“The Luxury Arms Race”

The NYT is out this morning with a good article detailing the current state of the Luxury goods sector, where it came from and where it is likely going. 

In short, COH and KORS are looking to diversify away from their increasingly commoditized, middlingly priced “luxury” hand bags under the guise of turning into diversified European luxury “houses”, akin to Louis Vuitton, Kering and Richemont. COH is buying Kate Spade and KORS Jimmy Choo in pursuit of this strategy. 

The following from KORS’ CEO John Idol explaining acquisition criterion highlights the (likely) economic nonsense this “strategy” represents:

“First, we’re really going to look at luxury companies. Second, we’re going to look at companies that lead in style and trend. [Third is for companies with] some size and scale [and] some heritage.”

The European luxury houses have spent decades cultivating truly high-end luxury brands. And while I am not yet a luxury goods expert, my guess is that along the way they rid themselves of anything along the lines of COH/KORS middling brands that diluted their high-end portfolio. 

So building a diversified portfolio of middling luxury brands at elevated valuations with cheap debt does not strike me as long-term shareholder friendly. 

But such is the climate, and the point of highlighting what is going on is to point out the relative valuation of Burberry Group (US OTC ADR: BURBY). With an EV of less than $9 billion, and an EBITDAM of 22%, BURBY is trading at approximately 11x EBITDA (source: Factset): 

At a $12.2 billion EV, also with a 22% EBITDAM, COH is trading for approximately 12.2x EBITDA. 

The NYT article says the following with regard to BURBY: 

“Burberry, a beleaguered company that is nevertheless Britain’s largest luxury brand by sales, was widely spoken of as a Coach takeover target before the Kate Spade deal. Burberry was considered too big at the time, but now that the stakes have been raised, it could make for a sizable jewel in a growing group’s crown. Mulberry, another British heritage brand, has also been mentioned by bankers in the sector, as have Hunter and Barbour.”

With cheap debt continuing to slosh around the globe, BURBY could quite quickly garner a “scarcity premium” valuation north of COH’s. 


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