016 quarters with regular acceleration (which was amplified even in Q1 17 and confirmed in Q2 17). In H1 17, sales in APAC grew on average by 13% for our luxury groups sample. We can add at this point that most of brands and most investors have been surprised by the speed and the magnitude of this rebound in Asia. Actually, so strong a recovery in such a short period of time is quite unusual and the question at this point: is how long do we believe this trend will last (because it will not last for ever!)? And when will the slowdown emerge (because it will happen)? We guess that this is more likely to happen in Q4 17 and much more certainly in 2018.

Fig. 15: Trends of luxury goods sector in Europe and in APAC in %

Organic sales growth average in APAC (in %) Organic sales growth in Europe (in %) 13 13 12 11 16 9 9 9 14 7 7 13 5 4 11 2 1 10 10

7 -2 5 5 -5 -5 4 4 4 3 3 3 3 2 2 -10 -12

Source: Company Data; Bryan, Garnier & Co ests. …and in Europe also thanks to much better tourist flows. In Europe (30% of sales), the positive trend (+10% on average in H1 with a very slight improvement in Q2 with an 11% increase) came from i/ much better oriented tourist flows especially in France (all nationalities are concerned, especially from China, the US and even Russia) on a clear undemanding comparison basis, as a consequence of the terrorists attacks in Europe in 2015-16 (in Paris, tourists

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were 10% higher than last year in H1 2017 with +30% for Chinese and +20% for Americans), and ii/ a much better performance from local consumers. Nevertheless, we argue that the momentum with tourists in Europe is likely to be less dynamic in the coming quarters if the EUR continues to strengthen.

The figures given by Global Blue, the global leader in the tax refund industry, highlight the strong rebound in Tax Free Shopping (TFS) sales in Europe YTD (+13% in July of which +6% in France and +23% in UK) and this is especially true with the most important clientele for the luxury sector: sales are up 20% with Chinese (a third of world tax free shopping sales), up 23% with Americans, and up 32% with Russians. We saw some slowdown in the trend in June with a limited 8% increase for TFS sales (no growth in France) versus +21% in Q1. June was also affected by an earlier Ramadan than last year, hence the rebound in July (+13%, o/w +6% in France). It is nevertheless obvious that with the current USD weakness vs the EUR, the trend with American clientele should slow in the coming months.

Furthermore, Asian TFS sales are also well oriented so far with a 20% increase in April YTD (sales especially with Chinese clientele are up 20%), despite a strong decline in Korea but thanks to the dynamic momentum in Singapore and Japan.

Fig. 16: Tax Free Shopping sales trend in Europe in July

Source: Global Blue; Bryan, Garnier & Co ests Nevertheless, the momentum in travel retail remains well oriented with a 16% world-wide TFS sales increase in July (+20% with Chinese clientele) versus +10% in June with a strong performance in Japan (driven by Chinese clientele), while in June/July, sales in Europe were up 9% with an expected further slowdown in Q3 given the USD weakness vs the EUR.

2.4. E-Commerce sales up double-digit! e-Commerce should be a For the luxury goods industry, the e-commerce channel can appear as counter-intuitive. Indeed, clear growth driver for the luxury means exclusivity, scarcity and selective retailing. These items are not very common in the e- luxury goods industry in the coming quarters and years. commerce environment. Nevertheless, this channel already accounts for around 7% of luxury goods’ sales according to Bain & Co (but only 4% in 2013) versus over 20% for the fashion industry. In 2020, the weight of online sales should represent 12% of the total luxury goods industry. As a comparison, online sales represent 25-30% of H&M’s sales across the Nordic countries. More

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importantly, in our view, we argue that around 60% of luxury goods purchases are digitally influenced through visiting brands’ websites before purchasing in stores (offline).

Currently, one of the reasons why online accounts for a small part of the industry is the lesser assortment of goods shown on e-commerce compared with the number that can be found in the brands’ boutiques, even if this is very often the brands’ strategy.

The two figures below highlight that, according to Bain & Co, the America are by far the leader for e- commerce luxury sales (56% of total online sales) while the region accounts for only 33% of the total luxury goods market. Nevertheless, we believe that the gap between the US and other regions concerning online sales should be narrowed in the coming years. In 2020, RoW (especially Asia) should account for 30% of online luxury sales vs 19% currently. US online penetration is close to 11% versus no more than 5% in Europe.

Fig. 17: Total and online luxury goods industry by region (2016)

Luxury goods market by region (%): Online luxury goods market by region (%):

RoW; 19 RoW; 34 Americas ; 33

Americas ; 56 Europe; 25

Europe; 33

Source: Company Data; Bryan, Garnier & Co ests. From now on, all groups are ready to catch up on this This segment is clearly a future growth driver. e-Commerce sales are growing by more than 20% per move by implementing new year (CAGR of 26% between 2013 and 2016) according to Bain & Co. In our view, the higher the structures and people selling price, the lower is the penetration of e-commerce as a % of sales. e-Commerce is and will be one of the most important growth drivers for the luxury goods industry. For instance, e-commerce sales for Richemont do not exceed 3% in our view. According to Bain & Co, online penetration is no more than 3% for hard luxury brands but it is close to 9% for accessories (leather goods and footwear). Actually, the accessories segment accounts for 40% of online luxury sales vs 30% for the total industry.

The fact that e-commerce remains a relatively low weight in the total market does not prevent luxury groups paving the way for digital expansion, as LVMH did when the group hired Ian Rogers (a former Senior Director at Apple) as Chief Digital Officer in 2015. At Richemont, Mr Franck Vivier was appointed in 2016 as Chief Transformation Officer, especially in charge of digital development, and a member of the Group Management Committee.

Moreover, the more retail-oriented the brand is, the lower is the weight of e-commerce. Actually, at LVMH, e-commerce accounts for around 6% of sales but less than 5% at Louis Vuitton and probably more than 15% for Sephora according to us (figures are not disclosed by the company and are only BG estimates). Nevertheless, LVMH, aware that e-commerce was a future growth driver for the industry, launched in June 2017 its new merchant website, 24sevres.com, a project driven by both Ian Rogers and Alexandre Arnault. LVMH’s galaxy brands (including Louis Vuitton and Christian Dior) are obviously sold on 24sevres.com, but not only. For instance, brands such as Prada, Gucci, and

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Salvatore Ferragamo can be found on this website, but not Hermès nor Chanel brands. Furthermore, Louis Vuitton launched in July 2017 a commercial website in Mainland China. Online is the fastest growing channel for the whole luxury goods sector. At Kering’s Luxury division, e-commerce sales grew 50% (+52% at Gucci alone) in H1 17 to reach, nevertheless, still a limited weight (4% retail sales). The Hermès brand is also working actively on its digital operations, under the control of Wilfried Guerrand (a Hermès family member), in order to launch before the end of the year a new website with a large number of references.

While online luxury sales accounted for slightly above 7% in 2016 versus less than 4% four years ago, Bain & Cie expects that this weight should reach 10% in 2018 and even 12% in 2020.

Fig. 18: Luxury online market

Luxury on line sales and change Online luxury goods as % of total luxury market 12 30 40 27 35 10 25 23 10 9 30 20 19 25 8 7,6 15 6,7 15 20 12 6 5,4 9 15 10 4,5 6,9 5,2 10 4 3,5 5 4 3 5 2 2 0 0 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 0 EURbn % change 2010 2011 2012 2013 2014 2015 2016 2017e 2018e Source: Bain& Cie, Altagamma; Bryan, Garnier & Co ests.

In analysing the luxury brands’ digital experience, it is also interesting, in our view, to look at the number of brands’ followers on Facebook or Instagram. Unsurprisingly, Chanel, Louis Vuitton, Gucci and Burberry (a pioneer on digital with an estimated 10% of group sales) have the biggest number of followers on both Instagram and Facebook.

Fig. 19: Instagram and Facebook followers of some luxury brands (in million)

Instagram Facebook

LV 19,9 Chanel 23,7

Chanel 19,3 LV 18,6

Burberry 16,8 Gucci 16,9

Gucci 15,9 Burberry 9,8

Rolex 6,2 Cartier 5,5

Cartier 4,2 Rolex 5,3

Ferragamo 1,7 Ferragamo 2,4

Tod's 1,1 Tod's 0,8 Source: Instagram and Facebook

At this point, we can add that Hermès has slightly more than 5m followers on Instagram, far less than Gucci despite similar amounts of sales, which is very consistent with the DNA of the respective brands, Gucci being much more fashion-oriented and also more attractive to Millennials. 2.5. Huge operating leverage impact More significant, in our view, than the very positive sales momentum, H1 17 was marked by a strong positive operating leverage impact for most of the brands. On average, our luxury goods groups

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sample half-year profitability (EBIT margin) has improved by 70bp. Nevertheless, again, margin achievements have been very varied amongst luxury groups, with Kering being the best performer and Salvatore Ferragamo the worst.

In H1, most groups have This global positive trend has been particularly strong for LVMH (+120bp to 18.5%). Actually, the enjoyed a clear operating profitability of LVMH’s Fashion & Leather division gained 440bp to 31.8%, including Louis Vuitton leverage: EBIT margin gained 70bp on average. whose profitability improved strongly (without releasing any precise figures) during the period thanks to top-line positive momentum and opex under control (almost no store openings and only renovations and extensions), implying a significant operating leverage. The Wines & Spirits business gained 220bp to 29.7%, especially thanks to Hennessy’s revenue increase (volume up 16%, of which +10% in Q2 despite a more demanding comparison basis). Nevertheless, the profitability of other divisions disappointed, especially Perfumes & Cosmetics (-70bp to 10.9%, a level far below some peers such as L’Oréal Luxe (around 20%).

Kering also achieved an even more strong performance in H1 with an EBIT margin gain of 330bp to 17.5%. Actually, Kering Luxury’s profitability gain was more than robust (+240bp to 20%), and especially at the Gucci brand whose margin enjoyed a terrific performance with +440bp to 32%. YSL also enjoyed clear margin gains (up 300bp to 22.9%). Only Bottega Veneta’s EBIT margin remained almost unchanged (-40bp to 25%) but in line with management’s expectations, as opex was more dedicated to communication and marketing in order to boost the brand’s top line (with savings on other P&L lines such as SG&A). Lastly, Puma’s profitability gained 260bp (+60bp at the gross margin level) and management’s FY 2017 EBIT guidance has even been revised up (EUR205m to EUR215m versus EUR185m to EUR200m previously).

Hugo Boss’ adjusted EBIT margin increased 70pb to 10.8%. The distribution upgrade (i.e. exit of the discount channel, wholesale rationalisation, etc.) and the lower share of markdowns had a positive impact on the GM (+20pb to 66%). The German group has also significantly reduced the pace of store openings (-4 in net to 438 DOS) whilst it is closing ~20 underperforming stores, which implied cost savings and lower D&A expenses (-60bp).

At Moncler, the main contributor to the adj. EBIT margin improvement (+100bp to 18%) was naturally the GM expansion (+150bp to 75.6%), supported by a favourable product, volume and channel-mix. These margin enhancers are a direct consequence of the successful implementation of the “Retail Excellence” project, enabling Moncler’s margins to reach a new record level for the first half of the year.

On the other hand, Tod’s Group and Salvatore Ferragamo achieved particularly poor performances in line with their sales achievements. Actually, their respective profitability was down 160bp to 10.8% and 460bp to 14.5%, a consequence of poor sales performance penalised by wholesale and negative retail sales at same stores, and a negative operating leverage impact (higher opex for instance with store openings). We also highlight the gross margin erosion for Salvatore Ferragamo (-200bp) due to strong discounts in order to clean up inventories, which is a positive move in the medium term but costly in the short term. With a 460bp decline, Ferragamo showed the worst luxury groups’ profitability performance in H1.

The Swatch Group saw its EBIT margin slightly increasing by 50bp to 10% in H1 17 (The Swatch Group achieved the lowest profitability level in H1) after an 870bp decline in H1 16. This implies that, despite the (modest) sales increase in H1 17, The Swatch Group’s profitability is still significantly below the H1 15 level which is due not only to its wholesale exposure but mainly to its production

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activity which was clearly loss-making during the period (tens of millions CHF in our view), a consequence of numerous cancellations of movement and component orders from third parties, while this business was still profitable in H1 16 but loss-making in H2 16. We expect that in H2 17 this production activity is likely to be at breakeven (not to say slightly profitable) as at least some Swatch Group brands have begun to reorder movements and components and that the momentum improved slightly in June and even more so in July.

For Hermès, which will report its H1 results on 14th September, we expect, thanks to strong top-line momentum (+9.7%), an EBIT margin that should be almost stable at 33.9% (already guided by the company’s management when H1 sales were released on 21st July) and, despite a non-recurring very positive FX impact (hedging gain) and tough comparison basis, as in H1 16, the EBIT margin gained 140bp. Amongst our luxury goods sample, Hermès achieves by far the highest level of profitability. We believe that the Louis Vuitton brand enjoys such a high level of profitability (above 40%) partly thanks to its 100% retail business model.

Fig. 20: Half-year EBIT margin (%):

In % H1 16 H1 17 Change (bp) Burberry 12.5 12.9 40 Hermès 33.9 33.7 -20 Hugo Boss 10.1 10.8 70 LVMH 17.2 18.5 130 o/w F& L division 27.7 31.8 410 Kering 14.2 17.3 320 o/w Kering Luxury 21.7 24.9 320 o/w Gucci brand 27.6 32.0 440 Moncler 17.0 18.0 100 Richemont 15.7 22.5 ns Salvatore Ferragamo 19.1 14.5 -460 Swatch Group 9.5 10.0 50 Tod's Group 12.4 10.8 -160 Luxury average 70 Source: Company Data; Bryan, Garnier & Co ests.

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3. But the best is likely behind us After a very strong H1, we believe that the best is likely behind us as we expect to see during the coming months and quarters a gradual but regular revenue momentum slowdown. Nevertheless, this will not prevent 2017 from being the best year for the sector since 2012. 3.1. Tougher comp in coming quarters for a few luxury groups A tougher comparison basis The table below highlights that in Q3 and in Q4, comps will become much more challenging. This is to come for some groups, particularly true for Kering whose sales grew 10.5% 10.4% in Q3 16 and in Q4 16 respectively, Gucci especially for LVMH and even more so for Kering… being the brand to monitor in the coming quarters given the record-high comparison base (+17% in Q3 16 and even +21% in Q4) after +5% achieved in H1 16. Therefore, even if Gucci’s activity remains robust in H2 17 (BG ests: +15%), it will be very challenging to maintain the same pace as in H1 17 (+43%). This comparison base issue will naturally continue in 2018, considering the stellar 43% growth recorded in H1 17. Despite an 18% expected for 2017 (o/w +28% for the Gucci brand), we believe that for Kering and Gucci, the best is very likely behind them.

This assumption is also valid for LVMH, but to a lesser extent. Following a 4% organic group sales growth in H1 16, LVMH sales grew by 7% H2 16, mainly driven by the Fashion & Leather division (+7% vs +1%). Our view is that the comparison base appears to be less challenging than for Kering. We anticipate a 9% sales increase for 2017 (o/w +11% for the Fashion & Leather division), implying +7% in Q3 17 and +5% in Q4 17 (respectively +11% and +6% for Fashion & Leather division).

Fig. 21: Comparison bases get tougher in H2 17 (% change):

% Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Burberry 13 8 -4 1 -1 0 4 4 2 4 Hermès 8 10 8 7 6 8 8 7 11 8 Hugo Boss 3 7 -1 5 -3 -1 -3 -1 1 3

LVMH 3 9 7 5 3 4 6 8 13 12

o/w F& L div 1 10 3 3 0 1 5 9 15 13 Kering -1 8 3 8 4 7 11 10 28 25

o/w Kering Luxury -3 8 3 7 3 5 11 11 32 25 o/w Gucci brand -8 5 0 5 3 7 17 21 48 39

Moncler 30 20 9 20 17 17 10 25 15 21 Richemont 2 2 3 -4 -7 -10 -11 5 4 1 Salvatore Ferragamo 2 3 0 2 -2 -3 -6 1 0 0 Swatch Group 4 4 -5 -5 -12 -12 -9 -6 1 2 Tod's Group -3 8 -2 2 -4 -4 -4 -1 -5 1

Luxury average 6 8 2 4 0 0 1 5 7 4 Luxury average excl. Moncler 3 7 1 2 -2 -1 0 3 6 2 Source: Company Data; Bryan, Garnier & Co.

Which are the groups less affected by this headwind? On the other hand, some groups within our luxury groups sample would not have to face such an issue. Among them, we highlight mainly Hermès which posted a very consistent performance between H1 and H2 2016 (+7%). Therefore, we do not expect any slowdown for the balance of the year. Given the industry’s recovery, Hermès is not expected to clearly outperform our sample average in 2017 (which was the case in the last three years). We argue that it would again be the case in 2018, as many luxury groups will have to cope with tougher comps which will not be the case for Hermès.

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…but some others like The situation is also far easier for Richemont. The Swiss group reported very poor figures during the Richemont and Hermès will first half 2016 with sales down 12% (-8% excluding the impact of watches’ inventory buy-back, not have to face the same issue! mainly concerning the Cartier brand) and the margin declining 820bp to 15.7% (-400bp to 19.8% excluding buy-backs). Consequently, we foresee a very encouraging 5-month trading statement 2017/18 sales on 13th September in view of an undemanding comparison base with organic sales growth of +9%, driven by the gradual recovery of the high-end watch industry, especially in Greater China (see above figures of Swiss watch exports), the still very dynamic jewellery business and obviously the easy comparison basis. For FY 2017/18, we expect sales to be up 7% at same FX.

We can make the same comment concerning The Swatch Group whose sales declined 12% (at same FX) in H1 2016 and 9% in H2. Actually, we argue that it will be the opposite. After the 1% sales increase in H1 17, we anticipate a clear sales acceleration in H2 with sales up 7%, thanks to the continuation of well-oriented retail sales (up double-digit for high-end brands), stronger wholesale sales in some areas and also more dynamic production activity, at least for the group’s brands.

Neither Tod’s Group nor Salvatore Ferragamo are concerned by the tough comparison issue. The two Italian groups have reported poor sales momentum at same FX for in H1 (-4% for the former and no growth for the latter) due to, in our view, strategy and/or management issues at least in the short term. We don’t expect an additional slowdown of sales trend in H2 but, conversely, a likely slight recovery. Nevertheless, as was the case in 2016 and also in 2015, both groups are expected to underperform the luxury industry in 2017. It is too soon to say if this will again be the case next year. 3.2. Negative FX impact expected in H2 17 USD lost some 10% vs EUR USD has weakened vs the EURO which is not good news for the luxury industry. Actually, the USD YTD… lost 14% versus the EUR YTD. If we extrapolate the current level of 1.20 USD for one EURO for H2 17, it should imply a negative 2% impact on the FY and a negative 7% impact for H2. Furthermore, the implied effect will be quite negative (and even more negative) for Q1 18 (-11%). For 2018, the nagtive impact of a 1.20 parity should be 5%.

Fig. 22: EUR vs USD

1,25

1,2

1,15

1,1

1,05

1€ = …… 1 28/08/15 28/11/15 28/02/16 28/05/16 28/08/16 28/11/16 28/02/17 31/05/17

Source: Company Data; Bryan, Garnier & Co ests.

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Luxury & Consumer Goods

Which will have a negative Given the fact, that the USD and correlated currencies account for around on average 45% of luxury impact on all luxury groups groups’ revenues, this would imply a negative 4pts on sales growth for H2 17 and around 1 point for from Q3 17 and even more so in Q4. FY 2017. For FY 2018, extrapolating the current USD level (1.20), the impact should be 2.5 points negative on average for luxury groups of which -5 points in Q1 18. Nevertheless, most luxury groups are hedged at favourable levels. For instance, LVMH is hedged at 1.11 for FY 2017 and for more than 60% for 2018. Concerning Kering, the hedging levels are even more interesting with 1.10 for 2017 and even 1.08 for 2018.

Fig. 23: EUR vs USD

EUR/USD EUR/USD Chge USD vs EUR % EUR/USD Chge USD vs EUR % Q1 16 1.10 Q1 17 1.07 3.4 Q1 18e 1.20 -11.0 Q2 16 1.13 Q2 17 1.10 2.5 Q2 18e 1.20 -8.0 H1 16 1.11 H1 17 1.08 3.0 H1 18e 1.20 -10.0 Q3 16 1.11 Q3 17e 1.17 -5.0 Q3 18e 1.20 -1.0 Q4 16 1.08 Q4 17e 1.20 -9.0 Q4 18e 1.20 0.0 2016 1.11 2017e 1.13 -2.0 2018e 1.20 -5.0 Source: Company Data; Bryan, Garnier & Co ests. 3.3. 2018 should be a more normalised year 7% average organic sales Despite a slowdown for some luxury groups, 2017 is likely to be the best year for the sector since growth for luxury groups for 2013. After no growth in 2016, we currently expect slightly more than 6% organic sales growth on FY 2017. average for our luxury groups sample (and even +7% including Moncler). This year, Kering is expected be the best performer among luxury groups with an estimated 18% revenues increase, implying +14% in Q3 and +11% in Q4, thanks to the Gucci brand with a 27% increase in revenues. The second-best group will be Moncler (+15%), followed very likely by LVMH with an estimated 9% organic revenue increase (+7% in Q3 and +5% in Q4) of which +11% for the only Fashion & Leather goods division. Tod’s Group and Ferragamo are expected to be the worst performers with, respectively, no more than a 2% and close to a 3% sales increase.

Fig. 24: Organic sales growth (2012-18e)

Chge in % 2012 2013 2014 2015 2016 2017e 2018e

Burberry 9 19 12 0 1 3

Ferragamo 13 11 7 1 -2 3 3

Hermès 16 13 11 8 7 8 8

Hugo Boss 10 6 6 3 -2 0 3

Kering 11 4 5 5 6 18 6

o/w Kering Luxe 15 7 5 4 5 20 7

LVMH 9 8 5 6 5 9 6 o/w F&L div 7 4 3 4 3 11 6 Moncler - 25 21 19 18 15 9 Richemont 8 10 2 0 -7 7 6 Swatch Group 12 6 1 1 -7 4 5 Tod's 8 2 0 2 -4 2 3 Average 11 11 7 4 1 7 6 Average excl. Moncler 11 9 5 3 0 6 5

Source: Company Data; Bryan, Garnier & Co ests.

On average for our luxury groups sample, we expect FY 2017 organic sales growth to reach 6% (excluding Moncler) and 7% including the Italian group. As a first assumption, we expect a 5% increase in 2018, as the comps will be much more challenging.

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4. Valuation & recommendation YTD, the luxury groups stocks welcomed the sector recovery that began in late 2016 and amplified in Q1 2017. Consequently, the current sector valuation appears quite demanding with a clear premium versus the historical average, while we assume that, in the coming quarters, we should see some slowdown in the sales momentum given the tougher comparison basis.

We take the opportunity of this report to change some recommendations, including the downgrade on LVMH (Neutral versus Buy) given the strong share price rally YTD (+20% after +33% in H2 2016) and the upgrade of Salvatore Ferragamo (Neutral versus Sell) after the stock underperformance since our recommendation downgrade from Neutral to Sell in June. The stock share price has lost almost 19% since its highest level in May. 4.1. Luxury groups stocks did very well Clear luxury stocks rally YTD Luxury groups stocks have performed very well with a 19% absolute gain on average (+15% YTD (+19%)… relative to DJ Stoxx), of which unsurprisingly +45% for Kering, +41% for Moncler and +20% for LVMH, the top three best performers, while the Tod’s Group share price lost 2% (the only stock share price to be down YTD) and Salvatore Ferragamo’s gained only 7%, two clear underperformers vs the sector average. Our luxury stocks sample’s outperformance is quite consistent with the sales momentum recovery initiated in Q3 16. Furthermore, it is worth noting that this outperformance was mainly achieved in Q1 17 as, in the last three months, our luxury stocks sample have moved globally in line with the DJ Stoxx (2% relative).

Fig. 25: Share price absolute evolution YTD and on 3 months

Performance YTD Performance on 3m

1 4 KERING BOSS (HUGO) (XET) MONCLER MONCLER CHRISTIA N DIOR KERING RICHEMONT N RICHEMONT N BOSS (HUGO) (XET) TIFFANY & CO BURBERRY GROUP CHRISTIA N DIOR LV MH BURBERRY GROUP COA CH HERMES INTL. THE SWA TCH GROUP 'B' THE SWA TCH GROUP 'B' TIFFANY & CO TOD'S HERMES INTL. LV MH PRA DA SALVATORE FERRAGAMO SALVATORE FERRAGAMO MULBERRY GROUP TOD'S COA CH MULBERRY GROUP PRA DA - 10,0 0,0 10,0 20,0 30,0 40,0 50,0 - 15,0 - 10,0 - 5,0 0,0 5,0 10,0

Source: Datastream 4.2. Valuation comparison The table below highlights that some stocks are trading at a clear premium versus luxury peers’ average as is the case for Tod’s Group (12% premium on 2018 EV/EBIT) which is not deserved in our view given the low visibility in the short term, but can be explained by a potential long-term recovery. The premium of Salvatore Ferragamo (14% on 2018 EV/EBIT) can be also explained by a recovery situation even if we cannot also exclude some speculation on this stock given the shareholding structure and some potential changes in the medium term. The sector average is trading at 13.8x on 2018 EV/EBIT excluding Hermès (14.5x including Hermès).

Conversely, LVMH is trading almost in line with our luxury peers’ average even with a slight discount and Kering with a limited 2% premium.

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Fig. 26: Valuation comparison

2017e 2018e 2017 premium on 2018 premium on x EV/EBIT EV/EBIT average (ii) average (ii) Burberry 14.4 12.6 -10% -9% Hermès Intl 23.4 20.7 - - Kering 15.9 14.1 0% 2% LVMH 14.5 12.9 -9% -7% Moncler 15.5 13.8 -3% 0% Richemont 18.1 14.7 14% 6% Salvatore Ferragamo 17.6 15.8 11% 14% Swatch Group 19.3 15.2 21% 11% Tod’s Group 18.1 15.5 14% 12% (i) Luxury average 16.7 14.5 - - (ii) Luxury average (excl. Hermés) 15.9 13.8 - -

Source: Company Data; Bryan, Garnier & Co ests. The current valuation appears somewhat quite demanding versus the historical average valuation on EV/EBIT as we can see in the chart below.

Fig. 27: Historical valuation

29

24

19

14

9

4 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

EV/EBIT Luxury Sector average (excl. Hermes) Avg 2005 - 2016e

Source: Company Data; Bryan, Garnier & Co ests. …implies quite a demanding valuation with a significant We have also compared luxury groups’ current P/E valuations and historical averages since January premium vs the historical 2010. Globally, the luxury goods sector is trading at a 24% premium versus this average, while the average. 2017 sales momentum is globally in line with the historical average.

Unsurprisingly, amongst our luxury groups sample, The Swatch Group valuation is very high with a premium close to 40%. Kering is trading at a very significant premium (37%), followed by LVMH (25%). On the other hand, Hermès and Ferragamo are trading almost in line with their respective averages since 2010 which can be explained by some recent speculative situations for both groups .

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Fig. 28: Current valuation vs historical valuation (since Jan 2010)

(x) PE forward aver since Jan 2010 premium (%) Burberry 21.7 18.9 14.8 Hermès 36.5 33.5 9.0 Kering 20.3 14.7 37.0 LVMH 21.3 17.1 25.0 Richemont 23.6 19.0 24.2 The Swatch Group 23.2 16.2 40.0 Salvatore Ferragamo 21.3 21.9 -3.0 Tod's Group 22.8 19.3 18.1 Luxury panel average (exc Hermès) 23.5 18.9 24.3 Source: Company Data; Bryan, Garnier & Co ests. 4.3. Recommendation LVMH recommendation Here we come back in more depth on our two Buy recommendations and explain why we have downgraded on valuation downgraded LVMH and upgraded Salvatore Ferragamo. issue!

• LVMH (Neutral versus Buy - FV: EUR227): First of all, we highlight the strong fundamentals of the global luxury groups’ leader and especially the high-quality brands (Hennessy, Louis Vuitton, Dior Couture…). Nevertheless, we downgrade the stock from Buy to Neutral for the following reasons: i/ more demanding comps to come especially in H2 particularly in Wines & Spirits and Leather goods which should imply some slowdown in the sales momentum; ii/ the share price rally YTD (+20%) following +33% in H2 16 (+21% relative to DJ Stoxx); iii/ a limited upside versus our FV (5%); and iv/ a high valuation with a 24% premium versus the historical average since January 2010.

• Richemont (Buy - FV: CHF88): We remain at Buy on the Swiss group and increase our Fair Value (CHF89 vs CHF83) given higher prospects. CFR should benefit from: i/ easy comps (H1 16/17 sales were down 12% and 8% excluding inventory buy-backs); ii/ the gradual recovery of the Swiss watch industry (three consecutive months of growth); and iii/ a positive product mix (more exposed to high end watches which recover more quickly and jewellery).

• Hermès Intl (Buy - FV: EUR442): We remain also positive on Hermès. Historically, Hermès stock outperforms peers when the situation is more challenging which is likely to be the case in the coming quarters. Over the last six months, the RMS share price has underperformed most of peers as investors were betting on stocks with higher betas. Things will change in the coming quarters.

• Moncler (Buy - FV: EUR24): The H1 results have clearly confirmed our investment case: (i) controlled and selective growth to maintain the brand appeal, (ii) successful expansion into knitwear which already supports momentum, (iii) “Retail excellence” initiatives are accretive to group’s margins and (iv) the outcome from the Italian Tax Authority concerning the “Patent Box” is pending, its positive EPS impact is not priced in by the CS forecasts).

• Salvatore Ferragamo (Neutral versus Sell - FV: EUR23): The group share price has lost 20% vs its highest level (10th May 2017), 8% in the last three months and even a further 7% since our downgrade from Neutral to Sell. Although, we leave our FV unchanged on the

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Luxury & Consumer Goods

stock, we argue that all the negative news is already in the share price. Even if we are aware that improvements will not come soon, we believe that the worse is behind with an anticipation of better momentum in the coming quarters; hence, our recommendation upgrade.

Fig. 29: Fair Value & Recommendation

EUR prev recommendation new recommendation previous FV new FV Burberry (p) Sell Sell 1490 1490 Hermès Intl Buy Buy 445 442 Hugo Boss Neutral Neutral 74 74 LVMH Buy Neutral 230 227 Kering Neutral Neutral 300 296 Moncler Buy Buy 24 24 Richemont (CHF) Buy Buy 83 88 Salvatore Ferragamo Sell Neutral 23 23 Swatch Group (CHF) Neutral Neutral 305 332 Tod's Sell Sell 58 57 Source: Company Data; Bryan, Garnier & Co ests.

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Intentionally left blank

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Price Chart and Rating History Hermès Intl.

442.5

392.5

342.5

292.5

242.5

192.5

142.5 02/03/16 02/06/16 02/09/16 02/12/16 02/03/17 02/06/17 HERMES INTL. Fair Value Achat Neutre Vente

Ratings Target Price Date Ratings Price Date Target price

28/11/14 BUY EUR262.75 31/08/17 EUR442 28/04/17 EUR445 24/10/16 EUR410 22/07/16 EUR370 07/04/16 EUR355 06/01/16 EUR360

02/12/15 EUR344

Kering 300.7 280.7

260.7

240.7

220.7

200.7

180.7

160.7

140.7

120.7 02/03/16 02/06/16 02/09/16 02/12/16 02/03/17 02/06/17 KERING Fair Value Achat Neutre Vente Ratings Target Price Date Ratings Price Date Target price 13/02/17 NEUTRAL EUR230.3 31/08/17 EUR296 20/01/16 BUY EUR150.5 28/07/17 EUR300 18/02/15 NEUTRAL EUR185 27/06/17 EUR290 15/01/14 BUY EUR146.15 26/04/17 EUR280

28/11/11 NEUTRAL EUR101.35 10/04/17 EUR243 13/02/17 EUR236 26/10/16 EUR218 24/10/16 EUR211 06/10/16 EUR193 13/09/16 EUR185 29/07/16 EUR175 07/07/16 EUR170 22/04/16 EUR174 07/04/16 EUR176 06/01/16 EUR180 02/12/15 EUR173 25/09/15 EUR177 28/07/15 EUR183 07/07/15 EUR180

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Price Chart and Rating History 241.6 LVMH 221.6

201.6

181.6

161.6

141.6

121.6 02/03/16 02/06/16 02/09/16 02/12/16 02/03/17 02/06/17

LVMH Fair Value Achat Neutre Vente

Target Price Ratings Date Target price Date Ratings Price 31/08/17 EUR227 31/08/17 NEUTRAL EUR216.2 27/07/17 EUR230 04/02/15 BUY EUR144.5 13/07/17 EUR232 25/07/14 NEUTRAL EUR139.8 11/04/17 EUR223 27/01/17 EUR208

23/01/17 EUR202 24/10/16 EUR194 12/10/16 EUR180 17/06/16 EUR171 13/04/16 EUR174 07/04/16 EUR177 06/01/16 EUR182 02/12/15 EUR177 25/09/15 EUR182 29/07/15 EUR186 24/03/15 EUR180 04/02/15 EUR158

13/01/15 EUR145

Richemont 110.8

100.8

90.8

80.8

70.8

60.8

50.8 02/03/16 02/06/16 02/09/16 02/12/16 02/03/17 02/06/17

RICHEMONT N Fair Value Achat Neutre Vente

Ratings Target Price Date Ratings Price Date Target price 24/10/16 BUY CHF64.95 31/08/17 CHF88

23/05/16 NEUTRAL CHF58.95 15/05/17 CHF83 12/05/17 Under review 12/01/17 CHF79 24/10/16 CHF73 04/10/16 CHF60 23/05/16 CHF63 20/05/16 Under review 31/03/16 CHF81 09/11/15 CHF90

07/09/15 CHF95

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Price Chart and Rating History

470.0 The Swatch Group 420.0

370.0

320.0

270.0

220.0 02/03/16 02/06/16 02/09/16 02/12/16 02/03/17 02/06/17

THE SWATCH GROUP 'B' Fair Value Achat Neutre Vente

Ratings Target Price Date Ratings Price Date Target price 24/10/16 NEUTRAL CHF304.8 31/08/17 CHF332 15/07/16 SELL CHF289.5 02/02/17 CHF305

05/06/14 NEUTRAL CHF535 24/10/16 CHF320 15/07/16 CHF270 24/05/16 CHF370 04/02/16 CHF410 01/02/16 CHF420 06/01/16 CHF440 25/09/15 CHF430 24/03/15 CHF450 05/02/15 CHF400

26/01/15 CHF430

Tod's Group 85.0 80.0

75.0

70.0

65.0

60.0

55.0

50.0

45.0

40.0 02/03/16 02/06/16 02/09/16 02/12/16 02/03/17 02/06/17

TOD'S Fair Value Achat Neutre Vente

Ratings Target Price Date Ratings Price Date Target price 12/05/16 SELL EUR61 31/08/17 EUR57 23/01/15 NEUTRAL EUR80.9 04/08/17 EUR58 20/06/17 EUR55 08/04/17 EUR58 15/03/17 EUR63 26/01/17 EUR59 25/10/16 EUR53 24/10/16 EUR55 16/10/16 EUR55 06/07/16 EUR53 12/05/16 EUR60 07/04/16 EUR78 15/03/16 EUR82 06/01/16 EUR84 02/12/15 EUR82 25/09/15 EUR85

07/08/15 EUR88

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Intentionally left blank

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Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a BUY recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to NEUTRAL be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a SELL recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Distribution of stock ratings

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