Moncler, the Italian-based luxury down jackets manufacturer, will soon celebrate its third year since its IPO on the Milan Stock Exchange with a sweet performance of +4% while the Dow Jones Luxury Index is down -22% since December 2013. We believe the company is still relatively small compared to its peers and we expect the brand to remain among the top fast-growing luxury companies.
The company was founded in 1952 by two French entrepreneurs from Monestier-de-Clermont, which is the origin of the name Moncler, at a time when winter holidays were democratizing. The brand was mostly known in France until 2003 when Remo Ruffini, current chairman and CEO, acquired the company with his vision as a creative director to make it a global luxury player. Moncler successfully launched Haute Couture collections exclusively made in Italy or France, which became a trendsetter in the fashion industry such as the Paris Fashion Week, attracting a large and wide customer base. Today, Moncler outlet has the biggest market share in high-end down jackets, which gives the brand flexibility on pricing hence margins and product innovation. Italian competitor Erno is also positioned in the same niche but its size and footprint is substantially smaller, VF Corporation could be considered a competitor but the product positioning is not comparable. The company is active in 70 countries with more than 180 mono-brand boutiques, including the recent opening of flagship stores in London, New York and Seoul. The rapid expansion of the retail network since 2013, from 57% to 71% of net revenues, means higher costs that are fortunately offset by higher EBITDA margins and the privilege of not diluting the brand equity, which is crucial for Moncler outlet online. In fact, this fast-growing brand has taken concrete measures to stay recognizable but also discrete as it is facing the same threats as fashion companies that are seen everywhere and fear to become ubiquitous.
Moncler shares should benefit from the positive buzz after the fashion shows in Milan and Paris. Indeed, Moncler Outlet Spring/Summer 2017 Fashion Week was important to promote its identity and elevate its image. The Freeze for Frieze operation, which promoted young contemporary artists and designers, was a clever move to show the desire for trends disruption and freedom of creation that Remo Ruffini has brought to the brand. These initiatives will increase the audience and reputation of the company among fashion and luxury influencers. Another external factor that should positively impact the top line, the colder-than-usual weather in Europe (50% of net sales) during October, which is forecasted to continue at least beginning of November. Being focused on winter fashion makes the brand highly dependent on the weather conditions, which tend to be abnormal in recent years. The diversification into Spring/Summer items is a good strategy but outside of Moncler’s DNA and above all, a lower margin business.
Throughout its mono-brand stores, Moncler generates €30,000 per square meter, which is one of the highest rate in the industry after LVMH. The company’s geographic breakdown is well diversified with Asia/RoW representing about 1/3 of revenues, so approximately €350 million in sales, which is still a small number when taking into account the strong potential of the brand in the region. Americas represent only 12% of sales, the new flagship in New York (its largest worldwide boutique) should further boost local sales as the region is still under-represented with 15 mono-brand stores compared to the quality and quantity of ski resorts available in the country as well as the Latin American clientele who enjoys shopping in Miami for tax reasons. The product assortment has been reviewed to offer accessories or other winter items in the middle of down jackets. Moncler has launched an efficient internal counterfeiting tool which enables the company to trace each item to avoid wholesale dealers selling on the grey market and tarnishing the brand image with items that are discounted. Moncler has allowed some wholesalers in the US to discount some down jackets collections due to the mild weather last year; however, these items were dedicated to the wholesale channel and not available in retail stores.
Moncler has been able to grow sales by double digits +19% (at constant exchange rates) to reach €880 million at the end of 2016. However, we noticed a slowdown in same-store sales growth, which decreased from +8% in 2014 to +6% in 2016. If we look at the last 12 months, revenues recorded at €931 million, inventory increasing at a slightly faster pace than sales in the last four years. The recent acquisition of a production site in Romania for an industrial technological R&D hub for down jackets and to further integrate vertically should help cheap Moncler sale increase its gross margin, which is currently at 74%. EBITDA margins of 32.8% are hard to beat. After topping 34% in 2012, we are skeptical in the company’s ability to improve margins. Nevertheless we appreciate its strong pricing power in a deflationary environment, thanks to its culture of thinking “outside the box”. Profitability ratios are very encouraging with ROA at 17%, ROE 31% and ROCE 33% while net debt has substantially decreased from €230 million in 2012 to €85 million in 2016 thanks to an improved free cash flow level. The company has increased its capital expenditures by 10% to €75 million in 2016 to finance the new store openings internationally but still pays stakeholders a 1.20% dividend. In an Italian stock market that is down -23% with a constitutional referendum to come in December, Moncler share price is up 15% year to date. Strong top-line growth is anticipated, so you are paying 30 times sales but we are confident the company will be able to sustain high profit margins so we believe we should focus on profitability multiples with EV/EBITDA at only 5.60x. Valuations are attractive; even if you look at the average earnings of the last three years, you are paying 15 times EPS, taking into consideration that Moncler outlet uk has grown rapidly. You are paying 1.6 times the earnings growth, which is more than acceptable for the luxury industry. We have heard several M&A rumors these last couple weeks in the fashion industry with Coach looking at Burberry and Phillips-Van Heusen potentially interested in Michael Kors. We believe Moncler could be a takeover target by European luxury groups as it’s approaching the billion euro sales threshold with a robust balance sheet and after demonstrating its ability to perform throughout the years in a business that is highly seasonal. The 6% disposal of Eurazeo shares in Moncler last September could be a takeover opportunity as the free float is now above 50%, which is tempting for an acquirer who is looking for a company that “Goes fast but with no hurry”.