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Ernst&Young Luxury factbook-2015

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Ernst & Young the Luxury & Cosmetics Financial Factbook
The industry faces three main challenges in the year ahead:
• Manage demand worldwide — This year, the industry has been impacted by currency
volatility: many consumers have abandoned local markets and shopped abroad instead,
to benefit from pricing differences. Most dramatically, while domestic consumption
in mainland China dropped 3% in 2014, Chinese consumers increased their spending
globally by 8%. Luxury companies have started to re-think the idea of a consistent offer
throughout the world, to minimize further effects of currency variations. The choice
is between maintaining a consistent pricing policy without adapting to specific local
fluctuations, or presenting a variable price for each area, chasing exchange rates and
purchasing power.
• Define an omni-channel strategy — Most companies are refocusing their strategies on
the customer experience: omni-channel, flawless retail management, people excellence.
Brands are seeking to take control of their operations by managing a dedicated retail
network. In parallel, companies have to deploy their presence worldwide and thus
continue to develop their wholesale portfolio, focusing on the high quality of their
partners. Digital is increasingly important, both as a marketing tool and as a sales
channel. Companies can no longer focus on a single channel: they have to define a
consistent strategy for all distribution networks and adapt their DNA specifically for
each channel, including social media.
• Fine-tune the retail model — The muscular retail strategy carried out by the major
international brands in worldwide tier-one cities has lowered the return of top-line
growth that can be obtained by increasing direct distribution networks. Today clients
are well informed about what they want to buy because of a combination of continuous
on-line/off-line switches, word of mouth, social communities. This may lead to a partial
redefinition of retail strategies, with selected closures of less-performing retail shops,
focus on core locations and well-positioned flagships, reduction in the average size of
directly operated stores (DOS) to improve main sale ratios and reduce costs.

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Ernst&Young Luxury factbook-2015

  1. 1. Seeking sustainable growth The luxury and cosmetics financial factbook 2015 edition
  2. 2. Contents Statistics and key facts Index evolution 2 Executive summary A. Financial parameters B. Operating aggregates C. Advertising expenses D. SOTP and segment analyses E. Trading multiples F. Transaction multiples 8 DCF and valuation parameters G. Global luxury goods market H. Global cosmetics market I. Points of view from EY’s global sector specialists and outside experts 36 Industry overview Approach and SOTP analyses Sample selection Focus on Jimmy Choo 64 Methodology 67 Glossary 68 Contact us
  3. 3. The luxury and cosmetics financial factbook 2015 Executive summary Welcome to the fifth edition of EY’s annual financial factbook for the luxury and cosmetics sector. The factbook combines publicly available data with input from our sector leaders based on their work with the world’s leading luxury and cosmetics companies. It looks at current industry trends, the evolution of operating aggregates and key financial parameters. For the second year in a row, the industry experienced an overall contraction in growth: the value of the global market for personal luxury goods grew by 3.0%, reaching €224b. After a decade of double-digit growth, fueled by the “retail rush,” brand extensions and the quest for the highest product positioning, the industry has now entered a period of maturity. Firms are now focusing on more sustainable growth rates, effective and cost- conscious retail investments, and how to balance different distribution strategies. Despite a generally more favorable outlook in Western countries, the economic environment remains complex. Currency fluctuations and the growing importance of travel retail, are affecting pricing strategies. And while major emerging markets, such as China and Russia, show negative trends, Japan and other Asian-Pacific markets are gaining pace. In terms of profitability, the slowdown in sales has clearly negatively impacted operating margins: the average margin of the industry’s listed companies declined by 1 percentage point compared with last year. Overall however, expectations for annual growth for the industry remain unchanged, in the range of 4% to 6% through 2017. This continued positive performance will be supported by the growth of luxury consumers and high-net- worth individuals (HNWIs), accessories and the continued development of online sales. The global cosmetics market grew by 3.6% in line with the previous year, reaching €181b in 2014. We expect a positive long-term trend in this segment. Steady growth will be led mainly by middle-class consumers’ aspiration for high-quality and innovative products. We also see development opportunities in the natural products and men’s segments. Flavie Lacault Factbook global coordinator, Fashion Luxury — Milan flavie.lacault@it.ey.com Executive summaryPage 2 Roberto Bonacina Director, Lead Advisory MA, Fashion Luxury — Milan roberto.bonacina@it.ey.com Marco Pier Mazzucchelli Partner, Head of TAS* Mediterranean — Milan marco.mazzucchelli@it.ey.com Note: *Transaction Advisory Services
  4. 4. Page 3 The luxury and cosmetics financial factbook 2015 Executivesummary The industry faces three main challenges in the year ahead: • Manage demand worldwide — This year, the industry has been impacted by currency volatility: many consumers have abandoned local markets and shopped abroad instead, to benefit from pricing differences. Most dramatically, while domestic consumption in mainland China dropped 3% in 2014, Chinese consumers increased their spending globally by 8%. Luxury companies have started to re-think the idea of a consistent offer throughout the world, to minimize further effects of currency variations. The choice is between maintaining a consistent pricing policy without adapting to specific local fluctuations, or presenting a variable price for each area, chasing exchange rates and purchasing power. • Define an omni-channel strategy — Most companies are refocusing their strategies on the customer experience: omni-channel, flawless retail management, people excellence. Brands are seeking to take control of their operations by managing a dedicated retail network. In parallel, companies have to deploy their presence worldwide and thus continue to develop their wholesale portfolio, focusing on the high quality of their partners. Digital is increasingly important, both as a marketing tool and as a sales channel. Companies can no longer focus on a single channel: they have to define a consistent strategy for all distribution networks and adapt their DNA specifically for each channel, including social media. • Fine-tune the retail model — The muscular retail strategy carried out by the major international brands in worldwide tier-one cities has lowered the return of top-line growth that can be obtained by increasing direct distribution networks. Today clients are well informed about what they want to buy because of a combination of continuous on-line/off-line switches, word of mouth, social communities. This may lead to a partial redefinition of retail strategies, with selected closures of less-performing retail shops, focus on core locations and well-positioned flagships, reduction in the average size of directly operated stores (DOS) to improve main sale ratios and reduce costs. This edition of the factbook, based on your feedback, offers operational and financial aggregates on the industry, along with key valuation parameters and multiples. It looks at the industry’s future trends and includes input from our sector leaders. We hope you find this report insightful and that it provokes constructive thought and discussion within your organization. Do not hesitate to contact us for any comments or suggestions. Roberto Bonacina roberto.bonacina@it.ey.com Flavie Lacault flavie.lacault@it.ey.com Page 3Executive summary Marco Pier Mazzucchelli marco.mazzucchelli@it.ey.com
  5. 5. The luxury and cosmetics financial factbook 2015 Statistics and key facts Globalcosmetics marketremains asupply-driven market,fueledby innovationwhere consumersare alwayslooking forquality, performanceand perceivedresults. China continues to be the top consumer country ( of the total market). Retail remained a key growth driver in 2014, but the market saw a slowdown in retail network expansion, illustrating the players’ objective to focus on organic growth. Accessories have become the largest category within luxury goods and have grown the fastest lately. Global personal luxury market grew by in 2014. 3% The online luxury market has grown twelvefold in the past 11 years and now makes up of total sales. The global cosmetics market grew by 3.6% in 2014. Asia-Pacific and Latin America represented almost half of the global cosmetics market in 2014. Demand is still growing, mainly sustained by the touristic consumption, which has been heavily influenced by currency fluctuations and local regulations. The growth was helped by the sharp depreciation of the euro, which left the sector with an unbalanced price structure across regions. The digital revolution has opened up huge opportunities for both luxury and cosmetics industry. For the second year running, dermocosmetics was the most dynamic market, with growth of 5.1%. Executive summaryPage 4 5% 1/3
  6. 6. The luxury and cosmetics financial factbook 2015 Source: Capital IQ Note: 1) Compound annual growth rate EY luxury and cosmetics index evolution compared to major indices (base 100 as of 1 January 2008) The analysis reported in the graph below shows that the EY luxury and cosmetics index (represented by the companies we included in the EY factbook) has outperformed the market over the last seven years with a total return of 87%, corresponding to an average yearly significant return of 9%, despite the economic downturn. This relative performance actually illustrates the appetite of investors for an industry that is characterized by solid financial fundamentals in terms of sales growth, major profitability, resilient international client base and exposure to growing markets, attributing higher valuations to companies-related securities. The EY index is a representation of those luxury and cosmetics companies analyzed within the factbook. A specific weight has been attributed to each company included in the EY index based on its market capitalization and revenues (each of these two parameters weighing for a half). The relative weights have been revised at every company inclusion after its initial public offering (IPO). Finally, the evolution of the EY index has been compared to these of the SP 500 and STOXX Europe 600 indexes using 1 January 2008 as a starting date (rebased to 100). Index evolution Executivesummary 0 50 100 150 200 250 EY INDEX STOXX SP As of 31 March 2015 9% 5% 1% 187 143 111 CAGR 08-15 1 85 90 95 100 105 110 115 120 EY INDEX STOXX SP 111 118 116 Page 5Executive summary (Base 100 as of 1 March 2014)
  7. 7. PAGE 6 OPENING LUXURY AND COSMETICS THE EY FINANCIAL FACTBOOK 2014 DCF and valuation parameters
  8. 8. Page 7Opening DCFandvaluation parameters Financial parametersA B Operating aggregates C Advertising expenses D SOTP and segment analyses E Trading multiples Transaction multiplesF The luxury and cosmetics financial factbook 2015
  9. 9. DCF and valuation parametersPage 8 Financial parametersA Source: •• WACC and LTGR: based on consensus of several broker reports for each company •• Market capitalization and beta: EY elaboration based on SP Capital IQ •• Gearing: companies’ financial statements Notes: •• Market capitalization is based on a one-month average as of 31 March 2015. •• Gearing is defined as net financial debt/enterprise value. •• Beta corresponds to levered beta measured on a weekly basis over a two-year period. •• Beta figure for Moncler and Jimmy Choo might be influenced by an insufficient number of observations on the considered period. WACC and LTGR by company •• WACC ranges from 7.2% (Safilo) to 10.8% (Chow Tai Fook) depending on the company’s risk profile perception with an overall limited variance. •• Long-term growth rate (LTGR) presents a larger range (2.0% to 5.0%) mainly depending on size, maturity stage of the retail network and product diversification. Luxury companies continue to reflect high-potential growth combined with a limited risk profile Companies are sorted in decreasing order based on the market capitalization in euros observed as of 31 March 2015 (one-month average). The luxury and cosmetics financial factbook 2015 Note: Bubble size reflects market capitalization. Dotted lines represents average values. Luxury companies Market capitalization (in €m) WACC Gearing Beta LTGR LVMH 83,940 9.3% 6.3% 0.95 3.0% Richemont 44,067 9.8% (10.3%) 1.25 3.0% Hermès 31,827 8.4% (4.0%) 0.72 3.5% Luxottica 27,580 7.7% 3.8% 0.64 2.5% Kering 23,653 9.1% 16.4% 0.88 2.7% Swatch 21,873 9.5% (6.3%) 1.08 2.8% Prada 14,983 9.1% (0.5%) 0.53 2.6% Michael Kors 12,392 10.0% (7.7%) 0.74 3.0% Burberry 11,211 9.4% (3.9%) 0.98 3.2% Ralph Lauren 10,754 8.9% (9.4%) 0.81 3.5% Coach 10,666 10.0% (10.0%) 0.80 2.5% Tiffany 10,400 9.0% 6.8% 1.10 2.5% Chow Tai Fook 9,972 10.8% 6.3% 0.81 3.3% Hugo Boss 8,025 9.6% 1.1% 0.70 2.6% Salvatore Ferragamo 4,825 9.4% 1.2% 0.75 3.0% Moncler 3,759 9.1% 2.9% 0.64 3.0% Tod’s 2,759 10.3% (3.8%) 0.83 3.5% Tumi 1,463 8.8% (3.5%) 0.91 na Brunello Cucinelli 1,194 9.2% 4.1% 0.62 5.0% Jimmy Choo 905 8.1% 16.1% 0.83 na Safilo 861 7.2% 18.7% 0.79 2.0% Hengdeli 804 10.2% 21.6% 0.69 2.0% Average 9.2% 2.1% 0.82 3.0% Median 9.2% 1.2% 0.80 3.0% Maximum 10.8% 21.6% 1.25 5.0% Minimum 7.2% (10.3%) 0.53 2.0%
  10. 10. Page 9DCF and valuation parameters Financial parametersA WACC and LTGR by company •• Natura’s (Brazil) long-term growth rate continues to be significantly higher than the average sample, driven by its geographical coverage. •• WACC sample levels are balanced by the two extremes of Natura (Brazil geographical risk) and Shiseido (Japan). The cosmetic sample is characterized by a smaller number of companies, which significantly impacts the variance of financial parameters Companies are sorted in decreasing order based on the market capitalization in euros observed as of 31 March 2015 (one-month average). Natura L'Oréal Beiersdorf Estée Lauder L'Occitane Coty 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% WACC LTGR The luxury and cosmetics financial factbook 2015 Source: •• WACC and LTGR: based on consensus of several broker reports for each company •• Market capitalization and beta: EY elaboration based on SP Capital IQ •• Gearing: companies’ financial statements Notes: •• Market capitalization is based on a one-month average as of 31 March 2015. •• Gearing is defined as net financial debt/enterprise value. •• Beta corresponds to levered beta measured on a weekly basis over a two-year period. Note: Bubble size reflects market capitalization. Dotted lines represents average values. DCFandvaluation parameters Cosmetics companies Market capitalization (in €m) WACC Gearing Beta LTGR L’Oréal 93,163 7.9% 2.3% 0.71 2.0% Estée Lauder 28,982 8.3% 0.9% 1.04 2.5% Beiersdorf 18,242 7.8% (4.4%) 0.77 2.3% Coty 7,444 8.0% 23.5% 0.99 1.8% Shiseido 6,788 4.1% 9.3% 0.72 na L’Occitane 3,628 9.1% (5.3%) 0.68 3.0% Natura 3,237 10.0% 17.0% 0.87 6.0% Average 7.9% 6.2% 0.83 2.9% Median 8.0% 2.3% 0.77 2.4% Maximum 10.0% 23.5% 1.04 6.0% Minimum 4.1% (5.3%) 0.68 1.8%
  11. 11. Page 10 DCF and valuation parameters Financial parameters WACC Beta Gearing LTGR Source: data based on consensus of several brokers reports for each company Note: LTGR data was not available for Tumi, Shiseido and Jimmy Choo EY luxury and cosmetics sample: summary of financial parameters The luxury and cosmetics financial factbook 2015 A 4.1% 7.2% 7.7% 7.8% 7.9% 8.0% 8.1% 8.3% 8.4% 8.8% 8.9% 8.9% 9.0% 9.1% 9.1% 9.1% 9.1% 9.2% 9.3% 9.4% 9.4% 9.5% 9.6% 9.8% 10.0% 10.0% Shiseido Safilo Luxottica Beiersdorf L'Oréal Coty Jimmy Choo Estée Lauder Hermès Tumi Average Ralph Lauren Tiffany Kering Prada L'Occitane Moncler Brunello Cucinelli LVMH Burberry Swatch Hugo Boss Richemont Michael Kors Coach Natura Hengdeli Tod's Chow Tai Fook WACC9.2% Industry benchmark Low High WACC 8.9% Industry benchmark Low High 10.0% 10.2% 10.3% 10.8% Salvatore Ferragamo (10.3%) (10.0%) (9.4%) (7.7%) (6.3%) (5.3%) (4.4%) (4.0%) (3.9%) (3.8%) (3.5%) (0.5%) 0.9% 1.1% 1.2% 2.3% 2.9% 3.1% 3.8% 4.1% 6.3% 6.3% 6.8% 9.3% 16.1% 16.4% 17.0% 18.7% 21.6% 23.5% Richemont Coach Ralph Lauren Michael Kors Swatch L'Occitane Beiersdorf Hermès Burberry Tod's Tumi Prada Estée Lauder Hugo Boss L'Oréal Moncler Average Luxottica Brunello Cucinelli Chow Tai Fook LVMH Tiffany Shiseido Jimmy Choo Kering Natura Safilo Hengdeli Coty 9.2% Industry benchmark Low High Gearing 3.1% Industry benchmark Low High Salvatore Ferragamo 0.53 0.62 0.64 0.64 0.68 0.69 0.70 0.71 0.72 0.72 0.74 0.75 0.77 0.79 0.80 0.81 0.81 0.82 0.83 0.83 0.87 0.88 0.91 0.95 0.98 0.99 1.04 1.08 1.10 1.25 Prada Brunello Cucinelli Moncler Luxottica L'Occitane Hengdeli Hugo Boss L'Oréal Shiseido Hermès Michael Kors Beiersdorf Safilo Coach Ralph Lauren Chow Tai Fook Average Tod's Jimmy Choo Natura Kering Tumi LVMH Burberry Coty Estée Lauder Swatch Tiffany Richemont 9.2% Industry benchmark Low High Beta 0.82 Industry benchmark Low High Salvatore Ferragamo 1.8% 2.0% 2.0% 2.0% 2.3% 2.5% 2.5% 2.5% 2.5% 2.6% 2.6% 2.7% 2.8% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.2% 3.3% 3.5% 3.5% 3.5% 5.0% 6.0% Coty Safilo Hengdeli L'Oréal Beiersdorf Coach Tiffany Luxottica Estée Lauder Prada Hugo Boss Kering Swatch Average Richemont Michael Kors Salvatore Ferragamo Moncler L'Occitane LVMH Burberry Hermès Ralph Lauren Tod's Brunello Cucinelli Natura 9.2% Industry benchmark Low High LTGR 3.0% Industry benchmark Low High Chow Tai Fook
  12. 12. Sales CAGR, FY13A–FY16E – luxury companies Source: Data based on consensus of several brokers’ reports for each company On average, revenue growth of listed companies is still high and almost doubles the growth of the industry. However growth rates are decreasing. Retail expansion as a growth driver is becoming less effective and still requires high investments. Expected growth will mainly be driven by: •• The touristic consumption, oriented by changing currency fluctuations •• The internet channel, which is expected to experience the highest annual growth ever •• The rationalization of the retail network in search of a like-for-like growth Michael Kors and Moncler notably outperformed the average growth levels. The sales outlook of luxury companies points to organic and more like-for-like growth *Kering sales for FY13A-FY16E exclude numbers for Redcats, Sergio Rossi and Groupe Fnac Notes: • 2014 figures are estimated or actual depending on their availability as of the date of this study. • Figures are converted into euros using exchange rates as of 31 March 2015 (Source: Capital IQ). •• The results of 2014 are actual (A) if the financial results are closed and expected (E) if the financial year is not closed yet. Page 11DCF and valuation parameters (6.3%) 1.6% 4.0% 4.4% 5.5% 5.8% 5.6% 6.2% 6.4% 7.3% 7.6% 7.6% 7.8% 8.2% 8.3% 8.3% 8.6% 10.7% 10.8% 11.1% 13.9% 16.3% 20.7% Coach Swatch Tod's Chow Tai Fook Prada Safilo Tiffany Ralph Lauren Richemont LVMH Hengdeli Hugo Boss Average Salvatore Ferragamo Kering Luxottica Burberry Hermès Jimmy Choo Brunello Cucinelli Tumi Moncler Michael Kors B Operating aggregates DCFandvaluation parameters The negative CAGR of Coach is mainly explained by the management plan to reduce square footage in its directly operated stores by about 5%, involving the closure of 70 retail stores and 50 outlet stores by the end of FY15. Sales (in €m) FY13A FY14A/E FY15E FY16E CAGR (FY13A-FY16E) Michael Kors 3,082 4,055 4,779 5,422 20.7% Moncler 581 694 806 913 16.3% Tumi 435 491 563 642 13.9% Brunello Cucinelli 322 356 400 442 11.1% Jimmy Choo 130 138 158 177 10.8% Hermès 3,755 4,119 4,646 5,089 10.7% Burberry 3,222 3,472 3,816 4,122 8.6% Luxottica 7,313 7,652 8,659 9,299 8.3% Kering 9,656 10,038 11,494 12,256 8.3% Salvatore Ferragamo 1,247 1,321 1,469 1,582 8.2% Hugo Boss 2,432 2,572 2,813 3,033 7.6% Hengdeli 2,008 2,217 2,347 2,503 7.6% LVMH 29,016 30,638 33,604 35,839 7.3% Richemont 10,649 11,042 12,022 12,831 6.4% Ralph Lauren 6,935 7,309 7,750 8,296 6.2% Safilo 1,122 1,179 1,256 1,327 5.8% Tiffany 3,752 3,956 4,091 4,419 5.6% Prada 3,587 3,552 3,903 4,207 5.5% Chow Tai Fook 9,293 8,398 9,449 10,572 4.4% Tod’s 967 966 1,025 1,088 4.0% Swatch 8,111 8,353 8,042 8,503 1.6% Coach 4,724 4,474 3,892 3,892 (6.3%) Average 7.8% Median 7.6% Max 20.7% Min (6.3%) The luxury and cosmetics financial factbook 2015
  13. 13. Page 12 DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Source: data based on consensus of several brokers’ reports for each company Sales CAGR, FY13A–FY16E – cosmetic companies Majority of players are expected to grow at lower single digits except for L’Occitane and Natura. The cosmetics market is still driven by: •• Innovation and emphasis on quality and new ideas •• Increased focus on customized and green cosmetics •• A regional focus on new markets to compensate the slow growth expected in Europe L’Occitane and Natura significantly outperformed the cosmetics sample expectations. Sales growth expectations for cosmetics players are lower than for the luxury segment but still show an average annual growth of 5% over the FY13A-FY16E period Notes: •• 2014 figures are estimated or actual depending on their availability as of the date of this study. •• Figures are converted into euros using exchange rates as of 31 March 2015 (Source: Capital IQ). 0.7% 3.0% 4.2% 4.3% 4.6% 5.4% 9.5% 11.7% Coty Shiseido Beiersdorf L'Oréal Estée Lauder Average Natura L'Occitane B Operating aggregates Sales (in €m) FY13A FY14A/E FY15E FY16E CAGR (FY13A-FY16E) L’Occitane 1,055 1,180 1,333 1,471 11.7% Natura 2,040 2,155 2,438 2,676 9.5% Estée Lauder 9,478 10,210 10,142 10,833 4.6% L’Oréal 22,124 22,532 24,033 25,136 4.3% Beiersdorf 6,141 6,285 6,595 6,946 4.2% Shiseido 5,913 5,972 5,695 6,455 3.0% Coty 4,328 4,237 4,195 4,422 0.7% Average 5.4% Median 4.3% Max 11.7% Min 0.7%
  14. 14. The luxury and cosmetics financial factbook 2015 Source: Data based on consensus of several brokers’ reports for each company The slightly lower 2014 EBITDA margin vs 2013 is mainly due to: •• Lower growth experienced in the emerging markets •• Sharp currency movements leading to unprecedented price cuts putting pressure on margins •• Partially compensated by the good performance of accessories EBITDA remains largely above 20% with few notable exceptions higher than 30%. The luxury sample average earnings before taxes, depreciation and amortization (EBITDA) margin shows that profitability will not materially grow, even if it still reaches significant level Average EBITDA margin, FY13A–FY16E — luxury companies *Kering margin for FY12A-FY15E exclude numbers for Redcats, Sergio Rossi and Groupe Fnac Note: the 2014 EBITDA margin is computed on the basis of either actual or estimated figures for 2014 sales, depending on their availability. As some groups are listed under different jurisdictions around the world, they may use different generally accepted accounting principles (GAAP), and therefore a direct comparison of EBITDA may be less meaningful than if their results were presented under the International Accounting Standards. 7.8% 10.6% 12.8% 17.2% 18.3% 18.4% 20.4% 20.5% 21.0% 21.4% 22.0% 22.5% 23.6% 23.6% 23.8% 23.9% 25.3% 27.1% 27.1% 29.2% 32.5% 33.4% 36.0% Hengdeli Safilo Chow Tai Fook Jimmy Choo Ralph Lauren Brunello Cucinelli Luxottica Kering Tod's Tumi Salvatore Ferragamo Average Hugo Boss Swatch LVMH Burberry Tiffany Coach Richemont Prada Michael Kors Moncler Hermès Page 13DCF and valuation parameters B Operating aggregates DCFandvaluation parameters EBITDA margin FY13A FY14A/E FY15E FY16E Average ratio (FY13A-FY16E) Hermès 36.0% 35.1% 36.2% 36.7% 36.0% Moncler 33.0% 33.5% 33.4% 33.8% 33.4% Michael Kors 32.9% 32.5% 32.5% 32.0% 32.5% Prada 31.7% 26.8% 28.5% 29.6% 29.2% Richemont 26.8% 28.2% 26.5% 26.9% 27.1% Coach 33.2% 27.2% 23.3% 24.5% 27.1% Tiffany 23.9% 25.5% 25.6% 26.1% 25.3% Burberry 24.7% 23.4% 23.3% 24.1% 23.9% LVMH 24.6% 23.0% 23.4% 24.2% 23.8% Swatch 24.8% 21.6% 23.9% 24.0% 23.6% Hugo Boss 23.2% 23.0% 23.8% 24.2% 23.6% Salvatore Ferragamo 20.8% 22.2% 22.1% 22.9% 22.0% Tumi 21.5% 21.2% 21.6% 21.3% 21.4% Tod’s 24.0% 19.9% 19.8% 20.4% 21.0% Kering 21.2% 19.8% 20.1% 20.9% 20.5% Luxottica 19.5% 20.1% 20.8% 21.2% 20.4% Brunello Cucinelli 18.6% 18.4% 18.1% 18.4% 18.4% Ralph Lauren 18.7% 17.6% 18.0% 18.7% 18.3% Jimmy Choo 15.2% 16.8% 18.1% 18.8% 17.2% Chow Tai Fook 12.4% 13.0% 13.1% 12.9% 12.8% Safilo 10.0% 9.4% 11.0% 12.0% 10.6% Hengdeli 8.0% 7.2% 7.8% 8.0% 7.8% Average 23.0% 22.1% 22.3% 22.8% 22.5% Median 23.6% 21.9% 22.7% 23.5% 22.8% Maximum 36.0% 35.1% 36.2% 36.7% 36.0% Minimum 8.0% 7.2% 7.8% 8.0% 7.8%
  15. 15. Page 14 DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Source: Data based on consensus of several brokers’ reports for each company Average EBITDA margin, FY13A–FY16E — cosmetics companies Cosmetic companies confirmed last year’s average EBITDA of 17.4% for the FY13A-FY16E period Cosmetics companies are expected to improve their operating margin in the coming years. The key drivers of margin growth are: •• Higher sales of prestige products (which bear higher price tags and margins) in emerging markets •• Consumers still aspiring to more innovating and high-quality products Natura and L’Oréal are showing outperforming profitability. Note: the 2014 EBITDA margin is computed on the basis of either actual or estimated figures for 2014 sales, depending on their availability. As some groups are listed under different jurisdictions around the world, they may use different GAAP, and therefore a direct comparison of EBITDA may be less meaningful than if their results were presented under the International Accounting Standards. 9.8% 15.2% 15.7% 17.4% 18.6% 19.3% 21.2% 21.9% Shiseido Coty Beiersdorf Average L'Occitane Estée Lauder L'Oréal Natura EBITDA Margin FY13A FY14A/E FY15E FY16E Average ratio (FY13A-FY16E) Natura 22.8% 21.1% 21.6% 22.2% 21.9% L’Oréal 20.5% 21.1% 21.5% 21.8% 21.2% Estée Lauder 18.0% 20.2% 18.8% 20.3% 19.3% L’Occitane 17.4% 18.2% 19.1% 19.5% 18.6% Beiersdorf 15.1% 15.5% 16.0% 16.4% 15.7% Coty 14.3% 13.9% 16.1% 16.6% 15.2% Shiseido 12.0% 8.1% 9.5% 9.6% 9.8% Average 17.1% 16.9% 17.5% 18.1% 17.4% Median 17.4% 18.2% 18.8% 19.5% 18.6% Maximum 22.8% 21.1% 21.6% 22.2% 21.9% Minimum 12.0% 8.1% 9.5% 9.6% 9.8% B Operating aggregates
  16. 16. The luxury and cosmetics financial factbook 2015 Source: Data based on consensus of several brokers’ reports for each company Average capex ratio, FY13A–FY16E — luxury companies The average capital expenditure (capex) sales ratio of the sample confirms an industry with intensive capital requirements The stable average level of 5% to 6% of the capex sales ratio is mainly explained by the requirements of the retail network (openings, renovations, etc.). Note: the 2014 capex ratio is computed on the basis of either actual or estimated figures for 2014 sales, depending on their availability. 0.3% 2.0% 3.1% 3.7% 4.7% 5.1% 5.2% 5.5% 5.7% 5.8% 5.8% 5.9% 6.0% 6.0% 6.0% 6.1% 6.9% 7.2% 7.4% 7.8% 8.2% 8.5% Hengdeli Chow Tai Fook Safilo Luxottica Kering Ralph Lauren LVMH Tod's Richemont Average Tiffany Moncler Tumi Salvatore Ferragamo Hugo Boss Hermès Coach Burberry Michael Kors Brunello Cucinelli Jimmy Choo Swatch Prada 10.9% Page 15DCF and valuation parameters DCFandvaluation parameters Prada continues to outperform on capex ratio; however it is expected to moderate as the company slows down its store expansion pace. Capex ratio FY13A FY14A/E FY15E FY16E Average ratio (FY13A-FY16E) Prada 15.3% 10.2% 9.0% 9.0% 10.9% Swatch 7.1% 12.4% 7.3% 7.1% 8.5% Jimmy Choo 7.7% 9.1% 7.9% 8.1% 8.2% Brunello Cucinelli 9.3% 8.8% 7.8% 5.4% 7.8% Michael Kors 5.6% 9.1% 8.1% 6.7% 7.4% Burberry 6.4% 7.9% 7.4% 6.9% 7.2% Coach 4.8% 4.6% 10.5% 7.7% 6.9% Hermès 5.6% 6.8% 6.1% 5.8% 6.1% Hugo Boss 7.1% 5.0% 6.0% 5.8% 6.0% Salvatore Ferragamo 6.6% 6.3% 6.4% 4.7% 6.0% Tumi 5.4% 6.9% 5.8% 5.7% 6.0% Moncler 5.6% 7.1% 5.8% 5.2% 5.9% Tiffany 5.5% 5.8% 6.0% 6.0% 5.8% Richemont 6.0% 5.3% 5.8% 5.5% 5.7% Tod’s 5.1% 6.5% 5.3% 5.2% 5.5% LVMH 5.4% 5.0% 5.3% 5.2% 5.2% Ralph Lauren 5.2% 5.4% 5.0% 4.8% 5.1% Kering 6.9% 1.8% 5.0% 4.9% 4.7% Luxottica 3.7% 3.7% 3.8% 3.7% 3.7% Safilo 3.2% 3.2% 3.1% 3.0% 3.1% Chow Tai Fook 1.7% 3.0% 1.8% 1.4% 2.0% Hengdeli 0.9% (1.6%) 0.9% 0.9% 0.3% Average 5.9% 6.0% 5.9% 5.4% 5.8% Median 5.6% 6.0% 5.9% 5.4% 5.9% Maximum 15.3% 12.4% 10.5% 9.0% 10.9% Minimum 0.9% (1.6%) 0.9% 0.9% 0.3% B Operating aggregates
  17. 17. Page 16 DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Source: Data based on consensus of several brokers’ reports for each company Average capex ratio, FY13A–FY16E — cosmetic companies Overall, the capital requirements are lower for the cosmetics sample, with the exception of those with retail networks Natura and L’Occitane capex ratios outperform the sample due to their retail profiles. Note: the 2014 capex ratio is computed on the basis of either actual or estimated figures for 2014 sales, depending on their availability. 3.1% 3.4% 4.0% 4.4% 4.5% 4.6% 5.7% 6.3% Shiseido Beiersdorf Coty L'Oréal Average Estée Lauder L'Occitane Natura Capex ratio FY13A FY14A/E FY15E FY16E Average ratio (FY13A-FY16E) Natura 7.6% 6.8% 5.6% 5.2% 6.3% L’Occitane 5.7% 6.3% 5.5% 5.5% 5.7% Estée Lauder 4.5% 4.7% 4.8% 4.6% 4.6% L’Oréal 4.6% 4.4% 4.4% 4.4% 4.4% Coty 3.6% 4.4% 4.2% 4.0% 4.0% Beiersdorf 3.5% 4.3% 3.3% 2.7% 3.4% Shiseido 1.4% 2.7% 4.3% 3.8% 3.1% Average 4.4% 4.8% 4.6% 4.3% 4.5% Median 4.5% 4.4% 4.4% 4.4% 4.4% Maximum 7.6% 6.8% 5.6% 5.5% 6.3% Minimum 1.4% 2.7% 3.3% 2.7% 3.1% B Operating aggregates
  18. 18. Source: Data based on consensus of several brokers’ reports for each company Average sales CAGR Average EBITDA margin Average capex ratio EY luxury and cosmetics sample: summary of operating aggregates 21.6% 24.1% 24.6% 24.0% 22.5% 20% 21% 22% 23% 24% 25% FY11 FY12 FY14 FY14 FY15 Ebitda Margin 4.7% 4.9% 5.8% 5.6% 5.9% 0% 1% 2% 3% 4% 5% 6% 7% FY11 FY12 FY14 FY14 FY15 Capex ratio 9.7% 11.8% 12.3% 10.1% 7.8% 0% 2% 4% 6% 8% 10% 12% 14% FY11 FY12 FY14 FY14 FY15 Sales Growth The luxury and cosmetics financial factbook 2015 Page 17DCF and valuation parameters DCFandvaluation parameters The charts below show the evolution of selected operating aggregates (sales CAGR, EBITDA margin, capex ratio) over the past editions of the EY luxury and cosmetics factbook. While growth and average profitability are decreasing within the increasingly competing and challenging environment, capex are not. The market still demands a high operating leverage. Luxury After the rebound due to the financial crisis, reaching a peak of 12.3% in FY13, the estimated CAGR of sales for FY15 reached its minimum over the past five years. Nevertheless, the pace is still significant, and the foreseen growth around 8% reflects a reduced but more sustainable development rate. Actually, after a phase of accelerated development (mainly driven by retail expansion, product diversification and geographic extension), companies are now more focused on organic growth. This slowdown in sales growth directly impacts the EBITDA margin aggregates, also showing a slight contraction over the considered period, as a consequence of the slowdown of emerging markets and a higher pressure on margins. The capex ratio has remained close to 6%, at its highest over the past five years, confirming the need of high operating leverage of the industry. B Operating aggregates
  19. 19. Page 18 DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Source: data based on consensus of several brokers reports for each company EY luxury and cosmetics sample: summary of operating aggregates The charts below show the evolution of selected operating aggregates (sales CAGR, EBITDA margin, capex ratio) over the past editions of the EY luxury and cosmetics factbook. Cosmetics •• The cosmetics sector on average has lower sales CAGR and EBITDA margin than the luxury sector. •• Sales CAGR observed in 2014 is in line with the 2013 figure, at the lowest point over the last five years. •• The EBITDA margin has remained globally stable over the considered period, at a solid level of around 17-18%. •• The capex ratio is slightly lower than for the luxury companies, mostly stable at 4.5%, which illustrates the lower exposition to retail and thus a lower requirement for investment. Average sales CAGR Average EBITDA margin Average capex ratio 17.0% 18.1% 18.3% 17.4% 17.4% 16% 17% 18% 19% FY11 FY12 FY14 FY14 FY15 Ebitda Margin 3.3% 4.0% 4.4% 4.7% 4.5% 0% 1% 2% 3% 4% 5% FY11 FY12 FY14 FY14 FY15 Capex ratio 8.2% 7.7% 8.8% 5.4% 5.4% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% FY11 FY12 FY14 FY14 FY15 Sales Growth B Operating aggregates
  20. 20. The luxury and cosmetics financial factbook 2015 Source: Data based on actual or estimated numbers based on availability as of the date of this report •• Marketing and advertising represent a significant cost component for both global luxury and cosmetics manufacturers. •• Advertising expenses will remain a major operating topic, especially for cosmetics companies focusing on top-line growth and brand awareness sustainability. •• Cosmetics advertising expenses are significantly influenced by their mass-market positioning. •• Luxury companies have a lower incidence of advertising costs; however, in addition to advertising, one should consider the additional costs/investments to promote their brands embedded in flagship stores and ambassadors. Advertising remains a key cost of the industry Page 19DCF and valuation parameters C Advertising expenses 4.8% 5.0% 5.2% 6.6% 6.7% 6.7% 9.2% 11.0% 11.4% 23.9% 25.9% 29.1% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% Coach Tumi Prada Hermès Salvatore Ferragamo Moncler Tiffany Luxottica Richemont Safilo LVMH Beiersdorf Coty Shiseido Estée Lauder L'Oréal Luxury companies Cosmetics companies Average 6.6% Average 25.1% 2.7% 3.1% 23.2% 23.5% DCFandvaluation parameters Selected companies — advertising expenses as a percentage of sales, FY14A/E
  21. 21. Page 20 DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Sales breakdown FY15E (in €b) EBIT breakdown FY15E (in €b) Enterprise value breakdown FY15E (in €b) Source: SOTP based on EY analysis and on the following brokers reports: RBC Capital (11 February 2015), Deutsche Bank AG (23 February 2015) and JP Morgan (23 March 2015) •• LVMH SOTP analysis implies a total enterprise valuation of €100.6b in FY15E. •• The fashion and leather goods segment is the largest contributor both in terms of sales (35%) and EBIT (57%). LVMH: SOTPD SOTP and segment analyses 35% 13% 9% 13% 31% Fashion and leather goods Perfumes and cosmetics Watches and jewelry Wines and spirits Selective retailing Eliminations Total 34.710.9 3.1 4.4 4.4 (0.4) 12.2 57% 7% 5% 20% 16% -5% Fashion and leather goods Perfumes and cosmetics Watches and jewelry Wines and spirits Selective retailing Eliminations Total 6.61.1 0.3 0.5 1.3 (0.3) 3.7 55% 8% 5% 22% 14% -4% 0% Fashion and leather goods Perfumes and cosmetics Watches and jewelry Wines and spirits Selective retailing Elimination Total 100.6 5.2 8.0 22.6 55.1 13.9 (4.4) 0.3 Surplus assets Luxury products (excluding spirits) Luxury products (excluding spirits) Luxury products (excluding spirits)
  22. 22. Source: SOTP based on EY analysis and on the following brokers reports: RBC Capital (11 February 2015), JP Morgan (11 February 2015), Societe Generale (18 February 2015) and Deutsche bank (23 February 2015) •• Kering SOTP analyses imply a total enterprise value of €28.1b in FY15E. •• Contributing around 97% of the total EBIT for 69% of sales, Gucci group is the most profitable segment in terms of operating margin. Kering: SOTP The luxury and cosmetics financial factbook 2015 Page 21DCF and valuation parameters DCFandvaluation parameters D SOTP and segment analyses Sales breakdown FY15E (in €b) EBIT breakdown FY15E (in €b) Enterprise value breakdown FY15E (in €b) 69% 7.8 29% 0.3 11.30.0 3.2 3.0% 0% Gucci Group Puma Other brands Eliminations Total 97% 1.9 8% .00 2.0 (0.1) 0.2 1.0% -6% Gucci Group Puma Other brands Eliminations Total 100% 28.1 8% 0.2 28.1 (2.4) 2.2 1.0% -8% Gucci Group Puma Other brands Eliminations Total Luxury Sport and lifestyle Luxury Sport and lifestyle Luxury Sport and lifestyle
  23. 23. Page 22 DCF and valuation parameters Sales breakdown FY15E (in €b) EBIT breakdown FY15E (in €b) Enterprise value breakdown FY15E (in €b) Source: SOTP based on EY analysis and on the following brokers reports: RBC Capital (11 February 2015), JP Morgan (11 February 2015), Societe Generale (18 February 2015) and Deutsche bank (23 February 2015) •• Gucci Group SOTP analyses imply an enterprise value of €28.1b in FY15E. •• Within the Gucci Group segment, the Gucci brand alone represents 49% of the top line and 61% of EBIT in FY15E, meaning that the Gucci brand is expected to constitute the largest segment within the Gucci Group and also the most profitable in terms of operating margin. Kering: further analysis of Gucci Group through SOTP approach 49% 17% 11% 23% Gucci brand Bottega Veneta YSL Other brands Gucci Group 7.81.8 0.9 1.3 3.8 The luxury and cosmetics financial factbook 2015 D SOTP and segment analyses 61% 22% 7% 10% Gucci brand Bottega Veneta YSL Other brands Gucci Group 1.90.2 0.1 0.4 1.2 54% 25% 9% 12% Gucci brand Bottega Veneta YSL Other brands Gucci Group 28.13.3 2.4 7.0 15.3
  24. 24. The luxury and cosmetics financial factbook 2015 L’Oréal: segment analysis •• The two main divisions of L’Oréal are Consumer Products and L’Oréal Luxe, accounting together for 76% of the group’s revenues and 90% of the EBIT. In particular, the L’Oréal Luxe division accounts for 28% of the total sales in FY14A. •• This division is expected to register a sales growth at a CAGR of 7.8% over the 2013A-17E period when its operating income is anticipated to grow from €1.17b to €1.65b (or at a CAGR of 8.9%) over the same period. •• The L’Oréal Luxe division will remain one of the biggest divisions within L’Oréal. Sales breakdown FY13A–FY17E (in €b) EBIT breakdown FY13A–FY17E (in €b) EBIT margin FY13A-FY17E Page 23DCF and valuation parameters DCFandvaluation parameters D SOTP and segment analyses 20% 20% 21% 21% 21% 17% 18% 18% 18% 18% 0% 5% 10% 15% 20% 25% 2013A 2014A 2015E 2016E 2017E L’Oréal Luxe Total cosmetics Source: Analyst research H2 2014 13% 13% 14% 13% 13% 49% 48% 48% 47% 47% 27% 28% 28% 28% 29%7% 7% 7% 7% 7% 4% 4% 4% 4% 4% 0 5 10 15 20 25 30 2013A 2014A 2015E 2016E 2017E Professional Products Consumer Products L’Oréal Luxe Active Cosmetics Body Shop 22.1 22.5 25.1 27.6 26.3 CAGR 7.8% CAGR 4.6% 16% 16% 15% 15% 15% 58% 56% 56% 55% 56% 31% 33% 33% 33% 34% 9% 10% 10% 10% 10% (16%) (16%) (15%) (15%) (15%) 2% 2% 2% 2% 2% -1 0 1 2 3 4 5 6 2013A 2014A 2015E 2016E 2017E Professional Products Consumer Products L’Oréal Luxe Active Cosmetics Eliminations Body Shop 3.8 4.9 4.6 4.4 3.9 CAGR 8.9% CAGR 5.5%
  25. 25. Page 24 DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Level of multiples illustrates the still-high attractiveness of the luxury industry •• The level is quite stable with respect to last year’s figures, even considering the slightly lower margins, showing a good resilience of the industry and confidence of the analysts in future strong growth and significant margins. •• The decreasing trend observed over the years is actually explained by the expected improvement of the operating performance. Source: Data based on consensus of several brokers reports for each company Notes: •• The trading multiples are based on: •• Fixed EV computed as market capitalization as of 31 March 2015 (one-month average) and latest-available net financial debt •• Projections estimated by analysts for successive years EV/sales (FY14A/E-16E) EV/EBITDA (FY14A/E-16E) Price to earnings (FY14A/E-16E) E Trading multiples 3.0x 2.8x 2.5x 2.9x 2.7x 2.5x 0 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 2014A/E 2015E 2016E Average Median 13.3x 11.9x 10.8x 13.4x 12.1x 10.9x 0 3.0x 6.0x 9.0x 12.0x 15.0x 18.0x 2014A/E 2015E 2016E Average Median 24.1x 21.4x 19.1x 23.4x 21.7x 19.4x 0 5.0x 10.0x 15.0x 20.0x 25.0x 30.0x 2014A/E 2015E 2016E Average Median
  26. 26. Improvement of multiples level for the cosmetics companies illustrates the growing dynamism of the industry •• Trading multiples of the cosmetics companies are globally in line with those of the luxury industry, even with slightly higher figures for EBITDA multiples, illustrating analysts’ expectations for margins to improve in the next years. Source: Data based on consensus of several brokers reports for each company Notes: •• The trading multiples are based on: •• Fixed EV computed as market capitalization as of 31 March 2015 (one-month average) and latest-available net financial debt •• Projections estimated by analysts for successive years EV/sales (FY14A/E-16E) EV/EBITDA (FY14A/E-16E) Price to earnings (FY14A/E-16E) The luxury and cosmetics financial factbook 2015 Page 25DCF and valuation parameters DCFandvaluation parameters E Trading multiples 2.6x 2.5x 2.3x 2.8x 2.6x 2.3x 0 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 2014A/E 2015E 2016E Average Median 15.6x 14.4x 13.0x 16.0x 14.8x 13.3x 0 3.0x 6.0x 9.0x 12.0x 15.0x 18.0x 2014A/E 2015E 2016E Average Median 27.7x 28.9x 24.4x 28.5x 28.3x 23.9x 0 5.0x 10.0x 15.0x 20.0x 25.0x 30.0x 35.0x 2014A/E 2015E 2016E Average Median
  27. 27. Page 26 DCF and valuation parameters EY luxury and cosmetics sample: summary of EV/sales multiples Source: Data based on consensus of several brokers reports for each company Note: Market capitalization is based on a one-month average as of 31 March 2015. The luxury and cosmetics financial factbook 2015 E Trading multiples EV/sales (FY14A/E) EV/sales (FY15E) EV/sales (FY16E) 0.5x 0.9x 1.3x 1.3x 1.3x 1.8x 2.2x 2.3x 2.5x 2.6x 2.8x 2.8x 2.8x 2.8x 2.9x 2.9x 2.9x 2.9x 3.0x 3.0x 3.1x 3.2x 3.5x 3.6x 3.7x 3.7x 4.2x 4.2x 5.6x 7.4x Hengdeli Safilo Shiseido Chow Tai Fook Ralph Lauren Natura Coach Coty Swatch Jimmy Choo Tod's Beiersdorf Tiffany Michael Kors Estée Lauder Tumi Kering L'Occitane LVMH Average Burberry Hugo Boss Brunello Cucinelli Richemont Salvatore Ferragamo Luxottica Prada L'Oréal Moncler Hermés 9.2% Industry benchmark Low High EV/sales (FY14A/E) 3.0x Industry benchmark Low High 0.5x 0.8x 1.1x 1.3x 1.4x 1.6x 2.3x 2.3x 2.4x 2.5x 2.5x 2.5x 2.6x 2.6x 2.6x 2.7x 2.7x 2.7x 2.8x 2.8x 2.9x 2.9x 3.1x 3.3x 3.3x 3.4x 3.8x 4.0x 4.8x 6.6x Hengdeli Safilo Chow Tai Fook Ralph Lauren Shiseido Natura Jimmy Choo Coty Michael Kors Coach Tumi Kering Swatch L'Occitane Tod's Beiersdorf LVMH Tiffany Average Burberry Estée Lauder Hugo Boss Brunello Cucinelli Luxottica Richemont Salvatore Ferragamo Prada L'Oréal Moncler Hermés 9.2% Industry benchmark Low High EV/sales (FY15E) 2.8x Industry benchmark Low High 0.5x 0.8x 1.0x 1.2x 1.2x 1.5x 2.0x 2.1x 2.2x 2.2x 2.3x 2.4x 2.4x 2.4x 2.5x 2.5x 2.5x 2.6x 2.6x 2.6x 2.7x 2.7x 2.8x 3.1x 3.1x 3.1x 3.6x 3.8x 4.2x 6.0x Hengdeli Safilo Chow Tai Fook Ralph Lauren Shiseido Natura Jimmy Choo Michael Kors Tumi Coty L'Occitane Kering Swatch Tod's Coach Beiersdorf LVMH Average Tiffany Burberry Hugo Boss Estée Lauder Brunello Cucinelli Luxottica Salvatore Ferragamo Richemont Prada L'Oréal Moncler Hermés 9.2% Industry benchmark Low High EV/sales (FY16E) 2.6x Industry benchmark Low High
  28. 28. EY luxury and cosmetics sample: summary of EV/EBITDA multiples Page 27DCF and valuation parameters DCFandvaluation parameters E Trading multiples Source: Data based on consensus of several brokers reports for each company Note: Market capitalization is based on a one-month average as of 31 March 2015. EV/EBITDA (FY14A/E) EV/EBITDA (FY15E) EV/EBITDA (FY16E) 7.2x 7.6x 8.0x 8.6x 8.7x 9.6x 9.9x 11.1x 11.5x 12.9x 12.9x 13.1x 13.6x 13.7x 13.8x 13.9x 14.2x 14.6x 15.5x 15.7x 16.0x 16.0x 16.6x 16.6x 16.8x 17.9x 18.6x 19.1x 20.1x 21.2x Hengdeli Ralph Lauren Coach Natura Michael Kors Safilo Chow Tai Fook Tiffany Swatch Richemont LVMH Burberry Tumi Hugo Boss Average Tod's Estée Lauder Kering Jimmy Choo Prada L'Occitane Shiseido Coty Moncler Salvatore Ferragamo Beiersdorf Luxottica Brunello Cucinelli L'Oréal Hermés 9.2% Industry benchmark Low High EV/EBITDA (FY14A/E) 13.8x Industry benchmark Low High 6.3x 7.0x 7.4x 7.4x 7.7x 8.7x 10.7x 10.7x 10.8x 11.6x 11.7x 12.0x 12.2x 12.5x 12.6x 12.6x 12.6x 13.1x 13.4x 13.5x 14.4x 14.7x 14.8x 15.2x 15.4x 15.9x 16.6x 17.3x 18.1x 18.4x Hengdeli Ralph Lauren Michael Kors Natura Safilo Chow Tai Fook Tiffany Coach Swatch LVMH Tumi Burberry Hugo Boss Average Kering Richemont Jimmy Choo Tod's Prada L'Occitane Moncler Shiseido Coty Salvatore Ferragamo Estée Lauder Luxottica Beiersdorf Brunello Cucinelli Hermés L'Oréal 9.2% Industry benchmark Low High EV/EBITDA (FY15E) 12.5x Industry benchmark Low High 5.8x 6.3x 6.6x 6.6x 6.7x 8.0x 9.8x 10.2x 10.2x 10.3x 10.5x 10.8x 11.0x 11.1x 11.3x 11.4x 11.6x 12.0x 12.0x 12.0x 12.6x 12.7x 13.3x 13.6x 13.8x 14.6x 15.4x 15.4x 16.3x 17.4x Hengdeli Ralph Lauren Natura Michael Kors Safilo Chow Tai Fook Tiffany Swatch Coach Tumi LVMH Jimmy Choo Burberry Hugo Boss Average Kering Richemont L'Occitane Tod's Prada Moncler Shiseido Estée Lauder Salvatore Ferragamo Coty Luxottica Brunello Cucinelli Beiersdorf Hermés L'Oréal 9.2% Industry benchmark Low High EV/EBITDA (FY16E) 11.3x Industry benchmark Low High The luxury and cosmetics financial factbook 2015
  29. 29. Page 28 DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Regression analysis: EV/sales multiple vs EBITDA margin E Trading multiples •• Regression analyses show strong correlation between EV/sales levels and profitability. •• Actually, this analysis illustrates that the premium paid on multiples is mainly explained by the good profitability performance. Source: Data based on consensus of several brokers reports for each company Notes: Market capitalization is based on a one-month average as of 31 March 2015. The analyses based on sales growth are not presented, as they resulted in an absence of correlation between sales multiples and growth. For information, the results of the analyses performed are: R2 for EV/sales multiple vs sales growth 2015: 6%; R2 for EV/sales multiple vs sales growth 2016: 0%. Regression analysis: EV/sales multiple vs EBITDA margin 2015 Regression analysis: EV/sales multiple vs EBITDA margin 2016 Burberry Prada LVMH Tod's Ralph Lauren Coach Hugo Boss Safilo Hermès Tiffany Swatch Shiseido Salvatore Ferragamo L'Oréal Richemont Luxottica Estée Lauder Beiersdorf Brunello Cucinelli Michael Kors Coty Jimmy Choo R² = 0.64 - 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 0% 5% 10% 15% 20% 25% 30% 35% 40% 2015EV/sales 2015 EBITDA margin L'Occitane Natura Moncler Tumi Kering Chow Tai Hengdeli Burberry LVMH Tod's Ralph Lauren Coach Hugo Boss Safilo Hermès Tiffany Swatch Shiseido Kering Salvatore Ferragamo L'Oréal Richemont Luxottica Estée Lauder Beiersdorf TUMI Brunello Cucinelli Coty Jimmy Choo R² = 0.63 - 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 0% 5% 10% 15% 20% 25% 30% 35% 40% 2016EV/sales 2016 EBITDA margin Natura Chow Tai Michael Kors Prada L'Occitane Hengdeli Moncler
  30. 30. The luxury and cosmetics financial factbook 2015 Page 29DCF and valuation parameters DCFandvaluation parameters Transaction multiples in the luxury industry remain at a significant premium to many other sectors Source: Capital IQ •• There are several parameters that influence the valuation multiples. In particular: the brand positioning, the historical and expected growth, profitability and cash flow generation, management and organization, premium to rarity, etc. •• Transaction multiples confirm that the industry kept its attractiveness over the past few years. •• The average sales multiple over the last years ranged between 1.4x and 2.0x, where the average EBITDA multiple ranged between 11.7x and 15.3x. Transaction multiplesF 1.6x 1.5x 1.9x 1.4x 2.0x 1.8x 1.3x 1.2x 1.6x 1.8x 0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 2011 2012 2013 2014 1Q15 Average Median 15.3x 12.0x 13.5x 11.7x 13.5x 12.3x 10.7x 11.5x 10.2x 13.2x 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 18.0x 2011 2012 2013 2014 1Q15 Average Median EV/sales (FY11-1Q15) EV/EBITDA (FY11-1Q15)
  31. 31. Page 30 DCF and valuation parameters The luxury and cosmetics financial factbook 2015 The MA deals in the cosmetics industry show a similar trend as the luxury industry Transaction multiplesF Source: Capital IQ •• The average sales multiple over the last five years ranged between 1.1x and 1.9x, when the EBITDA multiple ranged between 10.0x and 16.6x. •• 1Q15 multiples went back to previous 2014 levels. 2014 multiples illustrated an exceptionally positive trend, mainly driven by strategic acquisitions carried out by the major players to foster growth in emerging markets, and broaden the products’ offering into innovative segments. 1.1x 1.6x 1.9x 1.4x 1.6x 0.9x 1.0x 1.6x 1.5x 1.7x 0.0x 0.2x 0.4x 0.6x 0.8x 1.0x 1.2x 1.4x 1.6x 1.8x 2.0x 2011 2012 2013 2014 1Q15 Average Median 10.0x 10.1x 11.7x 16.6x 11.1x 10.1x 8.8x 10.2x 14.9x 11.1x 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 18.0x 2011 2012 2013 2014 1Q15 Average Median EV/sales (FY11-1Q15) EV/EBITDA (FY11-1Q15)
  32. 32. Page 31DCF and valuation parameters The luxury and cosmetics financial factbook 2015 DCFandvaluation parameters Analysis of worldwide MA transactions in the luxury industry since 2011 Transaction multiplesF •• The number of completed deals on global scale is still significant, despite the financial crisis. The MA activity from both strategic and financial investors in the industry experienced a strong first quarter in 2015 with 18 completed deals. •• PE activity was intense and stable during the past years, showing an always-stronger interest for the industry, confirmed through the creation of dedicated funds. •• As presented in the graph about the top 10 markets by the number of completed deals over the FY11-1Q15 period, Italy turns out to be the first country as a target nationality, proving the attractiveness of Italian companies for investors (investors’ interest for ‘‘made in Italy’’ and brands’ high quality). Number of completed deals in the luxury industry (global) Number of completed deals by type of buyer (global) Number of completed deals sorted by nationality of the target over FY11–1Q15 (among the top 10 markets) Source: Capital IQ, Mergermarket, Factiva 48 52 62 44 18 0 10 20 30 40 50 60 70 FY11 FY12 FY13 FY14 1Q15 No.ofdeals 37 44 42 31 1211 8 20 13 6 23% 15% 32% 30% 33% 0% 5% 10% 15% 20% 25% 30% 35% 0 5 10 15 20 25 30 35 40 45 50 FY11 FY12 FY13 FY14 1Q15 Corporate PE PE/total No.ofdeals Italy 30% United States 28% France 12% Switzerland 14% UK 8% India 3% HK 1% China 2% Germany 1% Netherlands 1%
  33. 33. Page 32 DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Analysis of worldwide MA transactions in the cosmetics industry since 2011 Transaction multiplesF •• The number of deals completed in 2014 and in the first quarter 2015 illustrates a return to a sustained level of MA activity after a drop in 2013. •• The dynamism of the cosmetics industry recently attracted a larger number of PE funds, respected to past years: in 2014, they were involved in 62% of the transactions globally. •• As presented in the graph about the number of completed deals by markets, quite interestingly, the first three positions are similar to those of the luxury industry, even if in a different order (US, France and Italy). 30 39 17 26 8 0 5 10 15 20 25 30 35 40 45 FY11 FY12 FY13 FY14 1Q15 No.ofdeals 22 31 14 10 5 8 8 3 16 3 27% 21% 18% 62% 38% 0% 10% 20% 30% 40% 50% 60% 70% 0 5 10 15 20 25 30 35 FY11 FY12 FY13 FY14 1Q15 No.ofdeals Corporate PE PE/total United States 36% France 23% Italy 8% Germany 7% South Korea 7% United Kingdom 5% Spain 4% Japan 4% Canada 3% China 3% Number of completed deals (global) Number of completed deals by type of buyer (global) Number of completed deals sorted by nationality of the target over FY11-1Q15 (amongst the top 10 markets)
  34. 34. The luxury and cosmetics financial factbook 2015 DCFandvaluation parameters
  35. 35. LUXURY AND COSMETICS THE EY FINANCIAL FACTBOOK 2014 Industry overview
  36. 36. Global luxury goods marketG Global cosmetics marketH Points of view from EY’s global sector specialists and outside expertsI The luxury and cosmetics financial factbook 2015 Industryoverview
  37. 37. The luxury and cosmetics financial factbook 2015 DCFandvaluation parameters The worldwide personal luxury goods market is estimated to have grown by 3.0%in 2014. However, at constant exchange rates, the market- observed growth (4.0%) was comparatively slower than the 7.0% recorded in 2013. Monobrand stores represent close to 30% of the overall market, while monobrand distribution across formats already claims 52%. The share of company- owned retail sales has gained 10 percentage points and represents nearly one third of the luxury goods market. This reflects a trend of brands increasingly seeking global control of their operations. In 2014, the historical pattern held true, as accessories grew 4.0% — more than any other personal luxury goods category and more than the market overall. As accessible status symbols, shoes benefit from strong tailwinds and have been growing faster than the overall leather-goods category for the last three years. Chinese consumers are now focused on purchasing more from overseas, with Korea and Japan emerging as hot new destinations. The Chinese luxury market in 2014 was in line with 2013 at €15 billion, primarily due to slowdown in the demand for watches, men’s wear and leather goods. The online luxury goods market continued its successful run with the share of online purchases increasing to 5.0% in 2014 from 4.5% recorded last year. Retailers are still the top-performing players online, followed by e-tailers and individual brands. Global luxury goods market Page 36 Industry overview
  38. 38. Glossary Contactus Title for section Welcome to the third edition of EY’s annual Financial Factbook for the luxury and cosmetics sector. The Factbook combines financial data, insight from EY’s global team of sector specialists and opinions of external experts. XX Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for L’Occitane and Natura from FY11A to FY14E. XX Increased demand through innovative products will cater to underserved emerging markets. XX Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate demand in established geographies. Source: Data based on consensus of several brokers’ reports for each company. Notes:Market capitalization is based on a one-month average as of December 2012. The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. Titles for charts Titles for charts H Global luxury goods Sampleselection andspecificanalyses ExecutivesummaryDCFandvaluation parameters IndustryoverviewMethodology anddisclaimer Page 37DCF and valuation parameters Sources: Altagamma/Bain and other selected research Note: 1) Luxury Goods Worldwide Market Study Fall–Winter 2014, Altagamma/Bain Global personal luxury goods continue to buoy the market, but growth is leveling off •• The worldwide personal luxury goods market is estimated to have grown by 3.0% in 2014. However, at constant exchange rates, the market-observed growth (4.0%) was comparatively slower than the 7.0% recorded in 2013. •• The growth was helped by the sharp depreciation of the euro, which left the sector with an unbalanced price structure across regions. •• Retail remained a key growth driver in 2014, but the market saw a slowdown in the retail network expansion, illustrating the players’ objective to focus on organic growth. •• The online luxury goods market continued its successful run with the share of online purchases increasing to 5.0% in 2014 from 4.5% recorded last year. Retailers are still the top-performing players online, followed by e-tailers and individual brands. Global luxury goods marketG 159 170 167 153 173 192 212 218 224 250 -265 8% 7% -2% -8% 13% 11% 10% 3% 3% -10% -5% 0% 5% 10% 15% -200 -150 -100 -50 0 50 100 150 200 250 300 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2017e Growth €billion Market size Growth Worldwide personal luxury goods market trend1 Industry overview Page 37 Industryoverview The luxury and cosmetics financial factbook 2015
  39. 39. Title for section Welcome to the third edition of EY’s annual Financial Factbook for the luxury and cosmetics sector. The Factbook combines financial data, insight from EY’s global team of sector specialists and opinions of external experts. XX Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for L’Occitane and Natura from FY11A to FY14E. XX Increased demand through innovative products will cater to underserved emerging markets. XX Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate demand in established geographies. Source: Data based on consensus of several brokers’ reports for each company. Notes:Market capitalization is based on a one-month average as of December 2012. The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. Titles for charts Titles for charts H Global luxury goods Page 38 DCF and valuation parametersPage 38 The luxury and cosmetics financial factbook 2015 Industry overview Global personal luxury goods market, by channel and format (2014E)2 Global luxury goods marketG •• Demand is still growing, mainly sustained by touristic consumption, which has been heavily influenced by currency fluctuations and local regulations. •• As illustrated in the graph above, there is a clear dichotomy between area of consumption and nationality, based on the exchange rate evolutions. •• China continues to be the top consumer country (1/3 of the total market), but Chinese customers tend to consume outside their home country. •• Conversely, Europe and Japan will benefit from this trend in 2015, with Japan reaching a growth leadership position and Europe particularly benefiting from dynamic touristic inflows. 1 Currency fluctuations and tourism flows heavily impact luxury consumption •• The share of company-owned retail sales has gained 10 percentage points and represent nearly one third of the luxury goods market. This reflects a trend of brands increasingly seeking global control of their operations. •• Monobrand stores represent close to 30% of the overall market, while monobrand distribution across formats already claims 52%. •• The airport channel has generated a CAGR of 11.0% from 2011 through 2014 and now represents 5.0% of total luxury sales and is particularly critical in Asia and Europe. •• The online luxury market has grown twelvefold in the past 11 years and now makes up 5.0% of total sales, mainly led by the accessories and apparel categories. 2 Company-owned retail continues to gain share Sources: Altagamma/Bain and other selected research Notes: 1) Business Monitor International 2) Luxury Goods Worldwide Market Study Fall-Winter 2014, Altagamma/Bain 1% 6% 1% 8% 7% 4% 2% 6% -3% 1% -4% -2% 0% 2% 4% 6% 8% 10% Europe Americas Japan Mainland China ROW 2015Fgrowth Nationality Area 29% 27% 25% 9% 5% 5% Monobrand stores Department stores Specialty stores Off-price stores Airport Online Luxury goods demand growth by nationality and by area (2015F)1 Luxury goods market by geography and channel
  40. 40. Glossary Contactus Title for section Welcome to the third edition of EY’s annual Financial Factbook for the luxury and cosmetics sector. The Factbook combines financial data, insight from EY’s global team of sector specialists and opinions of external experts. XX Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for L’Occitane and Natura from FY11A to FY14E. XX Increased demand through innovative products will cater to underserved emerging markets. XX Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate demand in established geographies. Source: Data based on consensus of several brokers’ reports for each company. Notes:Market capitalization is based on a one-month average as of December 2012. The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. Titles for charts Titles for charts H Global luxury goods Sampleselection andspecificanalyses ExecutivesummaryDCFandvaluation parameters IndustryoverviewMethodology anddisclaimer Page 39DCF and valuation parameters The Chinese luxury market is experiencing a contraction in growth, yet Chinese consumers continue to represent about a third of the global market •• The Chinese luxury market in 2014 was in line with 2013 at €15 billion, primarily due to slowdown in the demand for watches, men’s wear and leather goods. •• Like-for-like sales struggled the most due to change in customer behavior across demographic groups — increased diversity of preferred brands, and exclusivity, quality and value for money becoming increasingly more important than logos. •• Continued impact of anti-corruption and frugality campaigns undermined luxury demand and was further exacerbated by the economic slowdown. 1 Slowdown across the board •• Chinese consumers are now focused on purchasing more from overseas, with Korea and Japan emerging as hot new destinations. In 2014, there has been a 61% increase in the number of trips by Chinese nationals to these destinations. •• This dominance has further increased with the development of new outlet sites in China and the fact that Chinese travelers have been enthusiastic visitors of the many outlet malls in Europe. •• In terms of outlook, a softer economy and political pressures on gifting and high-end spending are continuing to put pressure on overall spending. However, a weak euro and the low price points are making both travel and shopping in Europe increasingly attractive. 2 Chinese consumers continue to dominate as top global customers Global luxury goods marketG Mainland Chinese personal luxury goods market (2011-2014E)1 Top three global personal luxury goods markets (2014E)1 China luxury demand by luxury consumer cohort2 Sources: Altagamma/Bain and other selected research Notes: 1) Worldwide Luxury Markets Monitor, 2015 Spring Update, May 2015, Altagamma/Bain 2) Europe: Branded Consumer Goods, Goldman Sachs, February 2015 12.9 15.0 15.3 15.3 0.0 4.0 8.0 12.0 16.0 2011 2012 2013 2014E €billion 72.0 23.2 17.9 0 10 20 30 40 50 60 70 80 US China and Hong Kong Japan €billion Second position globally after including Hong Kong 23% 27% 49% 40% 28% 32% 39% 36% 25% 0% 10% 20% 30% 40% 50% 60% Middle class Affluent High net worth 2004 2014 2024 Industryoverview Industry overview Page 39 The luxury and cosmetics financial factbook 2015
  41. 41. Title for section Welcome to the third edition of EY’s annual Financial Factbook for the luxury and cosmetics sector. The Factbook combines financial data, insight from EY’s global team of sector specialists and opinions of external experts. XX Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for L’Occitane and Natura from FY11A to FY14E. XX Increased demand through innovative products will cater to underserved emerging markets. XX Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate demand in established geographies. Source: Data based on consensus of several brokers’ reports for each company. Notes:Market capitalization is based on a one-month average as of December 2012. The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. Titles for charts Titles for charts H Global luxury goods Page 40 DCF and valuation parameters Accessories remain the biggest category, and it is the fastest growing Global luxury goods marketG •• Since 2012, accessories have become the largest category within luxury goods and have grown the fastest lately, with a CAGR of 11% from 2010 through 2014. •• In 2014, the historical pattern held true, as accessories grew 4% — more than any other personal luxury goods category and more than the market overall. •• The online channel is developed well in the accessories segment and constitutes 41% of total sales. •• Soft accessories have been the top-performing luxury category in both the short and the long term. 1 Accessories: outperformer •• As accessible status symbols, shoes benefit from strong tailwinds and have been growing faster than the overall leather-goods category for the last three years. Shoe specialists are outpacing lifestyle brands, especially in the men’s segment. •• However, price as a contribution to growth has reached an unsustainable level, and implies the brands have been overpricing, particularly in the leather/accessories category, which is expected to limit the growth in the near future. •• The increase in competition is also expected to put some price pressures in the leather/accessories segment. 2 Soft accessories driving the growth Global personal luxury goods market by product type (2014E)1 Growth rates of global personal luxury goods market by product type1 Luxury leather goods and shoes, 2011-14E2 Sources: Altagamma/Bain and other selected research Notes: 1) Worldwide Luxury Markets Monitor, 2015 Spring Update, May 2015, Altagamma/Bain 2) Luxury Goods Worldwide Market Study Fall-Winter 2014, Altagamma/Bain *Others include “Arts de la table”, textile furniture etc. Accessories 29% Apparel 25% Hard luxury 22% Beauty 20% Others* 4% 15% 4% 9% 5% 11% 0% 5% 10% 15% 20% Others* Beauty Hard luxury Apparel Accessories CAGR 10-14E 29 34 36 37 11 12 13 14 0 5 10 15 20 25 30 35 40 2011 2012 2013 2014E €billion Luxury leather goods Luxury shoes Page 40 The luxury and cosmetics financial factbook 2015 Industry overview
  42. 42. The luxury and cosmetics financial factbook 2015 Industryoverview
  43. 43. Global cosmetic goods market The beauty market is set to double in size in the next 10 to 15 years, and all the world’s regions will grow, with China, the US, Brazil, India and Japan expected to become the top markets. The global cosmetics market grew by an estimated 3.6% during 2013, which was slightly lower than the average of 3.8% observed in the past decade. With growth of 5.2%, the selective market continued to grow at a steady pace in 2014, bolstered by Asia, the United States and e-commerce. It contributed 29% of global growth. Skin and hair care account for more than the half of the total market. The consumer behavior has not changed since the crisis, and the market has continued to expand steadily. Cosmetics world has been reinterpreted by the digital arena, illustrating the growing interest for beauty topics in the social world, an interest that comes from a larger and more aware consumer base receptive to new product launches. The luxury and cosmetics financial factbook 2015 Page 42 Industry overview
  44. 44. Glossary Contactus Title for section Welcome to the third edition of EY’s annual Financial Factbook for the luxury and cosmetics sector. The Factbook combines financial data, insight from EY’s global team of sector specialists and opinions of external experts. XX Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for L’Occitane and Natura from FY11A to FY14E. XX Increased demand through innovative products will cater to underserved emerging markets. XX Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate demand in established geographies. Source: Data based on consensus of several brokers’ reports for each company. Notes:Market capitalization is based on a one-month average as of December 2012. The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. Titles for charts Titles for charts H Global luxury goods Sampleselection andspecificanalyses ExecutivesummaryDCFandvaluation parameters IndustryoverviewMethodology anddisclaimer Page 43DCF and valuation parameters The global cosmetics market continues to grow steadily … Source: L’Oréal Annual Report 2014 and other selected research Note: 1) L’Oréal estimates of the worldwide cosmetics in net manufacturer costs, excluding soaps, oral hygiene, razors and blades as well as currency effects. •• The market continues to expand steadily and has proved resilient even during times of tough economic conditions as the consumer behavior has not changed after the crisis. The size of the global cosmetics market reached €181b, recording growth of 3.6% in 2014, which is slightly lower than the average of 3.8% observed in the past decade. Consumers’ aspirations for quality have increased, and they are open to new technology, more sophisticated dermocosmetics products and new retail distribution models. •• The market remains supply-driven, fueled by innovation, where consumers are always looking for quality, performance and perceived results. Global cosmetics marketH Global cosmetics industry market growth, YOY (2005-2014)1 Global cosmetics market segmentation by products and geographies (2014)1 127 134 141 145 147 153 161 168 175 181 4% 5% 5% 3% 1% 4% 5% 5% 4% 4% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 0 20 40 60 80 100 120 140 160 180 200 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E €billion Cosmetics market Growth % Skincare 35% Hair care 23% Makeup 17% Fragrances 13% Hygiene 11% Other 1% Asia, Pacific 35% Western Europe 22% North America 21% Latin America 12% Eastern Europe 7% Africa, Middle East 3% Industryoverview Industry overview Page 43 The luxury and cosmetics financial factbook 2015
  45. 45. Title for section Welcome to the third edition of EY’s annual Financial Factbook for the luxury and cosmetics sector. The Factbook combines financial data, insight from EY’s global team of sector specialists and opinions of external experts. XX Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for L’Occitane and Natura from FY11A to FY14E. XX Increased demand through innovative products will cater to underserved emerging markets. XX Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate demand in established geographies. Source: Data based on consensus of several brokers’ reports for each company. Notes:Market capitalization is based on a one-month average as of December 2012. The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. Titles for charts Titles for charts H Global luxury goods Page 44 DCF and valuation parameters … and remains a supply-driven market underpinned by innovationGlobal cosmetics marketH •• The product portfolio of industry players has expanded into natural and green products, replacing commonly used chemicals and synthetic ingredients with organic inputs, responding to changes in consumer tastes and preferences. •• Initially introduced into the skin-care product segment, the natural product shelf has now expanded to other segments of the industry. •• The new product lines have created new markets for the industry, and new companies have entered the industry to satisfy this demand. •• The demand for research and development personnel has increased significantly, which is key to remaining competitive and staying on top of the latest industry trends. 1 Natural products •• The digital revolution has opened up huge opportunities for the beauty world as it allows mass-market brands to foster closer relationships with their consumers through web interaction. •• It has enabled brands to provide new ways to reach, educate and inspire new consumers, as well as loyal customers, in order to stimulate the market’s future growth. •• Today’s consumers are informed and connected, and are looking to personalize their routines. The tendency is also clear in the prescription-based dermocosmetics sector, which meets the health and beauty expectations of a growing number of consumers. 2 Key role of digital media •• The demand for men’s products has also boomed during the past five years, with Asia emerging as the most crucial market. •• Consumers in Asia account for 64.0% of the global men’s skin care market, which still pales in comparison with the overall women’s skin care, but is reportedly growing at a rapid 9.4% per annum. •• Moreover, spending on men’s skin care still totals less than 3.3% of the total women’s skin care market, further indicating potential room for growth. 3 Strong potential from the men’s segment •• For the second year running, dermocosmetics was the most dynamic market, with growth of 5.1%. •• Makeup, which provides consumers with a medium to express themselves and their creativity, was in 2014 the fastest growing category worldwide at 5.0%. •• The market was buoyant on all continents, even in Western Europe, with growth of nearly 3.0%. •• With growth of 5.2%, the selective market continued to grow at a steady pace in 2014, bolstered by Asia, the United States and e-commerce; it contributed 29% of global growth. 4 Widespread growth1 Source: L’Oréal Annual Report 2014 and other selected research Note: 1) L’Oréal estimates of the worldwide cosmetics in net manufacturer costs, excluding soaps, oral hygiene, razors and blades as well as currency effects. Page 44 The luxury and cosmetics financial factbook 2015 Industry overview
  46. 46. Industryoverview The luxury and cosmetics financial factbook 2015
  47. 47. Page 46 DCF and valuation parametersPage 46 The luxury and cosmetics financial factbook 2015 Industry overview The Italian luxury market from an MA and investor perspectivePoints of view from EY’s global sector specialists and outside expertsI Roberto Bonacina EY Lead Advisory MA Fashion Luxury The fashion and luxury market is continuing to grow despite the difficult macroeconomic and financial landscape. This sector remains highly attractive to financial and strategic investors, both national and international. MA in the fashion and luxury sector, unlike others industries that experienced a decrease after the financial crisis, is facing a positive pattern. 2014 registered a slight decrease in the total number of completed deals compared to the last three years; however, the first quarter activity of 2015 boosts hopes for strong growth for this year. The Italian MA market was characterized in the recent years by the foreign acquisition of Italian brands. In 2014, the so-called inbound MA accounted for 75% of the total number of transactions carried out in Italy. In the same year in Italy, two-thirds of the deals were completed by financial investors, in contrast with prior years, where corporates had a greater percentage of successful deals than PE.
  48. 48. Page 47DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Industry overview Page 47 The Italian luxury market from an MA and investor perspectivePoints of view from EY’s global sector specialists and outside expertsI 17 12 17 12 5 31 40 45 32 13 0 10 20 30 40 50 60 70 FY11 FY12 FY13 FY14 1Q15 No.ofdeals Italy Global 48 52 62 44 18 - - 2 1 2 11 6 8 9 1 6 6 7 2 2 0 2 4 6 8 10 12 14 16 18 2011 2012 2013 2014 1Q15 Outbound Inbound Domestic 4 2 6 8 2 13 10 11 4 3 0 2 4 6 8 10 12 14 16 18 2011 2012 2013 2014 1Q15 PE Corporate Number of completed deals (Italy vs global) Outbound/inbound/domestic — Italian deals Deals by nature of buyer (corporate vs PE) — Italian deals Top luxury houses are looking for unique brands and new stylists and talents with a quasi-venture capital approach. Strategic investors’ interest is in supporting/investing in product excellence: uniqueness of brand, made in Italy, craftsmanship, superior quality and privileged access to raw materials and heritage. These qualities are key to being positioned as high end, absolute luxury and to winning in certain niche segments (tailor-made suits, precious leather goods, jewels, etc.). Italy remains the place to be for its strong backbone of entrepreneurs and companies that come from the art of doing and the unparalleled tradition in the use of hands in manufacturing, crafting and made-to- measure products. Today, the most illuminated entrepreneurs are becoming aware that such knowledge and art need to be renewed and transferred to the younger generations, and they are therefore investing in training in order to transmit the traditions of old experience and craftsmen to them. Interest from financial investors is related not only to high-margin/high-growth companies with clear positioning, but also to fashion houses that, although small, have a good equity story to grow, operating in market niches with proved capabilities to expand business in fast growing countries. In all cases, the presence of a relevant share of international sales is key to proving the scalability of the business also on foreign markets. Industryoverview
  49. 49. Page 48 DCF and valuation parametersPage 48 The luxury and cosmetics financial factbook 2015 Industry overview The Italian luxury market from an MA and investor perspectivePoints of view from EY’s global sector specialists and outside expertsI Emerging market investors are heavily looking for opportunity, but so far, only a very limited number of transactions have taken place, mainly driven by Middle-East investors (Valentino being a landmark transaction). Overall, they usually act through local contacts that sometimes have a limited knowledge of the market, like to invest in minority stakes with the strategy of working closely with the entrepreneur in order to plan credible growth strategies, identify value creation levers and deploy resources to accelerate developments in local markets such as China, Japan, Korea and Russia. If brand and uniqueness of products is usually the key driver for acquisitions and values, for strategic, financial and alternative investors, recent experience shows that the presence of an experienced management and an adequate organization is able to command much higher valuations. In fact, the execution risk of an investment in the fashion and luxury sector, although potentially very rewarding, is perceived as high, particularly by financial investors. The level of complexity is growing in terms of consumers, purchasing behaviors, distribution models, geographies. Executing an appropriate development strategy that would envisage internationalization, brand/product extension, retail investments and distribution rollout in various channels is very challenging and needs vision by entrepreneurs and management capabilities by key executives. Management can be a value multiplier when coupled with high brand recognition and products. The recent Versace and Pomellato transactions are a clear example for this: good management coupled with exceptional brands. And investors pay for that! In this respect, Italy has great room for improvement. A recent survey that compares the major European countries clearly shows that if, on average, family- owned businesses are often led by a CEO member of the family, when it goes down to the key management team, Italy changes the situation. In fact, in family businesses in Italy, 66% of the management is composed of family members, a big difference if compared to 10.4% in UK, 25.8% in France, 28.0% in Germany and 35.5% in Spain. This could at least partially explain why Italian fashion companies have always excelled in growing and extending a single brand name (usually the family name), but more rarely have successfully achieved a conglomeration/portfolio strategy through acquisitions and the integration of different brands under the same umbrella. Summarizing, Italy remains the place to be, where brands, craftsmanship and product innovation lie. However, to grow in such a competitive industry, companies and entrepreneurs need to reinforce their structures to bring their own organizations to the next phase of growth. This will pay off and not only in terms of value paid by investors.
  50. 50. Page 49DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Industry overview Page 49 Managing performance improvement of luxury storesPoints of view from EY’s global sector specialists and outside expertsI The luxury sector is showing an inconsistent trend. In Asia, the luxury sector slowed in 2013. It levelled out in 2014 and over the coming years, it will hardly see the rapid growth as in the previous years. The main reasons are anti-corruption campaigns in the Chinese market and increased prudence and maturity of consumers. Anti-corruption measures in mainland China have reduced the use of public funds for high-end gifts, and in the meantime, for people with spending growth driven by rising incomes, luxury purchase are made in Hong Kong or other low-tax destinations. That is not enough anyway for the luxury growth in the entire area. Brazil, Russia, India, China and South Africa (BRICS) consumers recently developed a more sophisticated awareness of luxury: many have become more selective and mature. Moreover, in countries such as Brazil and Mexico, strong import taxes limits foreign luxury brands growth. “New BRICS” emerging countries in the Middle East and Asia are fast becoming core drivers of domestic and tourist spending growth, with national birth rate decreases and discretionary spending increases. In mature markets, consumer confidence slightly increased in the last month’s driving rise of leisure spending. The US remains the world’s number one nation for luxury goods consumption thanks to renewed consumer confidence and soaring GDP. With those light-and-shadows scenarios the luxury sector is facing, it becomes crucial to identify critical success factors, risks and opportunities for store performance improvement. Paolo Lobetti Bodoni Mediterranean Retail and consumer products Advisory Leader Marketing of locally manufactured items with a global appeal is for sure a key differentiator: luxury brands want people to know that their products are sourced and crafted locally. An example of this approach comes from a major high end fashion company that hosted an artisan in selected US stores to create handbags live in front of the customers. Another way to promote effectively a global brand locally is to leverage media and communication: a leading clothing manufacturer opened recently its Shanghai flagship store using a Chinese local messaging platform, WeChat, as a medium for advertising the launch, plus it has included its global followers in the preparation, posting a series of photos of the journey from London to Shanghai. The physical store is the opportunity to present high-end goods evoking an aspirational lifestyle: many of the top brands are embracing the environmentally friendly movement by choosing specific store design and furniture (green, steel, glass and wood are main patterns), along with a peaceful and comforting atmosphere, all in order to communicate specific brand values and deliver an exclusive customer experience. Store staff preparation is vital since sales assistants are acting as permanent ambassadors of the brand, and the one to one relationship with the customer is a key factor for the accomplishment of the sale. Chinese consumers list meager customer service and inadequate knowledge among retail staff as a primary reason for shopping abroad. Industryoverview
  51. 51. Page 50 DCF and valuation parametersPage 50 The luxury and cosmetics financial factbook 2015 Industry overview Managing performance improvement of luxury storesPoints of view from EY’s global sector specialists and outside expertsI The majority of luxury consumers are willing to interact with a digitally enabled sales associate. Bringing mobile technology into stores and investing in training and coaching for the sales representatives may help enforce trust while creating an even-more made-to-measure experience for consumers. Brands and retailers that wish to distinguish their customer experience should take into consideration the omni-channel approach. Specifically, mobile will continue to be an essential medium for reaching international, affluent consumers, and marketers should work to create an optimized, user-friendly shopping environment on mobile devices. Although there is no reason, for example, why customers could not go online, choose items they want to try on and send that information to the store, that would eliminate a lot of pre-work that could be automated. In any case, digital should be used to enrich, not disrupt customer experience. A relevant example comes from a leading jewelry retailer that in October 2013 revealed an in-store iPad application that helps customers to create a made-to-measure engagement ring. The app allows customers to compare features for their perfect diamonds ring. With the help of a sales associate, the client uses the app to select specific elements of the ring such as diamond shape, color, clarity, etc. If you are wondering if digital apps will eventually replace the sales associate, the iPad app gets the best from the two in order to enforce customer service. A leading department store chain in New York also created an iPad application to recreate its in-store experience. The app combines products’ contents with online shopping features to provide customers a thorough brand experience. Digital technology can also be helpful on the customer relationship management (CRM) side: today, only few luxury players are fully aware of the potential of customer relationship management; that opens large opportunities for improvement through digital integration — for instance, by having the sales team using iPads to scan and record customer details and social media information and retrieve data from previous customers’ visits. Both luxury retailers and many luxury hotels, such as a leading Asian hotel chain, are already using mobile devices to increase the effectiveness of CRM: to quickly and effectively help customers check out and find products in store, and sales staff pull up consumer preferences, giving them a tailored shopping experience. On the hotel’s side, the advantage of mobile integration helps with traveler check in as well as with concierge and in-room services, etc. A US-based leading jewelry retailer stands out for its CRM attitude: people into the stores able to provide outstanding customer service or product-related information. It has a database that includes more than 60,000 customers who have spent more than US$5,000 in the past 18 months. These customers are offered a made-to-measure experience, such as: meetings with personal shoppers, free engraving, shipping, champagne receptions on the mezzanine of the New York flagship store and occasional private events.
  52. 52. Page 51DCF and valuation parametersIndustry overview Page 51 Managing performance improvement of luxury storesPoints of view from EY’s global sector specialists and outside expertsI Then, CRM should be accompanied by customer satisfaction analysis: today, only 10% of luxury brands measure customer satisfaction, huge improvements can be realized by properly implementing customer satisfaction analyses. Not less relevant is store’s efficiency, new for the luxury sector, which is driven by margin reduction, increased competition, improved consumer maturity and awareness: a lean organization can deliver benefits to a variety of services or processes. A luxury handbags retailer in-store’s lean reorganization regards service lead time reduction: in the past, salespeople counseling customers would vanish into storerooms when goods weren’t available on the shop floor. Now, at each store, a few employees are assigned to the storeroom to convey goods not available. At a large store in Paris, items are sent via a service elevator from the storeroom to the cashier, already wrapped to be sold. As a result, to fully exploit stores’ performance and to drive more customers and more profit, luxury brands will need to: •• Ensure a made-to-measure customer experience along with a coherent brand image worldwide •• Tailor the store concept and customer experience to meet local needs •• Activate specific training and coaching modules for the sales staff in order to continuously improve the capability to communicate brand values •• Analyze competition through mystery shopping, and implement customer satisfaction measurement •• Omni-channel approach through adoption of all the possibilities made available by technology such as a specific iPad app to be used either from home by the customer alone (in order to generate interest in the products and encourage customers to buy or move to the nearest store) or as a support (not replacement) of sales personnel •• Enforce CRM by using new technologies: the sales staff sees on iPad all the track records and statistic of the customer they are serving (without interfering with sales process or bothering the customer) •• Promote efficiency in order to decrease lead time during customer service by implementing lean principles into the in-store processes The luxury and cosmetics financial factbook 2015 Industryoverview
  53. 53. Page 52 DCF and valuation parametersPage 52 The luxury and cosmetics financial factbook 2015 Industry overview Recent challenges for luxury business in ChinaPoints of view from EY’s global sector specialists and outside expertsI Recent tax challenges for the luxury business in China Please note that the issues hereafter presented are valid June 2015 The luxury business in China has definitely experienced various types of challenges during the last years/months (anti-corruption measures, slowing down of the economy, distribution structure’s challenges); but had at the same time to deal on a daily basis with the evolving tax rules applicable here in Mainland. We will summarize below what makes China so challenging — to some extent — from a tax point of view for the luxury groups, but we will also give you some insights on what could allow you to improve your tax position and make your tax journey into the Chinese market more successful: 1. The China consumption tax (CT) reform: It seems now clear that a CT reform policy is expected to be promulgated in late 2015. A possible expansion in charge scope, possible changing CT rates and computation method for some of the already in-scope CT items would be also altered, depending on the extent of shift in the point of taxation. In that respect, some consumer goods with a highly luxury character, such as private aircrafts, may be newly included into the CT scope. In addition, the taxation or not on certain luxury merchandises (based, for instance, on a threshold determined on the retail value of the product) is clearly under review and may be implemented in the following months. Finally, the point of taxation may also be shifted to a later stage of the supply chain/value chain rather than the stage of production/importation (having of course an impact on the taxable basis) and may also necessitate a consideration of an output/input taxation model. 2. China value-added tax (VAT) reform into the real estate industry: Luxury groups usually run their businesses by renting stores/flagship stores in prime locations that usually command higher rental. With the VAT reform to come involving the real estate industry, including purchase and rental in the late 2015, landlords will pay VAT rather than Business Tax (BT) going forward. Under the BT regime, leasing of immovable property is subject to BT at a rate of 5%, this being often embedded into the overall rental charges and constituting a final cost for the landlord and an indirect cost for the tenant. Under the new VAT regime, landlords should collect from its tenants VAT at a rate of 11% on their rent. This VAT should be however recoverable as input VAT (i.e., input VAT could be used to offset the subsequent output VAT due on sales). Ivan Chan Partner, Tax — Shanghai Stephane Rinkin Partner, Tax — Shanghai
  54. 54. Page 53DCF and valuation parameters The luxury and cosmetics financial factbook 2015 Industry overview Page 53 Recent challenges for luxury business in ChinaPoints of view from EY’s global sector specialists and outside expertsI The above VAT development could represent a substantial VAT and cost saving opportunity for the luxury groups — part of the payments made becoming input VAT. Hence, the rental costs could therefore be reduced. For instance, if the overall annual rental charge for a store is RMB1.11m now, the rental charges would be brought down to RMB1m if the lease becomes subject to VAT at 11%. RMB110k could be used as input VAT to offset the output VAT charged on sales, and this would reduce the overall VAT payable. An adequate and proactive preparation to re- negotiate the leasehold contracts with the landlords should be therefore a top priority for the luxury groups active in China. 3. Transfer pricing (TP) documentation requirements: As a member of G20, China has been very active in the Base Erosion and Profit Shifting (BEPS) project. The Chinese State Administration of Taxation (SAT) is likely to welcome the actions to improve transparency and disclosure, and to obtain information regarding taxpayers’ global value chains and financial and tax positions. Although the current transfer pricing documentation circular in China contains the requirement for certain global information, in practice, it still focuses largely on China operations. The SAT has however taken action to amend the documentation regulations. It remains to be seen whether the new requirements will replicate those under Action 13 transfer pricing documentation of BEPS, or escalate to another level of detail and complexity. Nonetheless, companies will need to strike a balance in complying with regulatory requirements and protecting trade secrets and confidential information. 4. Stock management — related VAT and customs costs: Overstocking and slow moving products are ongoing operation issues for some luxury brands ever since the luxury goods market in China slowed down, especially after the anti-gifting initiative in 2014. In general, moving imported goods back overseas is not easy and potentially not at all tax efficient due to the customs and VAT regulations in place in China. In addition, the destruction of products (seasonal products) could lead, in certain circumstances, to significant amount of VAT corrections if not properly handled. One reason, then, why luxury goods companies explore the option of free trade zones is to facilitate selling products overseas and to suspend the payment of import duty and taxes. Bonded arrangements should operationally work for luxury goods companies that sell on wholesale basis such as wines. Compulsory commodities inspection has been in addition removed for the export of ready-to-wear and shoes effective 2014 and 2015 respectively. Theoretically, luxury goods companies may now sell back imported merchandise overseas with less governmental bureaucracy. Nonetheless, it is still costly due to import duty and VAT leakage if a proper tax regime has not been implemented. Finally, positive VAT outcomes have been obtained lately in relation with the destruction of products. Luxury groups shall clearly take initiative to review their trading models and current tax treatment in relation with these overstocking and slow moving products in order to optimize as much as possible their tax position in China. On the other hand, in recent years, we have frequently heard voices from SAT that the luxury business is one of key industries that the SAT usually keeps an eye on its new development while the other key industries include automobiles, pharmaceuticals, etc. As examples, please find below two main challenges coming from the China tax authorities that we have seen real cases incur recently: 1. Overseas intercompany charges: We understand China tax authorities have recently reinforced the review on outbound intercompany royalty and service payments in selected luxury good companies and requested Industryoverview
  55. 55. Page 54 DCF and valuation parametersPage 54 The luxury and cosmetics financial factbook 2015 Industry overview Recent challenges for luxury business in ChinaPoints of view from EY’s global sector specialists and outside expertsI such information from 2004 to 2013, with stringent criteria being proposed to substantiate the deduction. This may be particularly relevant to many companies in the luxury sector that have been charging royalty and/or service fees to their Chinese distribution subsidiaries and leaving routine returns to the Chinese entities. The aforesaid review may call for transactional transfer pricing analysis on outbound royalty and service payments; it may also bring up the question of whether these transactions are closely linked to the importation of goods and whether the payment should be included in the dutiable value if not taxed before. In case any deduction claim for the outbound payment is denied by the tax authority, there may be limited means to reconcile the adjustment with customs duty and import VAT already paid, resulting in double taxation. In addition, the Chinese tax authority has been keen on examining location-specific advantages due to local regulatory, demographic, economic and other characteristics and taxing on the profits associated. This development may also place significant curbing implications to intercompany charges. 2. Deductibility of advertising and promotion expenses: We have also seen China tax authorities challenge a deduction claim for expenses incurred in a mega advertising and promotion campaign in China arguing that it represents brand building that benefits the brand owner at least partly, and some expenses should be borne by the brand owner and charged out from China. There has been a rising trend that Chinese tourists purchase luxury goods while traveling overseas. In the meantime, luxury brands may have continued their investment in China, along with the cost in advertising, marketing, store decoration, etc. that can enhance the brand awareness to Chinese consumers. If any of the direct or indirect brand building cost in China is deemed to benefit overseas affiliates due to the purchase by Chinese tourists overseas, the Chinese tax authorities may demand that arm’s-length compensation should be received by the Chinese entities or that the relevant cost be disallowed for deduction in China. As you see, tax challenges have to be properly handled in order to comply with the Chinese tax requirements. At the same time, China is however also really concerned by the development of its internal economy and very strong and good messages have been delivered at multiple levels during the last weeks. We cannot avoid mentioning for instance the decrease of the customs duty on some very specific luxury products by the Customs Tariff Commission (CTC) effective from June 1, 2015, mainly aiming to bring the Chinese tourists back to the local market and to promote domestic consumption. As you can see, we are in a very complex environment where good news contrasts with a lot of tax/regulatory doubts and risks for the luxury sector in China. The right approach to have is certainly then to accept, understand and share broadly that it is inevitable to encounter tax challenges in China and to always have a proactive and opened approach allowing the journey into the Chinese market to remain full of great success and opportunities.

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