This document provides an overview of the luxury goods sector from an HSBC EMEA Equity Research report dated July 2012. It discusses the structure of the luxury goods industry, including diversified luxury groups, hard luxury companies focused on watches and jewelry, and soft luxury companies focused on apparel and leather goods. It also covers key themes in the sector such as pricing power, market maturity, and image control. The report summarizes drivers of the luxury goods sector including emerging market exposure, currency fluctuations, and M&A activity. It concludes with sector valuation metrics and growth projections for 2008-2012.

1. EMEA Equity Research
Luxury goods abc
July 2012
Luxury goods
Luxury Goods team
Antoine Belge*
Head of Consumer Brands and Retail Equity Research, Europe
HSBC Bank Plc, Paris Branch
+33 1 56 52 43 47 antoine.belge@hsbc.com
Erwan Rambourg*
Head of Consumer Brands and Retail Equity Research
The Hong Kong and Shanghai Banking Corporation Limited
+852 2996 6572 erwan.rambourg@hsbc.com.hk
Sophie Dargnies*
Analyst
HSBC Bank Plc, Paris Branch
+33 1 56 52 43 48 sophie.dargnies@hsbc.com
Sector sales
David Harrington
Sector Sales
HSBC Bank Plc
+44 20 7991 5389 david.harrington@hsbcib.com
Lynn Raphael
Sector Sales
HSBC Bank Plc
+44 20 7991 1331 lynn.raphael@hsbcib.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
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2. 2
Sector structure
July 2012
Luxury goods
EMEA Equity Research
Luxury goods
Diversified groups or holdings ‘Hard luxury’ companies ‘Soft luxury’ companies
LVMH Christian Dior
Richemont Swatch Group Coach Burberry
Louis Vuitton 41% LVMH stake
Cartier Omega
Moët Hennessy Dior Couture brand
Montblanc Breguet
Sephora
IWC Tissot
DFS Prada Ferragamo
Panerai Swatc h
Bulgari
Perfumes
Tiffany Harry Winston Tod’s Hermès
PPR Luxottica
Gucci Ray-Ban Hugo Boss
Puma Oakley
Retail ass ets Eyewear licences
Lenscrafters
Sunglass Hut
Source: HSBC
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3. Sector valuation history (forward PE)
July 2012
Luxury goods
EMEA Equity Research
40.0 x 2000 bubble
35.0 x
2007 market
30.0 x
China starts peak
SARS
25.0 x to matter
epidemic
20.0 x
15.0 x
10.0 x
5.0 x Asian financial
09/11 attacks
crisis Post-Lehman collapse
0.0 x
Jun- Mar- Dec- Sep- Jun- Mar- Dec- Sep- Jun- Mar- Dec- Sep- Jun- Mar- Dec- Sep- Jun- Mar- Dec- Sep- Jun-
97 98 98 99 00 01 01 02 03 04 04 05 06 07 07 08 09 10 10 11 12
Source: Factset, HSBC
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4. 4
EBIT margin versus asset turnover (FY2012*)
July 2012
Luxury goods
EMEA Equity Research
1.9
1.7 Coach
1.5 Ferragamo Hugo
Asset Turnover (x)
1.3
Burberry
1.1
Tiffany Prada
Tod's
0.9 Hermes
Richemont
Lux ottica
Sw atch
0.7
LVMH
PPR Christian Dior
0.5
10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
EBIT Margin (%)
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* FY2012 figures for Burberry, Tiffany, Richemont and Prada are actuals, all other figures are HSBC estimates.
Source: HSBC estimates

5. EMEA Equity Research
Luxury goods abc
July 2012
Sector description Antoine Belge*
Head of Consumer Brands and
The luxury goods sector includes companies that develop, produce, market, distribute and sell high-end Retail Equity Research, Europe
HSBC Bank Plc, Paris Branch
apparel, jewellery, watches, leather goods and accessories. Some luxury goods companies are also +33 1 56 52 43 47
antoine.belge@hsbc.com
involved in other premium-priced categories, such as LVMH with its fragrances, and wines and spirits, or
Erwan Rambourg*
are vertically integrated; the Swatch Group, for example, has a watch-component division. Many listed Head of Consumer Brands and
companies are family-controlled, although some have a 100% free float, such as Burberry and Tiffany. Retail Equity Research
The Hong Kong and Shanghai
The sector is characterised by high operating margins, substantial emerging-market exposure and strong Banking Corporation Limited
+852 2996 6572
cash generation. M&A has been a driver in the past, but with a few exceptions – Luxottica, for example – erwan.rambourg@hsbc.com.hk
synergies are scarce, making it hard to return cash to investors in an efficient manner. Sophie Dargnies*
Analyst
 Diversified groups/holdings: Some of the listed companies in the space have grown by acquisitions HSBC Bank Plc, Paris Branch
+33 1 56 52 43 48
that gave them large, diversified brand portfolios. The proxy for the sector and the largest group is the sophie.dargnies@hsbc.com
French company LVMH, which now has more than 50 brands in five different product categories: *Employed by a non-US affiliate of
fashion and leather, fragrance and cosmetics, wines and spirits, watches and jewellery, and selective HSBC Securities (USA) Inc, and
is not registered/ qualified
distribution. Christian Dior is a listed holding company of LVMH. PPR is more of a conglomerate pursuant to FINRA regulations
than a diversified luxury group, since it holds retail assets, a stake in sports brand Puma and a luxury
portfolio. Richemont and the Swatch Group also have diversified portfolios, although they focus on
so-called hard luxury.
 Hard-luxury companies: ‘Hard luxury’ describes products such as watches, jewellery and pens,
although pens no longer contribute much to sales. Watches and jewellery are often considered
together, but their distribution structures vary considerably. Watches are primarily wholesale-driven,
because consumers want to compare designs, brands, prices and functionality. Jewellery is often
retail-driven – companies sell their own jewellery in their own stores. The largest listed hard-luxury
companies are Richemont, with its star brand Cartier, and the Swatch Group, with the star brand
Omega. Monobrand companies include Tiffany and Harry Winston, which sells mostly jewellery.
 Soft-luxury companies: ‘Soft luxury’ describes high-end apparel and leather goods. Soft-luxury
goods are mostly sold in directly operated stores. Monobrand listed companies include Burberry,
Hermès, Prada, Ferragamo, Tod’s, Hugo Boss and Coach.
Key themes
Luxury goods stocks historically have shown strong growth, trading at a premium valuation to the market.
The key concern is the sustainability of their growth, and the key question for the bigger brands like Louis
Vuitton and Cartier is how close the brand is to being mature. It seems paradoxical to try to sell more of
what theoretically should be exclusive, but the leaders of the industry have walked a fine line between
selling in volume and holding on to their identity (and the consumer). Most of the key themes in the
sector will revolve around image management, pricing power and the concept of maturity.
We believe that the key concerns and themes are:
 High-end consumer behaviour: Most investors consider luxury goods demand to be directly linked to
GDP growth. To a certain extent, that has been the case in some countries. But consumption of luxury is
driven by social, cultural and psychological factors as well as financial issues. Luxury boomed in Japan
during one of the country’s deepest recessions. Similarly, consumer confidence was sluggish in many
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6. EMEA Equity Research
Luxury goods abc
July 2012
developed markets in 2010 and 2011, but luxury demand soared as wealthy consumers loosened their belts
after almost two years of austerity.
 Pricing power: Luxury brands do not really compete on price but rather on design and desirability. During
the downturn, prices generally held up. In recovery phases, brands tend to launch higher-priced, higher-
margin products, and raise prices again.
 Trading up or down, more or less: Linked to this pricing power and the social status that is associated
with luxury, there is a big debate around the consumer behaviour of trading up or down, and trading more
or less. In spirits, trading down is common; customers buy cheaper vodka in the US during a recession, for
example. We think in luxury goods, high-end consumers tend to trade less when times get tough. A
consumer interested in the latest Patek Philippe watch would probably postpone buying it during an
economic crunch rather than trade down to a Casio or Swatch.
 Market share/polarisation: Trading less implies that some brands have a reference status and will both
increase sales when times are good and expand their market share when times are tougher. Louis Vuitton
is usually the reference in leather and accessories; Cartier in watches and jewellery.
 Market maturity/saturation: If Louis Vuitton, for example, increases sales by a high single-digit to
low double-digit rate every year, how long can this last? When will its market be saturated? This is a
theoretical debate that has gone on for years. Japan and possibly a few other countries may be treated
as cash cows now, but we believe companies still have considerable capacity to recruit customers and
persuade them to trade up.
 Image control: It is hard to get consumers to trade up if the distribution network is not up to speed in
product assortment, merchandising and in-store service. Most brands try to control their image as
much as they can. That often means taking back licences or transferring sales from wholesalers to
directly operated stores, which is harder for wholesale-driven businesses such as watches or
fragrances. And if the product category is a profitable diversification from the main business, but is a
category in which the company does not have know-how or a production base, such as fragrances and
eyewear at Burberry or Gucci, a licence makes sense. Another recurring subtheme here is counterfeit
products in luxury.
Sector drivers
Luxury goods have been driven by emerging-market exposure, both within developing countries and through
customers from those countries buying goods in Europe. We expect entering and developing leadership
positions in higher-growth countries, where margins are already higher than in the developed world outside
Japan, will continue to be a key factor for the sector. Historically, currency and M&A have also had an impact
on stock prices.
 Currency: Most European luxury goods manufacturers produce in euros (in France and Italy) or
Swiss francs, and sell throughout the world. They have important exposure to the US dollar and
dollar-linked currencies, such as the renminbi and the Hong Kong dollar, and to the yen. A
weakening of the euro or/and the Swiss franc has a positive impact on earnings for French, Italian
and Swiss luxury companies (which may have a time lag depending on hedging strategies).
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7. EMEA Equity Research
Luxury goods abc
July 2012
 M&A and cash management: There have been few deals since the LVMH buying spree in 1999-2000;
LVMH’s acquisition of Bulgari in 2011 being one. But with cash piling up, there is recurring talk about
deals, and cash generation could become an issue if buy-back programmes or dividend hikes do not occur.
Beyond the scarcity of targets (many of which are privately held with no pressure to sell), the issue with
acquisitions in the sector is that they do not produce many synergies – if LVMH were to acquire a leather
goods brand, it would not be distributed in existing Louis Vuitton stores.
 Geographic diversification: The US remains an underdeveloped market, in our view, and countries
like India, Russia and Brazil could represent growth opportunities in the future. But the investment
case for the sector now relies greatly on Asia outside Japan. Although there are theoretical risks when
operating in China, we believe they are outweighed by the many reasons to remain excited by the
country’s potential.
Valuation
Luxury goods companies tend to trade on forward-looking price/earnings ratios because they are usually
not very capital/debt-intensive. Historically, the sector has traded at an average 50% premium to the
market, with troughs during which the sector was trading in line (as it did following 9/11) and peaks when
the sector was trading at a 100% premium (for example, during the 2000 bubble). In absolute terms, the
sector traded in a forward PE range lying in the low to mid twenties in 2002-07. Since the 2008-09
downturn, it has traded more in the mid to high teens.
Luxury goods can be described as a ‘momentum sector’ since multiples tend to expand when earnings
estimates are raised (and the reverse is also true).
One thing to bear in mind about investments and cost containment in the sector is that most of the
companies are managed, and their equity held, by families. Consequently, management of brands, people
and profits is done with the long term in mind, not necessarily the next quarter, which investors can
sometimes find a difficult approach.
Luxury goods: growth and profitability
2008 2009 2010 2011 2012e
Growth
Sales (organic) 3.9% -2.9% 15.3% 18.9% 11.3%
EBITDA -5.2% -2.2% 44.3% 27.0% 16.2%
EBIT -5.7% -8.4% 55.7% 37.7% 16.4%
Net profit -14.4% -16.8% 22.9% 33.9% 21.5%
Margins
EBITDA 21.1% 20.7% 24.3% 25.8% 26.4%
EBIT 17.7% 16.6% 20.2% 23.0% 23.5%
Net profit 11.5% 10.2% 13.6% 15.0% 16.0%
Productivity
Capex/sales 6.5% 4.6% 5.6% 6.6% 5.8%
Asset turnover (x) 0.56 0.72 0.55 0.50 0.51
Net debt/Equity 38.9% 14.8% -2.7% -7.9% -13.7%
ROE 20.7% 18.3% 27.8% 29.9% 29.1%
Note: based on all HSBC coverage of luxury
Source: company data, HSBC estimates
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8. EMEA Equity Research
Luxury goods abc
July 2012
Sector snapshot
Key sector stats Core industry driver: international tourist arrivals and the
world population, 1995-2010
MSCI Europe Textiles, Apparel and 2.26% of MSCI Europe US
Luxury Goods Dollar Index Dollar 1000 7.5
900 7.0
Trading data
5-yr ADTV (EURm) 599 800 6.5
Aggregated market cap (EURbn) 212 700 6.0
Performance since 1 Jan 2000 600 5.5
Absolute 106%
Relative to MSCI Europe US Dollar 127% 500 5.0
3 largest stocks LVMH, Hermes, Richemont 400 4.5
Correlation (5-year) with MSCI Europe 0.58
2001
1995
1996
1997
1998
1999
2000
2002
2003
2004
2005
2006
2007
2008
2009
2010
US Dollar
International tourist arriv als (LHS, m)
Source: MSCI, Thomson Reuters Datastream, HSBC
World population (RHS, bn)
Source: US Census Bureau, World Tourism Organization, HSBC
Top 10 stocks: HSBC luxury goods coverage (weights are given
for presence in relevant indices)
Stock rank Stocks Index weight PE band chart: HSBC luxury coverage*
1 LVMH *44.9% 22x
2 Hermes International #2.6% 290
3 Richemont *17.0% 20x
4 Christian Dior *14.4% 240 17x
5 PPR **13.8%
14x
6 Coach ##0.1% 190
7 Prada *#0.2% 12x
8 Luxottica *9.4% 140
9 The Swatch Group 'B' *6.9%
90
10 Burberry Group *5.3%
* MSCI Europe Textiles, Apparel and Luxury Goods Dollar Index ** MSCI EU Retailing 40
# SBF120 ##S&P 500 *# S&P Europe LM:$
Source: MSCI, Thomson Reuters Datastream, HSBC 2001 2003 2005 2007 2009 2011
* Includes LVMH, Christian Dior, PPR, Luxottica, Burberry, Richemont, Hugo Boss,
Country breakdown: HSBC Luxury Goods coverage (by market Swatch, Hermes, Tiffany, Ferragamo, TOD’s, Prada, Coach
Source: Thomson Reuters Datastream, HSBC
capitalisation)
Country Weights (%)
PB vs. ROE: HSBC luxury coverage*
France 56.5%
Switzerland 15.1% 4.0 25
United States 9.1%
Italy 8.3% 3.5 20
Hong Kong 6.3% 3.0
UK 3.4% 15
Germany 1.3% 2.5
10
Source: Thomson Reuters Datastream, HSBC 2.0
1.5 5
1.0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012
Fwd PB (LHS) Fw d ROE % (RHS)
* Includes LVMH, Christian Dior, PPR, Luxottica, Burberry, Richemont, Hugo Boss,
Swatch, Hermes, Tiffany, Ferragamo, TOD’s, Prada, Coach
Source: Thomson Reuters Datastream, HSBC
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