Luxury & Consumer Goods: More optimism for 2013, Top Picks are adidas and Burberry

News published on April Wednesday 10, 2013
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  • adidas Group (BUY – FV: EUR92): In spite of the good performance in 2012 and year-to-date, adidas still offers an attractive growth/valuation profile. We expect a 2012-15e EPS CAGR of 19% thanks to mid-single digit sales growth and 100bp EBIT margin improvement p.a. to reach management’s 11% target by 2015. Regarding 2013, the adidas brand is well positioned in its core growth markets (market share gains in China, Russia and the US in 2012) and we expect continued positive momentum thanks to innovative product launches such as Boost. We note the top-line comparison base gets easier as the year progresses (+14% in Q1, +7% in Q2, +4% in Q3 and +1% in Q4) and we expect World Cup 2014 products to be visible in the P&L from Q4 13. From a profitability perspective, we expect geographic, product and channel mix to boost the gross margin, together with a waning negative impact from input costs, which means we are comfortable with management’s 9% EBIT margin guidance. adidas is trading at 14.3x PE14e and 7.6x EV/EBITDA 2014e, and we believe earnings momentum should push multiples toward cycle highs (16-17x P/E and 10x EV/EBITDA).
  • Burberry (BUY – FV: GBP16): Burberry is the cheapest stock in the Luxury universe: at 13.9x P/E and 9.8x EV/EBIT CY14e, it is trading at 9% discount to the sector, with broadly similar prospective growth rates (CY2012-15e EPS CAGR of 14% vs. c.12% for the sector). Burberry’s recent underperformance was impacted by Mulberry’s warning of weak UK sales, although this seems exaggerated as BRBY makes only c.8-9% of sales in the UK vs. 60% for Mulberry. Short term, after Q4 sales (published on 17th April), we believe earnings (published on 21st May) should be strong thanks to operating leverage and lower discounting. Longer term, we highlight Burberry’s significant margin expansion potential through opex leverage: in FY12, Burberry had an opex ratio of 50.5% (and we expect over 53% in FY13) vs. low to mid-40s in the sector on average. We expect this margin potential to be unlocked as Burberry slows retail space expansion, which was in the low-teens in FY12-13.

 

We remove Groupe SEB (BUY – FV: EUR70) and Luxottica (BUY – FV: EUR38) from our top picks list for different reasons. 


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