Burberry to Tiffany Seen Attracting LVMH as Sales Slow
Comment of the Day

February 25 2013

Commentary by Eoin Treacy

Burberry to Tiffany Seen Attracting LVMH as Sales Slow

This article by Andrew Roberts for Bloomberg may be of interest to subscribers. Here is a section
LVMH Moet Hennessy Louis Vuitton SA is poised to pursue a takeover as revenue growth, led by sales of its eponymous handbags, slows the most in four years.

The $87 billion company could go after Burberry Group Plc, the U.K.'s biggest luxury-goods producer, as a way to increase revenue while it works on repositioning the Louis Vuitton brand, Berenberg Bank said. After LVMH purchased Italian jewelry maker Bulgari SpA in 2011, it also could pursue Tiffany & Co., the New York-based jeweler with a market capitalization of $8.1 billion, according to Cantor Fitzgerald LP.

Chief Executive Officer Bernard Arnault, who helped to build LVMH into the world's largest luxury-goods maker through acquisitions, “is going to need to buy growth,” John Guy, a London-based analyst at Berenberg, said in a telephone interview. “He's going to need to buy time in order to sort Vuitton out.”

Purchasing another blockbuster brand would allow LVMH to reduce its reliance on smaller labels such as Fendi and Celine, while buying it time to burnish Louis Vuitton and develop its other fashion lines, about half of which Guy estimates aren't profitable. LVMH's sales are projected to increase 7.3 percent this year, the worst annual rate since 2009, according to data compiled by Bloomberg, as the Paris-based company slows expansion of its flagship brand to enhance Louis Vuitton's image and exclusivity.

Eoin Treacy's view The focus on cachet, permanence and reliability of products represent high barriers to entry in the high end luxury goods sector. Michael Kors and Coach both succeeded in entering this sector by appealing to the affordable luxury or mid-tier element of the market. One of the reasons Hermes trades on such a high multiple (P/E 40) relative to other major luxury brands is because of LVMH's earlier attempts to purchase the company and continued speculation that it may try again.

The appeal of the sector from an investment perspective is that is offers an avenue to profit from the increasing affluence of the world's upper middle class. The fact that growth is evident not only in Asia but globally suggests that this is more than simply a play on the rise of an individual country.

Among the larger members of the sector LVMH has pulled back to test the upper side of its two-year range and the region of the 200-day MA. A sustained move below €120 would be required to question medium-term scope for continued higher to lateral ranging. Christian Dior owns more than 40% of LVMH and has more than 50% of the company's voting rights. The share broke out of its two-year range in December and found support three weeks ago above €120. A sustained move below that level would be required to question medium-term scope for additional upside.

BMW has a similar pattern. Compagnie Financiere Richemont continues to unwind its overbought condition relative to the 200-day MA and a sustained move below the trend mean would be required to question the consistency of the medium-term uptrend. Swatch is susceptible to mean reversion following an impressive rally since November. PPR has a similar pattern. Hermes is rallying towards the upper side it of its 18-month range.

Prada and Luxottica Group have been trending relatively consistently over the last year but are temporarily overextended relative to their respective moving averages.

The high barrier to entry in the sector increases the potential that smaller companies, particularly those with a solid international growth trajectory, will eventually be taken over. Among companies with a market cap of less than $20 billion Ralph Lauren has at least paused in the region of the upper side of its yearlong range. Coach broke downwards from its two-year range last week and a sustained move above $50 will be required to question medium-term supply dominance. Micheal Kors has held a progression of higher reaction lows since listing in Hong Kong in late 2011. The most recent meaningful low is HK$50.

Among companies with a market cap of less than $10 billion, Burberry bounced impressively from the 1000p level in October and remains in an overall 18-month range. Potential for additional upside can be given the benefit of the doubt provided its holds above the 1200p area. Hugo Boss has been ranging in the region of its highs since late January and a sustained move below €80 would be required to question medium-term scope for additional upside. Tiffany hit a medium-term peak in mid-2011 and has held a progression of lower rally highs since. This performance is coincident with the price of 1 carat flawless diamonds. A move above $67 would begin to confirm a return to demand dominance beyond the short term. Remy Cointreau found support in the region of the 200-day MA from October and rallied to hit a new all-time high last week. A sustained move below the MA would be required to question the consistency of the medium-term advance. Salvatore Ferragamo broke out of a seven-month range in January and is somewhat overextended relative to the 200-day MA at present. TODs has held a progression of higher reaction lows since July and a sustained move below €95 would be required to question medium-term scope for continued upside. Mulberry more than halved from its 2012 peak near 2500p but rallied in the last few weeks to break the medium-term progression of lower rally highs. A sustained move below 1200p would now be required to question potential for some additional higher to lateral ranging.

Of the above companies those with the largest percentages of free floating shares are Burberry (99.6%), Coach (99%), Ralph Lauren (98.5%), Tiffany (90.4%) and Michael Kors (72%). Many of the European companies reviewed above have significant family interests who would need to acquiesce to any takeover proposal. Generally speaking, the larger cap sector continues to outperform with the drinks segment representing a significant growth story.

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