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August 28 , 2017
We initiate coverage of Folli Follie Group (FFG), with a Buy rating and a Target Price at EUR 29.0 per share.
Target Price (EUR/sh) 29.0
We feel that the story of this cEUR1.4bn international luxury brand, focusing on the affordable luxury segment,
is not well understood.
The focus of FFG over the last 20 years, long before its global peers, has been on the Asia market, building a Current Share Price* (EUR/sh)
21.00
*25/08/ 2017
formidable presence in the region and establishing a recognizable brand name. Asia revenues represent 67% of
group total, generated through more than 420 POS (excl. travel retail). As demand for affordable luxury in Asia
should remain strong, the group is expected to increasingly benefit from its market position and management
Stock Data
actions, while it continues to expand internationally aiming at achieving global brand name recognition.
Market Cap (EUR m) 1,393
In the medium term the group will remain a strong regional player that is expected to grow sales at 8% 2016- Free Float 53%
19F GAGR, a rate that is at the higher end of the industry and to enjoy a sustainable EBIT margin at around EV (EUR m) 1,593
20%, also at the upper end of the industry. Num. of Shares (m) 66.4
As opportunities for the group we recognize:
The growth prospects of China. Economic growth and demographics should allow the market to continue to Performance 1m 3m 12m
expand at a robust pace, especially in the affordable luxury segment. FFG group operates through c235 POS in Absolute (%) 2.0 6.9 -4.5
China having built strong brand name recognition. ASE General (Abs) 1.9 7.3 47.8
Global tourism. Global tourist flow is expected to double over the next 20 years mainly due to Chinese tourists.
FFG has a network of about 100POS in airports and duty free malls that is expected to grow at a fast pace,
assisted also by the groups strategic stake in Dufry (and a Board seat), the worlds leading global travel retailer. Day avg. no traded shr (k-12m) 68
Price high-12 m (EUR) 22.40
Online sales and stores renovation. Currently less that 10% of the group sales are generated online but the
Price low-12m (EUR) 17.27
medium term aim is for this figure to reach 30%, while the group has already invested significantly towards this.
This effort to be supported (omnichannel approach) by Folli Follies new store-concept that is already driving LFL
sales of the renovated stores sharply higher, before they subside to more normalized levels, but still, posting 40.0
30.0
Links of London expansion. The UK based subsidiary (c 15% of groups luxury revenues) is in an expansion mode 25.0
20.0
mainly targeting North America and Asia (China). Links positioning at the higher-end of the affordable luxury 15.0
category should allow the group to compete in a different market segment that commands higher margins, 10.0
5.0
albeit it will face high completion. 0.0
Growth from the Greek operations. Greece is now seen as a market that could provide growth to the group, FOLLI-FOLLIE COMMERCIAL MANUFACTURING AND TECHNICAL SOCIETE ANONYME
driven by the rebound of the local economy and strong tourism. The group holds a leading position in the ATHEX Composite Index (Rebased)
Retail/Wholesale in Greece representing fashion brands (Retail/Wholesale division amounts to c13% of group
sales) and also in Department Stores (c13.5% of group sales). Folli Follie Group is a global retailer in the
affordable luxury market, operating in more than
We forecast revenue to grow 8.8% y-o-y in 2017 and a 2016-19F revenue CAGR of 8% driven by organic growth 30 countries with c940 points of sale worldwide.
in Asia. After a 12.4% y-o-y growth in 2017, EBIT 2016-19F CAGR is estimated at 9.6% with EBIT margin from Operation is focused on three core business
19.6% in 2016 is seen expanding to 20.5% by 2019, assisted by operating leverage. Net income is expected to segments; (1) design, processing and marketing of
decline by 3.3% y-o-y in 2017 to EUR215.1m as last year the group had benefited by extraordinary financial the brand names Folli Follie and Links of London
globally (73% of group sales) (2) wholesale and
gains of cEUR10m. 2016-19F EPS CAGR is seen at 4.3%.
retail of branded products in Europe (16% of group
We initiate coverage on FFG with a Buy recommendation and a target price of EUR 29.0 per share suggesting a sales), and (3) operation of department stores and
38% upside from current price levels. We view that the stocks underperformance over the last couple of years outlets in Greece (12.8% of group sales). The
Group has a global presence with Asia contributing
(currently c36% lower from the levels seen in 2014) has been partially the result of the uninspiring FCF
with c67% of total sales in 2016, Europe (excl.
generation but also due to the fact that the company is listed in the Athens Exchange. Despite the continuing Greece) with 9.7%, Greece represented 22.5% of
high working capital intensity, FCF should gradually improve, while the Greek market has already posted a 30% total revenue and North America another 1.1%.
increase y-t-d driven by expectations for a strong rebound of the economy and the improving risk profile of the
country. Although not directly comparable to the global luxury peers FFG trades at 2018F P/E and EV/EBITDA of Shareholding structure
6.0x and 4.1x that represents a discount over its global affordable luxury peers of 58.5% and 50.4% respectively. Dimitris Koutsolioutsos (34.4%), Fosun International
Holdings Ltd. (13.9%), Fidelity International (5.93%)
At the same time the group trades below its 5-yr P/E and EV/EBITDA levels.
EUR m 2015 2016 2017e 2018e 2019e Constantinos Zouzoulas Head of Research
Constantinos.zouzoulas@axiavg.com
Revenues 1,193.0 1,337.3 1,455.1 1,579.1 1,683.1
+30 210 7424460
EBITDA 265.0 291.9 327.3 353.7 379.3
Net Income 182.6 222.5 215.2 232.7 251.3 Argyrios Gkonis - Analyst
EPS 2.8 3.4 3.2 3.5 3.8 Argyrios.gkonis@axiavg.com
+30 210 7424462
Net Debt 132.2 154.5 125.7 125.7 131.5
P/E (x) 6.7x 5.6x 6.5x 6.0x 5.5x
EV/EBITDA (x) 5.2x 4.7x 4.5x 4.1x 3.6x
Div. Yield 0.0% 0.0% 0.8% 1.2% 1.3%
Net Debt/EBITDA (x) 0.50 0.36 0.23 0.11 -0.05
Source: AXIA Research, The Company
Web: www.axiavg.com Please refer to the last page for disclosures and analyst certification
AXIA Research Page 1
Folli Follie Initiation of Coverage
Investment Case
We initiate coverage on Folli Follie Group with a Buy recommendation and a target price of EUR 29.0
per share, implying a 38% upside potential from current levels. Folli Follie is a multinational fashion
company (jewellery, watches and accessories) operating in the affordable luxury segment (c73% of
sales) through the Folli Follie and Links of London brand names. The company is also active in Retail
& Wholesale in SE Europe (c13.5% of sales) as well as in Department Stores in Greece (c13.5% of
revenue). Geographically 66.7% of group sales derive from Asia.
Strong growth potential. We view FFG as one of the most appealing stories in the Athens exchange
driven by the groups positioning in the affordable luxury segment in Asia and by managements
inspiration to establish the company as a global brand name. As main short-to-medium term growth
drivers we recognize i) the economic growth and the demographic trends in China ii) the
introduction of a new retail concept that results to substantial LFL uplift iii) the push to online sales
iv) the prospects of the travel retail segment v) the expansion to underpenetrated markets and vi)
the expectation for an economic rebound in Greece.
We estimate 2016-19F revenue CAGR of 8.0%, which settles at the high end to the sector peers.
Chart 1a: 2016-19F Revenue CAGR FFG vs. peers* Chart 1b. 2016-19F EBIT CAGR FFG vs. peers*
8.0% 9.6%
7.6%
3.4%
2.6% 2.9%
Folli Follie Average-Affordable Average-High end Folli Follie Average-Affordable Average-High end
JWA luxury JWA luxury
*refer to pg. 8 for the companies we include in the peer groups, Source: The Company, AXIA Research
Lower capex to assist FCF generation raising the prospect of a dividend distribution. Growth is not
expected to come at the detriment of profitability. We view the current level of EBIT margin as
sustainable in the medium term since the pressure from higher exposure to wholesale should be
more than counterbalanced by operating leverage.
Stronger operating profitability coupled with some moderate ease in the working capital outflows,
and a declining capex, should assist to the gradual improvement of the groups FCF. At the same
time, leverage remains at very low levels (net debt-to-EBITDA at 0.55x). The above create
expectations that the group could reinstate its dividend policy, possibly starting in this fiscal year.
Eye-catching discount. Folli Follie is trading at a 2018F P/E and EV/EBITDA of 6.0x and 4.1x
respectively, while its international affordable peers trade at a 2018F P/E of 14.4x and EV/EBITDA of
8.2x. We acknowledge that the discount vs. luxury brands is partially due to the positioning of the
peer group (mainly includes global names) and this reflects on their FCF generation, but also due to
the fact that FFG is listed on the Athex.
Chart 2a: FFG P/E vs. peers Chart 2b: FFG EV/EBITDA vs. peers
13.2 x
24.5 x 11.9 x 11.4 x
11.1 x
22.2 x 21.3 x
20.3 x 8.9 x 9.5 x
16.7 x 16.5 x 8.2 x 8.1 x
14.5 x 13.9 x 6.6 x
9.2 x 4.5 x 4.1 x 3.6 x
6.5 x 6.0 x 5.5 x
Folli Follie Average-Affordable JWA Average-High end luxury Folli Follie Average-Affordable JWA Average-High end luxury
Well positioned to reap the benefits from a growing demand in Asia, especially in China
FFG is operating in the affordable luxury segment in Asia for more than 20 years and in
China for more than 15 years, having built significant exposure (c420 POS in the region,
excl travel retail, of which c235 in China) and a recognizable brand name.
China has been one of the key growth markets for fashion since the 2008 financial crisis.
Further economic growth and social trends should allow Chinese demand for luxury to
continue to grow at a fast pace. To this end i) Chinas GDP growth is expected to be
maintained at c6% over the next 5 years ii) Chinese middle and upper middle class to
further expand. According to McKinsey report, China is expected to contribute 28% of the
worlds new upper-middle and upper-class households between 2015 and 2025 while iii)
Chinas urban population has increased by 25% over the last 20 years to c58% and is
expected to continue to grow. McKinsey & Company is forecasting that about 700 large
cities in China will account for USD7.0tr or 30%, of global urban consumption growth to
2030.
Chinese tourists, account for an estimated c2025% of the global luxury market and are
renowned for their buying sprees. A more affluent China should further drive the travel
retail market higher in the coming years, noting that a mere c6% of Chinas population
currently holds a passport. The jewellery division generates an estimated c15% of
revenues from this channel and we would expect further expansion in the segment (c20%
store growth of the next 3 years) assisted also by the strategic stake of the company in
Dufry, the worlds largest duty-free operator.
The trend of the Chinese consumers to trade down from luxury, is benefiting affordable
luxury companies. This trend is supported by the Chinese government efforts to crack
down on corruption and conspicuous consumption.
We incorporate a 9.5% 2016-19F revenue CAGR from Asia, mainly driven by LFL growth in
China. We also account for net growth of stores in the region by 5% (smaller stores to
close) over the next 3 years, mainly associated with continuing expansion in China.
Revenue is forecasted to increase 8.8% y-o-y in 2017, while we anticipate 8.0% 2016-19F revenue
CAGR. The performance to be driven mainly by LFL growth in the Jewelry Watches and Accessories
division in Asia (including online and travel retail) but also a 7.0% increase of the total POS the group
operates between 2016-19F. EBIT margin is seen at 20.3% in 2017 and should slightly increase over
the coming 3 years, leading to a 2016-19F EBIT CAGR of 9.6%. EPS GAGR over the same period is
estimated at 4.3%.
Investment Risks
Investment Risks
Economic cycles. Folli Follie is exposed to economic and political uncertainty in the countries which
it operates. The heavy exposure to the developing markets in Asia increases the companys
sensitivity to economic cycles in the region. A downturn in the consumer sentiment or of the
consumption growth in key markets could put pressure on revenue and margins.
Increased Competition. Folli Follie faces competition primarily from luxury and mid-priced retailers
of jewellery, handbags and accessories. Several top American and European affordable luxury
brands consider Asia (and China specifically) as an untapped market and are currently expanding
into the region. This will increase the competition in the groups largest market, and could impact
margins. E-commerce is also enabling international brands to enter new markets easier and faster.
Pressure from Suppliers. Group margins have benefited from low cost production countries,
primarily from China. With cost inflation introduced, suppliers could seek higher prices from clients.
This might not be easy to pass through to customers amid competition strengthening.
Interest Rate Risk. The Group has several bond loans, short-term bank loans and different leasing
contracts of buildings and equipment. The group uses interest rate risk hedging tools to address this
risk.
Foreign Exchange and Commodity Risk. Folli Follie purchases the majority of its products from
China, while 67% of its revenues derive from Asia (China and Japan). About 32% of sales were
denominated in EUR and GBP. The group does not hedge its exposures.
The exposure to silver and gold is relatively low, as an estimated 10%-11% of total sales are related
to these materials.
Valuation
Our valuation delivers a fair value for FFG of EUR 1.93bn or EUR 29.0 per share, which implies a 38%
upside from current levels.
We base our valuation on a DCF model as we feel this better depicts the companys unique
positioning and growth potential. We view that FFG is not directly comparable to its global luxury
peers given its high reliance upon the fast growing economies in Asia, its distribution mix (that
heavily relies on wholesale in these markets) but also the global brand-name recognition enjoyed by
the peers.
Regarding the main assumptions that drive our 3-step DCF model are:
Explicit assumptions for the period 2017-21, with 6.9% revenue CAGR and 100bps EBT
margin expansion by 2021 to 20.6% driven by operating leverage
Forecast 2021-26F revenue CAGR at 4% with flat EBIT margin at 20.6%
Capex to average below EUR50m after 2019, reflecting the completion of the groups
renovation efforts to increase in 2016 as enters a new renovation cycle
Some moderation in working capital flows after 2019, assisted by inventory optimization
following the groups omnichannel approach
WACC at 10.2% reflecting the fact the group is domiciled in Greece and also its exposure in
the Greek economy (22.5% of sales). We note that the groups cash reserved are held
outside the county
Long-term growth rate at 1.5%
Other assets at EUR200m, mainly reflecting the groups exposure in Dufry
Despite the high accounts receivable, bad debt associated to these receivables has been very small.
Regarding inventories, the bulk of which is associated with the Jewellery, Watches and Accessories
division sales, the largest part of the division sales come from classical collections that run for a
number of years and only handbags (est. at less than 15% of the division sales) is a seasonal product.
This minimizes the risk of write-offs created by obsolete / slow moving inventory.
We do account for some moderation in the working capital outflows after 2019, assisted also by the
optimization of inventories, facilitated by the omnichannel approach. Still, we expect working
capital needs to remain high as the groups expansion will continue at a fast pace, mainly through
distributors. A faster deceleration of the WC should be expected mainly as the aim for global brand
awareness has been achieved.
Capex
In FY2016 the group generated FCF of EUR43.3m, incorporating investments of EUR100m. The
record high capex (as % of sales) was mainly due to the acceleration of the store-renovation efforts
as the group is introducing a new retail concept. We expect capex to subside to cEUR70m in 2017
and from 2018 onwards to about half the 2016 level as the latest renovation cycle concludes.
Peer multiples
In parallel to the DCF exercise, we cross-reference to peer group multiples. We believe that a direct
comparison to global luxury names might not be appropriate since the peers in consideration are
global names, with a different product mix, geographical focus and distribution profiles.
In any case, vs. peers FFG trades at a 58.5% and 50.4% discount to 2018F P/E and EV/EBITDA. Our
price target of EUR29.0 implies a P/E and EV/EBITDA ratio for FFG of 8.3x and 6.2x respectively, in
2018F, which is a 43% and a 24% discount, respectively to peers.
In terms of historical multiples the group is trading at a 2018 P/E and EV/EBITDA discount of 35%
and 38% respectively vs. a 5-year average of 9.2x and 6.6x respectively. Although we account for a
slower pace of growth and of profitability in the coming years, the group has now a larger footprint
(especially in Asia), helping it generate higher sales and operating profitability, while the prospects
remain positive.
Trading wise, the groups share price since reaching a high of EUR33.0/share in 2014, dropped to a
low of EUR13.0/share in January of 2016, while during these 2 years, group revenue and net
earnings grew by 34% and 58%, respectively.
57.5%
34.0%
30.9% 29.6%
The drop in the share price has followed that of the Athens stock exchange that posted a decline of
c62% during the same time. Although headquartered in Greece just 22.5% of FFG revenues and an
estimated less than 10% of EBITDA derives from its Greek operations.
Still, since the beginning of this year the Athex has posted c30% increase, while FF share has lagged
the index, registering a c9.5% growth.
We believe FFGs stock recovery requires an improved sentiment towards Greece and stronger FCF
performance by the group
In respect of the country, we view that concerns over Greece have eased after the completion of the
second review and the subsequent exit of the country to the markets. The upcoming third review
(most likely to begin in early October) should be less difficult to be concluded on time (most likely at
the end of the year) since it is not expected to include additional fiscal measures, while the
acceleration of talks over debt relief (since the IMF eventually will need to decide its participation in
the program, most likely by the end of the year) should also provide support to investors sentiment.
Finally, the overall risk profile of the country has improved.
Regarding the groups FCF generation, we view that the weak performance in Q1:17 is related, to a
large extent, to seasonality and starting in Q2:17, we should see improved cash flow generation.
Chart 5a: FFGRP vs. ASE 3Y performance Chart 5b: FFGRP vs. ASE YTD performance
120 140
100 130
80 120
60 110
40 100
90
20
80
0
70
Group Overview
Folli Follie Group is a global retailer in the affordable luxury market, operating in 30 countries. The
vast majority of income and profitability derives from Asia and Europe. Operations are focused on
three core business segments i) design, processing and marketing of Jewellery, Watches and
Accessories (JWA) under the brand names Folli Follie (FF) and Links of London (Links) globally, ii)
Wholesale and Retail of branded products in Europe, and iii) operation of Department Stores and
outlets in Greece.
Chart 6a: FFG Geographic Evolution of Sales (EUR mn) Chart 6b: FFG Geographic Evolution of EBITDA (EUR mn)
892
244.0
755
204.3
424 431
49.8 43.9
14 15 3.7 4.0
EMEA Asia Pacific North America EMEA Asia Pacific North America
About 73% of FFG revenue is rising from the JWA activity, about 13% from the Retail/Wholesale,
while Department Stores account for the rest. On a geographic basis, 66.7% of sales were generated
in Asia in 2016, 22.5% in Greece, 9.7% from the rest of Europe and 1.1% from North America.
Chart 7a: FFG Revenue Split by Region Chart 7b: FFG Revenue Split by Division
FY:13 FY:14 FY:15 FY:16 Q1:17 FY13 FY14 FY15 FY16 Q1:17
Greece Other Europe Asia Pacific North America JWA Retail & Wholesome Department Stores
Source: The Company, AXIA Research
The JWA division represents (2016) 73.1% of group sales having delivered a 14.7% CAGR since 2011.
In terms of EBITDA, JWA generated 91.6% of total in 2016, growing at a 2011-16 CAGR of 18.5%
Chart 8a: JWA Sales and EBITDA margin (EUR mn) Chart 8b: FF and Links of London JWA Stores
120 0
30%
978
25% 773 809
763
100 0
857
712
800
705 20% 637
642
584
600
15%
400
10%
200
5%
0
0%
2012 2013 2014 2015 2016
Sales EBITDA margin 2012 2013 2014 2015 2016
The FF brand is estimated to represent c85% of the divisions revenues and Links the rest (the group
does not provide separate data for the two divisions). Although both FF and Links operate in the
affordable luxury segment they differ in terms of market position, geographical focus and channel
distribution mix.
Chart 9a: FF & Links of London Product Sales Chart 9b: JWA Sales Breakdown Estimate
12%
25% 8%
15%
30%
80%
45% 85%
Price range
FF brands price point sits at the medium-to-lower end of the affordable luxury price
range. The average product price is estimated at EUR100-200. After 2012 the FF brand
mainly uses stainless steel as the base material of its jewellery (also some silver) with
silver and gold coating.
Links of London carries a more exclusive collection within the affordable segment with the
estimated average product price at GBP150-250. It uses mainly silver and gold as the base
material of its jewellery.
Regarding the production of jewellery, for the FF brand it takes place in China through a
number of third party producers (so the company does not face any import charges in
China). Links of London also produces in China but also in Greece and in Italy, aiming at
optimizing production flexibility as the size of the brand is smaller than FF and the bulk of
the revenue is generated in Europe.
Chart 10a: FF stores per region Chart 10b: Links of London stores per region
Europe North
21% America
24%
Other
EMEA 50%
Asia
US/ Pacific 50%
3%
Asia
Japan Pacific
10% 26%
Source: AXIA Research
Chart 11a: FF POS per network Chart 11b: Links of London POS per network
8%
27% 22%
47%
26% 70%
Concept Stores Shops in Malls Shops in Shops Concept Stores Shops in Malls Shops in Shops
Distribution networks
We estimate that about 30% of FF brand sales are generated through own stores, while
another 30% through branded franchised stores. The remaining of sales derives from
department stores and travel retail. The proportion of online sales to total is estimated at
8%-9%.
Distribution of Links is split between retail and distribution. Online sales are estimated to
represent 20% of the total.
Chart 12a: Folli Follie Distribution Channel Chart 12b: Links of London Distribution Channel
40% 30%
50% 50%
30%
20%
8%
Retail / Wholesale
Through the Wholesale and Retail activity, Folli Follie represents and sells fashion brands in Greece
as well as in South East and Western Europe.
Specifically, the group is one of the biggest consumer retail and wholesale players in Greece,
operating about 120 stores all over the country and representing names such as Calvin Klein, Guess,
Juicy Couture, Nike, Samsonite, Ted Baker, Converse, Hugo Boss, Gucci and Ralph Lauren.
For some of these brands, the group is also the exclusive distributor in Bulgaria and in Romania. In
these 2 countries it operates c60 POS.
For the Juicy Couture brand, FF group is granted the exclusive wholesale and retail distribution
rights in Greece, Romania, Bulgaria and Cyprus.
In addition to cloths and accessories, FFG over the last few years has substantially expanded to the
beauty and cosmetics segment. Its portfolio includes the exclusive representation and distribution
of a number of names including Shiseido products in Greece and Cyprus.
Chart 14a: Retail/Wholesale Sales & EBITDA margin (EUR mn) Chart 14b: Retail/Wholesale distribution network
200
178 15%
180
165 120 121 116
160
10%
137 100
140
92
120
106 5%
98
100
80
0%
60
34 30 30 25 33 33
40
-5% 21 23 24 24
20
0
-10%
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Revenues EBITDA margin Greece Romania Bulgaria
Source: AXIA Research
Department Stores
The group participates with a 46% stake in the company that operates five department stores in the
Greek market under the brand name Attica Department Stores. These are the largest department
stores in Greece, housing a wide array of high-end designer brands of cosmetics, perfumes, clothing,
footwear, accessories, handbags, jewellery and travel items.
Additionally, the group is active in the field of outlets with two well-known outlet stores in Athens.
Chart 15a: Department Stores Sales & EBITDA margin (EUR mn) Chart 15b: Department Stores Revenues (EUR mn)
200
181 7.0%
180
154 171
6.0% 21
160
136 19 20
2 2
5.0% 17 17 2 21 23
140
124
4 15 2 2
18 19 18
2 17 16 17
120
4.0% 2
16 15 15 15
14 13 14 54 57
100
9
11 12 47 49 52
3.0% 41 43
80
35 37
60
2.0%
79 84 85 90 93 96 99
40
1.0% 68 72
20
0
0.0%
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
2012 2013 2014 2015 2016
Attica Golden Attica Factory Outlets
Sales EBITDA margin Attica North Attica "The Mall" Attica Thessaloniki
5.90%
Koutsolioutsos Family
13.90%
34.40% Others
Fosun International
45.80% Fidelity Investments
The global fashion industry, after enjoying a number of years of strong growth, is slowing down as a
result of a more measured performance in the key markets of the US and Europe. Apart from
political uncertainty and the shifts in the global economy, the forces that are impacting the fashion
industry include i) the increased competition from online players, ii) the decreasing foot traffic, iii)
the speed of changing consumer preferences and iv) the discounted environment with growing off-
price divisions that pressure the margins of the luxury brands.
Focusing specifically on the jewellery segment, Asia is the worlds largest jewellery market,
estimated to command more than a 60% stake in global sales, while the regians growth is expected
to outpace that of other regions. Focusing on China this is the largest jewellery market in the world
representing c1/3 of the global demand and is expected to grow at 6%-7% in the medium term.
We recognize four key themes that shape the global fashion industry
turn to affordable luxury
emerging of the middle class in China
changing path to purchase
growth of tourism, especially in respect of Chinese tourists
McKinsey & Company notes that the impact from the recent slowdown in the industry is mainly felt
in the higher end of the luxury products, leading the segments growth to slowdown to 0.5%1.0%
in 2016 vs. the 8.0% CAGR recorded between 2010 and 2015.
The product category in the segment that is experiencing significant deceleration is watches and
jewellery, a category that according to the McKinsey Global fashion Index (MGFI), this category was
the fastest growing in the past having enjoyed a 2005-15 sales CAGR of 11%.
Watches and jewellery growth is estimated to have slowed down to 1.5-2% in 2016, and to pick up
slowly in 2017, with the luxury producers of the category being the most impacted by this sharp
deceleration.
On the other hand, affordable luxury players have benefited from consumers trading down, and
thus this segment has been growing at a CAGR of 9% over the past 3 years and is expected to remain
the best performing within the sector, growing by 3.5%-4.5% in 2017.
Economic growth: Although Chinas GDP growth is forecasted to ease from the current high levels,
the pace of growth of the Chinese economy is expected to remain strong, considerably higher than
that of the worlds average. IMFs estimates that Chinas GDP growth in 2017 and 2018 will reach
6.6% and 6.2% respectively, and should remain at c6% by 2022, while GDP growth for advanced
economies is expected at 2.0% in both 2017 and 2018.
Chart 17a: China GDP (Trillion USD) Chart 17b: China GDP Growth Vs. Other Economies
7.3%
6.9% 6.7% 6.6%
6.2% 6.0% 5.9% 5.8% 5.7%
11.1 11.2 5.4%
10.5
9.6 4.2%
8.6 3.5% 3.5% 3.5% 3.6% 3.7% 3.7% 3.7% 3.8%
3.4% 3.4%
7.6 3.1% 3.1%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Advanced Economies World China
Expanding middle class: The economic growth continues to trickle down to the countrys upper and
middle income households.
Since the early 2000s, Chinas middle class has been among the fastest growing in the world,
swelling from 29 million in 1999 to almost 500 million today. The middle-class population is poised
to be around 60% of the urban population by 2030 which translates to around 870 million people
and could reach 70% of its population by 2050, for an estimated 1 billion people.
With the authorities also planning to boost consumption, the middle-income class potential uplift
from the share of consumption to GDP should settle at c50% by 2030 from 36% in 2014.
The per capita disposable income in urban areas is estimated to reach around US$30,000 by 2030
from the less than US$10,000 currently.
The upper middle-income group is envisaged to increase from 7.1% of the population in 2015 to
19.7% of the population in 2030 and the high-income individuals (above US$32,100) should jump
from 2.6% of the population in 2015 to 14.5% in 2030.
5
3.4
2.6
2.1 1.5
0.7
1.9 2.4
1.4
2011 2016 2021
The impact of the Chinese millennials: The most dynamic segment of the countrys middle and
upper middle class is that of the millennials. According to BCG, consumption by Chinese under the
age of 35 accounts for 65% of consumption growth and is set to grow at an annual rate of 11% from
2016 to 2021 or twice that of consumers older than the age of 35.
This large and affluent group is set to become the largest (c70% of the total by 2021-22) and the
most influential consumer segment in Chinas consumer market.
Key characteristic of the Chinese millennials is that they are more exposed to western cultures and
ideas and the modern lifestyle. As a result, they aspire towards having a premium lifestyle and
therefore they are demanding premium products and services that could enhance a personal sense
of well-being.
Chart 19: China Total & Urban Population and Urbanization Level
160 0
70.0%
1,341 1,376 1,388
1,270 1,306
60.0%
140 0
120 0
50.0%
100 0
660
555 30.0%
600
455
400
20.0%
200 10.0%
0
0.0%
2000 2005 2010 2015 2017E
Population (mn) Urban Population (mn) Urbanization Levels
Tier 3 and 4 cities / Urbanization: Chinas middle class now is estimated at c500 million people,
which is roughly 68-69% of the urban population. Most of this group of people is concentrated along
the coastal provinces in Tier 1 and Tier 2 cities.
Expectations are that in the Tier 3 and 4 cities middle class will grow at a faster pace.
In addition, the trend towards urbanization is expected to continue.
Urbanization has been a key part of Chinas development in the last two decades. By now, over half
of Chinas population lives in urban areas as the share of urban population increased from 31.91% in
1997 to 57.35% in 2016.
All in all, according to a McKinsey & Company report, about 700 large cities in China are expected to
account for USD7.0 trillion, or 30% of global urban consumption growth to 2030.
Demand for Affordable luxury: We highlight the trend towards affordability for fashion in China.
This segment apart from a loyal following of new middle-class customers (lower incomes), is
generating renewed interest and sales from wealthier legacy customers. To this end, many middle-
class Chinese consumers are abandoning high-end, pricy luxuries and are switching to more
affordable and quality promising brands.
Partially, the strong growth of the affordable segment in China over the past few years has been
supported by the anti-corruption and austerity campaign implemented by the Chinese government.
The measures that intended to curb the spending habits of civil servants, military leaders and
provincial leaders had a large impact on the luxury segment of the fashion industry.
Changing Path-to-Purchase
Wholesale is the dominate distribution format for luxury goods, accounting for two-thirds of all sales
(2016). Retail is growing steadily on a global level in terms of preferred distribution format, but the
landscape in which it operates is changing. Brick-and-mortar stores are closing due to slower in-
store traffic, while the online business is booming.
Chart 20a: China Online Shoppers Population (million) Chart 20b: China Online Shoppers Penetration
467 441
413
361 340 60.0% 63.8% 63.4%
55.7% 54.8%
236 42.4%
Use of digital technology has emerged rapidly in the retail business as a new path-to-purchase, for
data-collection on customers, marketing, and for improving the overall customer experience.
Omnichannel retailers retailers offering merchandise in both the digital and physical sphere
acquire an advantage over retailers with only one distribution channel. Physical stores function as
showrooms, purchase, pick up and return points, while websites and apps offer inspiration and are
used for easy ordering.
E-commerce notably outperformed the rest of the personal luxury goods market in 2016, growing
by 13.0% y-o-y and reaching an 8.0% share of the global industry. An increasingly popular direction
is the use of mobile phones as a shopping tool, a trend estimated to gain even more popularity in
the coming years.
The distinction between online and in-store purchases has become obscure to define. The tendency
of shopping through multiple channels is expanding, and omnichannel retailers are more
competitive as they offer an especially attractive and complete customer experience. On the
background of this trend, and due to a challenging overall operating environment, retail space
growth is expected to represent a smaller proportion of total growth as companies shift focus to
store productivity rather than expansion in existing markets. Nevertheless, the environment is not
shifting towards an all-online platform, but in the direction of a more complete shopping experience
through omnichannel integration.
Global Tourism
Tourism accounts for 40%-50% of the personal goods luxury market.
Tourist flows play an important part in luxury goods revenue, and airport stores as a distribution
channel make up 6.0% of the luxury goods market. This was evident on the sales and the
profitability of the luxury industry in 2016 when the numbers of Chinese tourists, for specific
reasons, dropped.
The International Air Transport Association (IATA) expects tourism growth to remain strong, leading
to almost double the air travellers over the next 20 years, a 3.7% CAGR.
The fastest-growing market in regards of additional passengers per year for the forecasted period is
China, which is expected to add 817 million new passengers on the background of growth in
disposable income that continues to drive outbound Chinese tourism. Chinese outbound travel is
dominated by millennials. Their buying habits differ than that of older Chinese.
According to MasterCard Research over half (51%) of Chinese millennials aged 18-29 are likely to
buy luxury goods when travelling overseas. This group is the biggest purchaser of luxury goods in
Asia Pacific. MasterCard Research notes that the Chinese millennials spend an average of more than
USD4, 000 per head on luxury goods, twice as much as the average across Asia Pacific nationalities.
At the same time more than half of millennial shoppers in China prefer Western brands.
S
o
Chart
u
21a: % of Chinese who own a Passport 1 Chart 21b: Travel Retail By Region 2
r
c
e 7% 9% 9% 11%
12%
:
N 31% 42%
a 46% 39%
9%
t
i 1%
o 2% 1%
6% 1% 19%
n 18%
a 20%
l
22%
4%
B 39% 42%
u 24% 30%
1.50%
r
e
a
u
2005 2010 2015 2020e
2013 2015 2016 2017 2025F Asia Pacific Americas Africa Europe Middle East
o
f
Source: UNWTO1, Wall Street Journal2, AXIA Research
The vision of the management for the group is clear: FF to become a global brand.
Expanding in new countries and markets with flagship stores, growing its travel retail segment and
taking an aggressive stance in the online market, are actions aiming to add to the firms global brand
name recognition.
In the medium term, though, FF will remain a strong regional player in the affordable luxury
segment and gain from the growth prospects of the Asian and specifically the Chinese market.
We forecast that the regions stake to the JWA sales will increase from 91% in 2016 to c94% by
2019.
402 50%
1,683 20% 379
1,579 40%
180 0
354
400
160 0
1,455 15% 327
1,337 350
30%
140 0
998 5%
887 250 223 10%
100 0
810 0% 187
800
-5% 200
0%
-10% 129
600 150
-10%
400
-15% 100
-20%
200
-20% 50
-30%
0
-25% 0
-40%
2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
In parallel, the Retail/Wholesale and Department Stores divisions are expected to add to the groups
top and bottom line as the Greek market rebounds. Combined, these two divisions are forecast to
report a 2016-19F top line CAGR of 3.5%.
2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
Source: The Company, AXIA Research
At the right place with the right product at the right price
FF is a western brand that first started growing in Asia before it begun to seek global expansion.
The group established its first international subsidiary in Japan in the mid-90s, while in early 2000 it
turned its focus on Hong Kong and on Mainland China. This is the opposite road followed by western
luxury producers.
In 2006 the group obtained a retail license to operate in China.
Excluding travel retail, in Asia, the group operates c420 POS, of which c235 are located in China.
Chart 24a: JWA Revenues from Asia (EUR mn) Chart 24b: JWA Revenues from Asia Vs. Other Regions
1400 1284
1206
1200 1119 3% 3% 2% 2% 2% 1% 1% 1% 1%
1009
1000 892
755
800
603 80% 84% 86% 88% 91% 93% 94% 94% 94%
600
400
200 88 88 71 63 66 68 69
13 14 15 11 11 12 12 17% 13% 13% 10% 7% 6% 5% 5%
0 5%
2014 2015 2016 2017e 2018e 2019e 2020e 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
FF brand is offering a lifestyle proposition to local customers: designed jewellery, watches as well
as accessories (handbags, scarf, sunglass, etc.) at an affordable price. Not all global competitors
offer the same product assortment and this is a strong differentiating factor for the group.
An established presence and positioning in the market is key for the group, especially in China since
indications are that the Chinese consumers, who continue to seek western luxury products, are
becoming more brand-loyal, aiming towards affordability.
Regarding competition most global luxury names participating in this segment already operate in
Asia and in China, while upscale luxury names are introducing affordable luxury lines.
A slowdown in the US and in Europe as well as the pressure from online leads competition in China,
the fastest growing market in the region, to intensify.
All in all, FF positioning at the mid-to-lower end of the affordable luxury provides the group with less
cyclicality, supported by a broad demographic appeal. This allows FF to better compete in the
fragmented affordable jewellery category in Asia (China) assisted by brand-name recognition and
accessibility.
The store reformatting is part of a global strategy but as c60% of the FF brand POS (excl travel retail)
are in Asia, the success of the new concept is imperative, aiming to lead at stronger brand name
recognition and to better position against completion while making the stores more productive and
profitable.
AXIA Research Page 23
Folli Follie Initiation of Coverage
The refurbishment efforts of the FF brand own stores (own-operated stores are estimated at c120-
130 or c20% of the total FF brand network) started in 2015. We understand that most of these
shops have been renovated. The push now is on the renovation of department stores, while the
final push for the introduction on the new concept will focus on distributor store.
All in all we estimate that 60% of FF brand network has been renovated and we expect the
renovation cycle to be concluded in 2019.
Similarly with global luxury players that updated their concepts and saw initial strong earnings
growth from the renovated stores, we understand FFs refurbished stores generate higher traffic
leading to a sharp increase in ticket comps. Eventually sales should subside to lower, more
sustainable levels, but higher than before.
The strong macro environment in China and the effect from the stores renovation leads us to
estimate a LFL growth in Asia of 13% in 2017, easing to 7.5% by 2019.
Chart 25a: Asia: Growth split Chart 25b: Asia POS (including travel retail)
552 564
527 539
0.4% 512 517
0.5% 452
6.9% 383 383
5.0% 0.4%
2.0% 0.2% 0.2%
1.0% 0.5%
5.9% 5.5% 5.4% 5.2% 5.2%
The driving force of the omnichannel experience is technology and therefore the group has
invested and continues to invest towards creating the infrastructure that will allow it to
emerge as an omnichannel retailer. Asia is the main recipient of these investments.
Currently online sales for the group represent a rather small portion to total revenue (as a
group online sales are estimated at c8%-9% of the total), but management works towards
increasing this number to 30% over the medium term. To this end the group is investing a
large part of its marketing budget on the online channel, an investment that should
gradually bear fruit.
We focus on China given the fast growth of e-commerce in the country. Online in China is
primarily driven by third-party channels and therefore the access though these channels is
associated with commissions.
Pushing towards direct online sales could help FFG to start reducing reliance from these
third-party channels. Still this remains a challenging proposition since FF is still not a global
brand-name. The group is expected to continue to maintain its focus in online sales, aiming
to capture the changing buying trends of the millennials, while further building brand name
recognition.
Chart 26a: POS in China by Store Category Chart 26b: Number of FF-brand Stores in Asia (Exc. Japan)
348 337
332 319 321 325 331
295
32.6%
Expansion in Chinas Tier 3 and 4 cities is expected to take place mainly through distributors.
This way FF will be able to grow its network much faster, more efficient and with limited
costs (no satellite offices with the associated costs).
Note that the group is already operating with a limited number of distributors (franchisees)
that own portfolios of luxury brands and some of them operate in more than one
cities/locations. Some of these distributors are department store operators as well.
We account for 13 net additional POS for FF brand in Asia (excl travel retail) over the next 3
years or a net increase of the network of 3.5%, compared to 2016.
Note that the group is expected to continue to try optimizing its network as it proceeds with
its concept upgrade and this means that the POS growth might not fully capture sales
growth due to the closing of smaller stores. Because of the closures we estimate that the net
decline of FF stores in Asia in 2016 came to c35 vs. a year ago.
By introducing Links, FFG should be able to benefit not only by the growing middle and
upper middle class in China but also by the trading down from luxury brands (also related
with crack down of luxury in china). On the other hand, Links should feel the pressure from
established brand names in this product category that have been positioned in this market
segment for some time.
Regarding store growth for Links, we expect the focus to be on Tier 1 and 2 cities in China,
initially through its own stores. Asia should account to c44% of the total growth of the Links
network by 2019.
Chart 27a: Links of London stores in Asia Chart 27b: Links of London VS FF stores in Asia
44
34
6% 10% 12%
2012 2016 2020
2012 2016 2020 Links of London Folli Follie
Travel retail remains a highly lucrative segment of the groups jewellery and accessories business as
it i) benefits by the strong trends of tourism, especially in relation to China ii) helps build global
brand name recognition and iii) allows the group to get familiarized with new markets which could
potentially lead to the groups expansion in these markets.
As noted earlier, the expansion in this channel is supported by the groups strategic shareholding in
Dufry.
We account for a c20% increase of the travel retail network by 2019 reaching 118 POS.
Chart 28a: Dufry number of Stores Chart 28b: Dufry Sales Channel
947
3%
4%
407 399
2% 91%
300
132
Chart 29a: Travel Retail JWA Market Cap, (USD mn) Chart 29b: Travel Retail Sales Growth by Product
7% 9% 8% 9%
8.5 7% 8%
8% 10%
18% 17% 17% 16%
6.2 20% 15% 12% 10%
We understand that the group will continue to selectively expand FF brand through flagship stores
globally aiming at introducing the brand name to new markets, while testing the prospects of these
markets. Eventually, FFG should aim to expand further in the markets with the highest potential of
growth. Australia, South Africa, Middle East and Turkey are markets that the group has presence
already and we view that these markets could present with further growth opportunities.
Regarding the distribution channel we note that the groups strategy is to enter into new markets
mainly through wholesalers/distributors. Once assured by the markets potential the usual action is
to acquire the distributor and to seek its retail expansion.
Conservatively, we account for 8 net additional stores from markets outside Asia by 2019, increasing
the network by c5%.
Growth outside Asia should account for 56% of the total growth of the Links network by 2019.
Chart 30a: Links on London stores outside Asia Chart 30b: Links of London stores: international Vs Asia
108 111
101 105
95 95 98
91
37 39 41
26 31 32 34
26
42 44 46
36 39
34
69 67 68 69 70 25 28
65 64 66
2014 2015 2016 2017e 2018e 2019e 2020e 2021e 2014 2015 2016 2017e 2018e 2019e 2020e 2021e
EMEA North America Total Outside Asia Asia
Source: AXIA Research
Chart 31a: Greek GDP Growth Chart 31b: Greek Clothing and Footwear (EUR mn)
0.70% 0.10%
-0.30% 2,141 1,887
-0.20%
1,648
-3.20% 1,348
-4.30% 1,215 1,212 1,312 1,231
6,615 6,588
-5.50% 5,310
4,318
3,472 3,330 3,273 3,171
-7.30%
-9.10%
2008 2009 2010 2011 2012 2013 2014 2015
2008 2009 2010 2011 2012 2013 2014 2015 2016 Clothing Footwear
As the Greek economy has stabilized and is expected to rebound strongly in the coming years we
expect the group to start reaping the benefits of the strategy followed and specifically to i)
consolidate the local market ii) acquire a strong brand-name portfolio iii) expand its store-network
in the country iv) renegotiate rents and reduce overall the operating cost of the stores. Note that
the network of Retail/Wholesale since 2010 (when Greece entered into a MoU with its creditors)
has increased by 30%.
Sales and profitability should be boosted by i) the strengthening of the groups collective store
concept (FFG stores that carry brands it represents) ii) online (as the group leverages on its
knowhow) and iii) by efforts to better control the wholesale segment.
Growth is also expected in Bulgaria and especially in Romania, with the groups strategy supported
by the improving economic conditions in these countries and the collective stores concept.
2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
Source: The Company, AXIA Research
We account for c9% network growth by 2019 to c190 stores, driven by new shops established in
Greece.
We make a note that the group is slowly becoming one of Greeces largest wholesalers of beauty
and cosmetics products. The prospect of further enlarging the beauty and cosmetics portfolio
coupled with the segments gradual return to growth (after a steep drop during the crisis-years)
could propel this segments sales and profitability, making it be a considerable driver for the
Retail/Wholesale division in the coming years.
Chart 33a: Retail stores Revenue and Revenue Growth (EUR mn) Chart 33b: Retail Stores EBITDA and EBITDA Growth (EUR mn)
250
35% 20. 0
15.0 8%
192 198 30%
178 180 186 15. 0
11.8
12.9 6%
25%
200
15%
98 106 5.0
2%
100
10%
5% 0.0
0%
50 0%
-5%
-5.0
-2%
-
-10% -4%
-10.0
-6.3
2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
Going forward we expect the rebound of the Greek economy and the influx of tourists to further
support growth. At the same time Attica Stores aim to expand its portfolio of brands, while online is
the next natural step for the subsidiary that is expected to be supported in this effort by the
knowhow of the FF Group.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E
Focusing on tourism we note the strong tourism trends in Greece over the past few years, while
expectations are that tourists flow in the country will remain strong over the next few years
(expectations are for c2.0m additional tourists in Greece per year over the next four years).
Regarding Chinese tourists to Greece, the Chinese government predicts that the inflow will increase
10x in the medium term and from 150,000 in 2016 the number of Chinese tourists in the country to
exceed 1.5m. This potential represents significant opportunity for the groups domestic operations
both in respect of the FF brand and Attica stores (especially City Link).
Chart 35a:Department Stores Revenue and Revenue growth Chart 35b: Department Stores EBITDA and EBITDA growth (EUR
(EUR mn) mn)
250
219 14%
210 18.6 18.9
191 201 12% 20. 0
17.0 17.7 7%
181 18. 0
16.1 15.3
171 10% 6%
200
154 16. 0
13.0
136 8% 14. 0
5%
150
124 6% 12. 0
9.6 4%
4% 10. 0
100
8.0
6.4 3%
2% 6.0
2%
50 0% 4.0
-2% 2.0
1%
-
-4%
0.0
0%
2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
FFG has delivered a strong 13.5% sales CAGR between 2012 and 2016.
We do expect the rate of growth to progressively normalize but should remain high above the
average of the affordable luxury competitors. We forecast an 8% sales CAGR in the period 2016-19F
driven by LFL growth in the JWA division.
1,778 25%
1,683 20%
1,579
180 0
160 0
1,455 15%
1,337
140 0
1,193 10%
120 0
998 5%
887 0%
100 0
810
800
-5%
600
-10%
400
-15%
200
-20%
0
-25%
2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
JWA sales from EUR978m in 2016 are expected to reach EUR1.285bn in 2019. The growth should be
driven by LFL sales, mainly the result of the higher demand and improved store productivity of the
FF brand.
Sales in Asia are expected to grow 13.2% in 2017 y-o-y reaching EUR1.009bn, while 2016-19F GAGR
is estimated at 10.6%.
We also see upside from the groups exposure in Greece as the local macroeconomic picture
gradually improves and the group starts reaping the benefits of market positioning and
management execution.
Retail/Wholesale revenues are seen growing from EUR178m in 2016 to cEUR189m in 2019 on the
back of stronger LFL growth in all markets but especially in Greece, while assisted by the network
expansion.
Finally, Department store sales are expected to grow 5.5% y-o-y in 2017 to EUR191.5 and to register
at a 2016-19F CAGR of 5% driven by the rebound of the Greek economy and strong tourism.
Groups operating profitability is attractive, while it can offer some small upside from current levels.
We forecast a 22.5% average EBITDA margin during the period 2016-19, from 21.8% in 2016 as the
adverse impact from the distribution mix should be counterbalanced by operating leverage, product
mix and faster margin expansion of the Retail/Wholesale division.
We do believe that profitability is sustainable and could be further supported by efforts to push FF
brand name recognition, the expansion of Links and online sales growth.
Chart 37a: Gross profit & margin for FF Group (EUR mn) Chart 37b: Gross profit & margin for JWA Division (EUR mn)
900
520
600
663
700
500
405
400
46% 300
48%
300
45% 200
46%
200
44%
100
44%
100
43%
0
42%
0
42%
2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
JWA gross margin declined from 56% in 2011 to 48.6% in 2016. The gradual drop primarily reflects
the shift of the distribution network to wholesale sales but also the economic challenges in key
markets such as Hong Kong and Greece as well as the faster growth the lower margin products
(watches and accessories).
We have to note the limited exposure of the FF brand to the fluctuating prices of the gold and silver
since starting in 2013 it is using mainly stainless steel in the production of its jewellery. On the other
hand Links is using silver and gold as base material.
Chart 38a: Gross profit & margin of Retail division(EUR mn) Chart 38b: Gross profit & margin of Department Stores (EUR mn)
100
91 60% 36%
86 79
90
85 76
79 72 36%
90
80
73 74 50% 69
80
69 65 36%
70
49 61
54 36%
70
40% 60
60
49 50 43 36%
50
39 30% 35%
40
35%
40
20% 30
35%
30
35%
20
20
10%
10
10
35%
0
0% 0
34%
2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
Gross profit Gross Margin Gross profit Gross Margin
Source: The Company, AXIA Research
Going forward, we expect groups gross margin to be pressured from the changing channel mix in
the JWA division. JWA gross margin is seen sliding from 48.6% in 2016 to 48% in 2017 to 47% in
2019 and to normalize at 46.5% in the longer term. Specifically we expect gross margin dynamics of
the JWA to include:
Wholesale. As franchise activities and travel retail are expected to drive growth for JWA,
this should continue to drive margin compression for the division
Online. The online channel in China is dominated by third-party online operators and the
sales through them are expected to continue to represent the bulk of online sales for the
group in the near-to-medium term. This means that commission payments and special
incentives to third-party operators will continue. On the other hand, we expect the group
to start pushing harder for full-price sales through its own sites. Although promotions and
discounts to attract interest are part of the sales effort, succeeding in expanding its own
on line sales will give a significant boost to JWA margins
Product mix. For the FF brand, jewellery remains the highest contributor of the divisions
sales but the share of jewellery sales has been on the decline, in favour of accessories and
watches. As accessories are expected to remain the fastest growing product segment, the
pressure on the gross margin will be maintained
Competition. With growth of the luxury markets of the US and Europe flattening, the
focus of the luxury industry should increasingly turn on China. Most of the global
competitors in the affordable luxury segment are already operating in the countrys Tier 1
and 2 cities. Although well positioned in the low-to-medium end of the affordable luxury
market, increased competition should also impact FFG, by limiting its pricing ability
Links of London growth: Although at one hand the growth of Links will support margins
due to i) more favourable product mix and ii) expansion through own stores, on the other
hand, the brand has limited pricing ability as raw materials fluctuate and as the GBP
devaluates (an estimated 80% of revenues come from the UK and Ireland).
The gross margin of the Retail/Wholesale is expected to significantly improve as demand and pricing
picks up (inflation has been reintroduced to the Greek market), although online competition should
remain strong.
The gross margin of the Retail/Wholesale from 40.8% in 2016 is expected to increase to 45% in 2019
and normalize at c48%.
On the other hand, Department Stores gross margin is to remain at c36%.
The groups gross margin is seen dropping from 45.8% in 2016 to 45.6% in 2017 and to 45.4% in
2019 and normalize at this level.
Chart 39: Total Opex Growth & Total Opex over Sales (EUR mn)
410 40%
389
450
368
400
337 35%
279 314 320
30%
350
300
278 261
25%
250
200
20%
150
15%
100 10%
50
5%
0
0%
2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
For the JWA division the reduction of the selling expenses should be supported by i) the
introduction of new store concept (focusing on larger stores) ii) the optimization of the
network that leads to the close of smaller / less performing stores as well as iii) the
renegotiations of rents in markets like Hong Kong and Greece. On the other hand,
advertising expenses as % of sales should continue to increase as the group invests both in
the FF and the Links brand.
Regarding the Retail/Wholesale division operating profitability is to be enhanced as the
rate of growth of rents, employee costs and advertisement are to remain subdued over
the next 2-3 years.
Chart 40a: Administrative Costs to Sales Chart 40b: Selling Expenses to Sales
8.2%
38.8%
6.2%
5.4% 5.4% 27.2%
4.9% 5.0% 5.0% 4.9% 24.3%
4.3% 22.5%
21.1% 20.5% 20.4% 20.2% 20.3%
Group EBITDA is expected to grow 12.1% y-o-y in 2017 reaching EUR327.3m, while 2016-19F EBITDA
CAGR is forecasted at 9.1% as the EBITDA margin from 21.8% in 2016 is expected to settle at 22.5%
in 2019.
In terms of divisions, JWA is expected to marginally increase its stake in the groups EBITDA from
91.6% in 2016 to 92% in 2019.
Chart 41a: Group EBITDA & EBITDA growth (EUR mn) Chart 41b: EBITDA margin per division
450
402 50% 26.7% 27.8% 27.1% 27.6% 27.2% 27.2% 27.1% 26.9%
379 40%
354 22.7%
400
350
327 30%
292
300
265 20%
250 223 10% 11.0%
187 9.8% 9.4% 9.4% 9.2% 8.9% 9.0% 9.0%
200
0% 8.5%
7.0% 6.2% 6.4% 6.6%
129 5.2% 6.0% 5.4% 5.8%
150
-10%
100
-20%
50
-30%
0
-40%
2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
-6.4%
EBITDA EBITDA growth 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e
JWA Retail/Wholesale Department Stores
Source: The Company, AXIA Research
Depreciation and amortization charges are modelled to continue to increase in the coming years as
the group is investing in the upgrade of its stores. The renovation cycle is expected to be completed
by 2019. Depreciation and amortization charges are estimated at cEUR32.5m in 2017 from
EUR29.6m in 2016 and are expected to settle at EUR34.3m in 2019.
Net financial expenses are seen settling at EUR17m in 2017 from EUR8.5 in 2016. Note that in 2016
the group had benefited by financial gains of cEUR10m related mainly to the mark-to-market of the
convertible bond.
Net income in 2017 is seen reaching EUR220m or 3.3% lower y-o-y, given the one off gains in 2016.
2016-19F EPS CAGR is seen at 4.3% as we pencil in an effective tax rate for the group of 22%. Note
that the bulk of profits are booked in Hong Kong that commands a corporate tax rate of 17%.
Working capital
Focusing on working capital we acknowledge that the group operates in a capital intensive
business, while the expansion through wholesale and the peculiarities of the Chinese market have
led WC levels beyond those of peers. On the other hand, we also understand that for the group,
working capital is a key tool that helps enhance its competitive position in its markets.
The high working capital requirements are mainly driven by the JWA division and reflect both
inventory intensity and high account receivable balances.
We expect working capital intensity to remain high as the group continues with its strategy to
increase sales. On the other hand, some improvement should be expected as management is trying
to firm its credit policy but more importantly as the omnichannel drive should facilitate the
optimization of the inventory balances. Still the results of this effort should take some time to
become visible.
Chart 42a: Working Capital Dynamics (EUR mn) Chart 42b: Changes in WC (EUR mn)
1200
1000 0
800 -50
600
-100
400
-150
200
-157 -148 -157
0 -200
-400 -246
2014 2015 2016 2017E 2018E 2019E 2020E
-300
Accounts receivable
Trade receivables amount to c50% of the group sales. The bulk of these receivables are related to
the JWA division and is interesting to note that their pace of growth is similar to that of the
divisions sales growth (2012-16 CAGR of 10.1% for receivables vs. 13.4% of group sales) that has
been driven by wholesale.
To this end, given the high % of JWA sales that derives from the Chinese market, we have to note
the peculiarities of this market in respect of payment terms. A recent report by PWC notes that
average supplier payment term for the retail industry in China is as long as two to four months,
while in the United States it is just 1.5 months (note that China accounts for 66.7% of JWA sales
from 37% years ago).
In addition we view that extending rather favourable terms to department stores for account
receivables is an aggressive but an efficient strategy that aims at higher market penetration and
brand name recognition. Finally, travel retail, due to its high bargaining power of the operators, is a
distribution network that also commands lengthy repayment periods.
The combination of the above has led to a receivable collection period for the group of more than 6
months.
Still, despite the rather lengthy repayment period, bad debt formation is small and not a source of
concern. Accumulated provisions to the accounts receivables amounted to EUR70m in end-2016 or
c10% of the total increasing by cEUR3.5m y-o-y.
As sales growth through wholesale (department stores and travel retail) continues, the lag in the
payments should persist. The rate of growth of receivables vs. sales could improve as sales through
distributors grow faster (we understand that the payment terms from this channel are shorter) and
as online sales pick up speed.
The expansion of Links, mainly through own stores at this stage, should also assist the AR balance.
All in all we expect group receivables as % of sales to remain high over the medium term as the
group continues to expand and as competition increases making it more difficult to alter credit
terms. Eventually, we are expecting an improvement driven by a gradual shift in the distribution
mix.
Inventories
The group also shows significant inventory intensity related again to the JWA division but also due
to the other activities. We estimate that the inventory of the JWA division to JWA sales is at c50%,
while the inventory-to-sales for Retail/Wholesale and Department Stores is at c30-35%.
Buffer stock accounts to an estimated 20%-30% of inventories.
We expect inventories as % of sales to remain high and to increase given the expected growth of
the group through distributors and online. There should be some improvement going forward as
the result of i) pushing towards the omnichannel approach (although we should expect full results
after couple of years) and ii) efforts to further reduce the number of SKUs for JWA, but the impact
should be more visible in the medium-to-longer term.
AXIA Research Page 38
Folli Follie Initiation of Coverage
Regarding the JWA division inventories we note that only handbags are seasonal products
(handbags are discounted when out of season), while the bulk of jewellery and accessory sales
derive from iconic collections that run for a number of years, easing concerns over retaining
old/slow moving stock of inventory, forcing the company to dispose it and/or sell it below book
value.
790 50%
800
724 45%
651 40%
586
700
35%
490
600
500
30%
378 367 25%
400
255 20%
300
15%
10%
200
100
5%
0
0%
2012 2013 2014 2015 2016 2017e 2018e 2019e
Accounts payable
The group has been consisted with the payments to its suppliers and we expect this trend to
continue, with account payable facing a 2-3 month turnover. Therefore we dont expect efforts to
alleviate working capital pressure through increasing accounts payable days.
Chart 45: Days payable outstanding for China retail market total (2013 2015 average)
127.4
84.8
77.6
61.5
55.2
Capex
FFG invested EUR100m in 2016 used to mainly to refurbish flagship stores and to invest on
technology, specifically online infrastructure. The renovation of the FF network started in 2015
while in 2016 the group accelerated the pace significantly leading capex/sales at a multi-year high
of 7.2%
FF-brand POS network renovation should be concluded in 2019. We expect capex to drop going
forward. Management has stated that its targeted investments for 2017 will settle at cEUR60m and
we would expect capex to further ease in 2018 and 2019. Following the completion of the
renovation cycle in 2018/19 we expect investments to subside to even lower levels, estimated at
cEUR50m.
Usually the renovation cycle in the luxury business is c 8-10 years and assuming that the cycle of
introducing new store concepts will not diverge from the industry norm we would expect low
investment requirements up until 2025.
Chart 46a: Capex (EUR mn) Chart 46b: Capex Split for Q1:17
403
380
351 359 328 355
242
104
76
43 31 46
21
-7
Debt
The group maintains very low net debt levels with gross debt amounts (end Q1:17) to EUR486m
and net debt setting at EUR183.1m or 0.55x EBITDA. We understand that it is not in the intention of
the management to lever up the balance sheet. We understand that the main effort of the group
will be to towards refinancing the EUR250m convertible bond (51% of gross debt) that expires in
2019 that carries a coupon of 1.75% (initial conversion price is at EUR 40.763/sh, subject to
adjustments the group has the right to make a Cash Alternative Election for all or part of the
conversion).
Dividend potential
The lower capex requirements for this and the coming years should allow the group to reinstate its
dividend policy. In our model we account for a dividend payment of EUR10.8m for FY17 (to be paid
in 2018) and a dividend yield of 0.8%
Detailed Financials
Income Statement 2014 2015 2016 2017E 2018F 2019F 2020F
Revenues 998.1 1,193.0 1,337.3 1,455.1 1,579.1 1,683.1 1,777.7
(-)COGS (496.3) (611.8) (725.0) (792.3) (860.3) (918.5) (968.5)
Gross Profit 501.8 581.2 612.3 662.8 718.8 764.6 809.2
Opera ti ng Expens es (278.6) (314.3) (319.6) (337.1) (368.1) (389.0) (410.4)
Other Inc/(Expe) (0.1) (2.0) (0.8) 1.5 3.1 3.7 4.3
EBITDA 223.0 265.0 291.9 327.3 353.7 379.3 402.1
EBITDA ma rgi n 22% 22% 22% 22% 22% 23% 23%
Depreci a ti on (20.6) (26.5) (29.6) (32.5) (32.8) (34.3) (35.5)
EBIT 202.4 238.5 262.3 294.8 321.0 345.1 366.6
Fi na nci a l Income 26.4 9.5 12.6 2.2 2.8 3.2 4.3
Fi na nci a l Expens e (35.7) (22.4) (21.1) (19.1) (19.1) (19.1) (19.1)
Other (0.3) (0.3) (0.2) 0.8 0.8 0.8 0.8
Net Fi na nci a l s (9.6) (13.3) (8.8) (16.2) (15.6) (15.2) (14.0)
EBT 192.8 225.3 253.5 278.6 305.4 329.9 352.5
Income Ta x (47.4) (38.6) (26.6) (58.5) (67.2) (72.6) (77.6)
EAT 145.4 186.6 226.9 220.1 238.2 257.3 275.0
Mi nori ti es 4.2 4.0 4.4 4.9 5.5 6.0 6.5
Net Income 141.2 182.6 222.5 215.2 232.7 251.3 268.5
EPS 2.1 2.8 3.4 3.2 3.5 3.8 4.0
Decl a red Di vi dend (Tota l ) 19.9 - - 10.8 16.3 17.6 18.8
DPS 0.3 - - 0.2 0.2 0.3 0.3
Balance Sheet 2014 2015 2016 2017E 2018F 2019F 2020F
Tota l Fi xed a s s es t 227.3 284.9 405.4 446.0 471.2 489.9 504.4
Inves tments 283.9 271.1 280.5 280.5 280.5 280.5 280.5
Other 94.5 94.7 95.4 95.4 95.4 95.4 95.4
Total non-current assets 605.7 650.7 781.3 821.9 847.1 865.8 880.2
Ca s h a nd equi va l ent 297.0 245.5 328.2 358.9 393.6 452.8 538.7
Tra de Recei va bl es 533.8 585.9 654.7 721.6 813.3 908.4 998.4
Inventori es 366.6 490.3 586.0 651.2 723.6 790.2 854.4
Other 166.0 214.8 213.1 238.8 257.3 272.4 287.5
Total current assets 1363.9 1556.9 1798.9 1987.3 2204.7 2440.7 2696.0
Total Assets 1969.6 2207.6 2580.2 2809.1 3051.8 3306.5 3576.2
Sha re Ca pi ta l 20.1 20.1 20.1 20.1 20.1 20.1 20.1
Reta i ned ea rni ngs 965.3 1140.2 1362.5 1582.7 1810.1 2051.1 2308.5
Other 348.7 415.7 468.8 468.8 468.8 468.8 468.8
Mi nori ty ri ghts 26.8 29.7 32.9 32.9 32.9 32.9 32.9
Total Equity 1360.9 1605.7 1884.4 2104.5 2331.9 2572.9 2830.3
Interes t bea ri ng Bonds a nd l oa ns 304.3 332.6 361.7 369.1 369.1 369.1 369.1
Other non-current l i a bi l i ti es 43.9 42.9 44.0 44.0 44.0 44.0 44.0
Total non-current liabilities 348.3 375.6 405.8 413.2 413.2 413.2 413.2
Tra de a nd other pa ya bl es 181.9 133.6 140.9 149.8 165.0 178.7 191.1
Short term borrowi ngs 46.8 45.0 72.5 65.1 65.1 65.1 65.1
Current porti on of debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other current l i a bi l i ti es 31.8 47.8 76.6 76.6 76.6 76.6 76.6
Total current liabilities 260.5 226.4 290.0 291.5 306.7 320.4 332.8
Total Equity and Liabilities 1969.6 2207.6 2580.2 2809.1 3051.8 3306.5 3576.2
Cash Flow 2014 2015 2016 2017E 2018F 2019F 2020F
Ca s h from Opera ti ons (before cha nges i n WC) 242.5 351.2 359.2 328.0 354.5 380.1 402.9
Net Interes t Pa i d -15.6 -7.7 -9.6 -16.2 -15.6 -15.2 -14.0
Income Ta xes Pa i d -26.5 -40.2 -52.4 -58.5 -67.2 -72.6 -77.6
Net Ca s h from Opera ti ons (before cha nges i n WC) 200.3 303.4 297.1 253.4 271.8 292.4 311.3
Worki ng Ca pi ta l Requi rements -144.1 -245.5 -157.0 -148.9 -167.5 -163.1 -157.0
Net Opera ti ng Inves tments -35.7 -64.5 -96.8 -73.0 -58.0 -53.0 -50.0
Free Cash Flow 20.5 -6.6 43.3 31.5 46.3 76.3 104.3
Per share data 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
EPS 1.4 0.4 5.2 2.1 2.8 3.4 3.2 3.5 3.8 4.0
BVPS 10.9 12.2 17.6 20.0 23.7 27.9 31.2 34.6 38.3 42.1
DPS - - 0.8 0.3 - - 0.2 0.2 0.3 0.3
Valuation ratios 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
P/E 5.4 x 25.6 x 4.2 x 12.8 x 6.7 x 5.6 x 6.5 x 6.0 x 5.5 x 5.2 x
EV/EBITDA 5.5 x 9.9 x 7.6 x 8.6 x 5.2 x 4.7 x 4.5 x 4.1 x 3.6 x 3.2 x
EV/EBIT 6.3 x 11.8 x 8.5 x 9.4 x 5.8 x 5.3 x 5.0 x 4.5 x 4.0 x 3.5 x
EV/Sales 1.1 x 1.6 x 1.6 x 1.9 x 1.2 x 1.0 x 1.0 x 0.9 x 0.8 x 0.7 x
P/BV 0.7 x 0.8 x 1.3 x 1.4 x 0.8 x 0.7 x 0.7 x 0.6 x 0.5 x 0.5 x
Div. yield % 0.0% 0.0% 3.4% 1.1% 0.0% 0.0% 0.8% 1.2% 1.3% 1.3%
FCF yield % 0.0% 0.1% -0.2% 1.1% -0.5% 3.1% 3.2% 4.3% 6.6% 9.1%
ROA 5.3% 1.4% 21.8% 7.4% 8.5% 8.8% 7.8% 7.8% 7.8% 7.7%
ROE 12.7% 3.2% 29.6% 10.9% 11.8% 12.3% 10.6% 10.4% 10.1% 9.8%
ROIC 0.0% 69.7% 103.8% 92.9% 82.5% 97.8% 93.7% 83.4% 81.5% 76.7%
Growth rates 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
Revenues -20.72% 9.59% 12.47% 19.54% 12.09% 8.81% 8.52% 6.59% 5.62%
EBITDA -35.05% 44.56% 19.51% 18.84% 10.14% 12.12% 8.09% 7.24% 6.00%
EBIT -37.79% 53.93% 21.46% 17.88% 9.95% 12.40% 8.87% 7.51% 6.23%
EBT -49.70% 541.82% -51.03% 16.84% 12.53% 9.92% 9.59% 8.03% 6.86%
Net Income -71.45% 1216.12% -57.60% 28.32% 21.58% -2.98% 8.20% 8.03% 6.86%
Profitability ratios 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
Gros s ma rgi n 50.6% 50.0% 50.3% 50.3% 48.7% 45.8% 45.6% 45.5% 45.4% 45.5%
EBITDA ma rgi n 19.5% 15.9% 21.0% 22.3% 22.2% 21.8% 22.5% 22.4% 22.5% 22.6%
EBIT ma rgi n 17.0% 13.4% 18.8% 20.3% 20.0% 19.6% 20.3% 20.3% 20.5% 20.6%
Net Income ma rgi n 8.9% 3.2% 38.7% 14.6% 15.6% 17.0% 15.1% 15.1% 15.3% 15.5%
Leverage Ratios 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
LT Debt / Total Ca pi tal i ztion 0.64 0.64 0.02 0.16 0.27 0.28 0.26 0.26 0.26 0.26
Total Debt / Total Ca pi tal i za tion 1.49 1.11 0.15 0.19 0.30 0.31 0.31 0.31 0.31 0.31
Net Debt/EBITDA 3.00 4.76 -0.16 0.24 0.50 0.36 0.23 0.11 -0.05 -0.26
Gea ri ng (Total debt / Debt+Equi ty) 0.50 0.48 0.16 0.21 0.19 0.19 0.17 0.16 0.15 0.13
Net Debt / Equi ty 0.83 0.76 -0.03 0.04 0.08 0.06 0.04 0.02 -0.01 -0.04
Coverage Ratios 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F
EBITDA/Interes t expens es 5.0 4.3 8.2 14.3 34.6 30.3 17.1 18.5 19.8 21.0
Pretax Interest Coverage (EBIT / Int.) 3.0 2.1 17.2 12.3 29.4 26.3 14.6 16.0 17.2 18.4
Disclosures
General information
This research report was prepared by AXIA Ventures Group Limited, a company incorporated under the laws of Cyprus (referred to herein,
together with its subsidiary companies and affiliates, collectively, as AXIA) which is authorised and regulated by the Cyprus Securities and
Exchange Commission (authorisation number 086/07). AXIA is authorized to provide investment services in the United Kingdom, Cyprus,
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Whilst all substantial sources of information for the research are indicated in this report, including, without limitation, bases of valuation
applied to any security or derivative security, such information has not been disclosed to the Subject Companies for their comments and
no such information is hereby certified.
All information contained herein is subject to change at any time without notice. No member of AXIA has an obligation to update, modify
or amend this research report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion,
projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the Subject Company is
withdrawn. Further, past performance is not indicative of future results.
Persons responsible for this report: Argyrios Gkonis (Analyst), Constantinos Zouzoulas (Head of research).
Key Definitions
AXIA Research 12-month rating*
Buy The stock to generate total return** of and above 10% within the next 12-months
The stock to generate total return**between -10% and 10% within the next 12-
Neutral
months
Sell The stock to generate total return** of and below -10% within the next 12 months
Under Review Stocks target price or rating is subject to possible change
Applicable Laws / Regulation and AXIA Ventures Group Limited policies might
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restrict certain types of communication and investment recommendations
Not Rated There is no rating for the company by AXIA Ventures Group Limited
* Exceptions to the bands may be granted by the Investment Review Committee of AXIA taking into account specific characteristics of the
Subject Company
**Total return: % price appreciation equals percentage change in share price from current price to projected target price plus projected
dividend yield.
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