Seeking Sustainable Growth: The luxury And Cosmetics

Seeking sustainable growthThe luxury and cosmetics financial factbook2015 edition

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

The luxury and cosmetics financial factbook 2015

Executive summaryWelcome 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 LacaultFactbook global coordinator, Fashion & Luxury — [email protected]

Executive summaryPage 2

Roberto BonacinaDirector, Lead Advisory M&A, Fashion & Luxury — [email protected]

Marco Pier MazzucchelliPartner, Head of TAS* Mediterranean — [email protected]

Note: *Transaction Advisory Services

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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.

• Defineanomni-channelstrategy — 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-tunetheretailmodel — 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 [email protected]

Flavie [email protected]

Page 3Executive summary

Marco Pier Mazzucchelli [email protected]


Statistics and key facts

Global cosmetics market remains a supply-driven market, fueled by innovation where consumers are always looking for quality, performance and perceived results.

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 marketgrew byin 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


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 S&P 500 and STOXX Europe 600 indexes using 1 January 2008 as a starting date (rebased to 100).

Index evolution

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0

50

100

150

200

250

EY INDEX STOXX S&P

As of 31 March 2015

9%

5%

1%

187

143

111

CAGR08-15

1

85

90

95

100

105

110

115

120

EY INDEX STOXX S&P

111

118

116

Page 5Executive summary

(Base 100 as of 1 March 2014)

PAGE 6 OPENING

LUXURY AND COSMETICS THE EY FINANCIAL FACTBOOK 2014

DCF and valuation parameters

Page 7Opening

DCF

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Financial parameters A

B Operating aggregates

C Advertising expenses

D SOTP and segment analyses

E Trading multiples

Transaction multiplesF


DCF and valuation parameters Page 8


Source:

• WACC and LTGR: based on consensus of several broker reports for each company • Market capitalization and beta: EY elaboration based on S&P 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.

Luxurycompaniescontinuetoreflecthigh-potentialgrowthcombinedwithalimitedriskprofile

Companies are sorted in decreasing order based on the market capitalization in euros observed as of 31 March 2015 (one-month average).


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 naBrunello Cucinelli 1,194 9.2% 4.1% 0.62 5.0%Jimmy Choo 905 8.1% 16.1% 0.83 naSafilo 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%

Page 9DCF and valuation parameters


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,whichsignificantlyimpactsthevarianceoffinancialparameters

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%

WA

CC

LTGR


Source:

• WACC and LTGR: based on consensus of several broker reports for each company • Market capitalization and beta: EY elaboration based on S&P 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.

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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 naL’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%

Page 10 DCF and valuation parameters

Financial parameters

WACC Beta Gearing LTGR

Source: data based on consensus of several brokers reports for each companyNote: LTGR data was not available for Tumi, Shiseido and Jimmy Choo

EY luxury and cosmetics sample: summaryoffinancialparameters


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 benchmarkLow High

WACC 8.9%


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%


Gearing 3.1%


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%


Beta 0.82


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

SalvatoreFerragamo

Moncler

L'Occitane

LVMH

Burberry

Hermès

Ralph Lauren

Tod's

BrunelloCucinelli

Natura

9.2%


LTGR 3.0%


Chow Tai Fook

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 andmorelike-for-likegrowth

*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.


(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


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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%)




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 of5%overtheFY13A-FY16Eperiod

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


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%



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 andamortization(EBITDA)marginshowsthatprofitabilitywillnotmateriallygrow,evenifitstillreachessignificantlevel

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



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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%




Average EBITDA margin, FY13A–FY16E — cosmetics companies

Cosmeticcompaniesconfirmedlastyear’saverageEBITDAof17.4%fortheFY13A-FY16Eperiod

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%




Average capex ratio, FY13A–FY16E — luxury companies

The average capital expenditure (capex) sales ratio of the sample confirmsanindustrywithintensivecapitalrequirements

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%


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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%





Average capex ratio, FY13A–FY16E — cosmetic companies

Overall,thecapitalrequirementsarelowerforthecosmeticssample, 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%



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%


Capex ratio

9.7%

11.8% 12.3%

10.1%

7.8%

0%

2%

4%

6%

8%

10%

12%

14%


Sales Growth



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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.




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%


Ebitda Margin

3.3%

4.0%4.4%

4.7% 4.5%

0%

1%

2%

3%

4%

5%


Capex ratio

8.2%7.7%

8.8%

5.4% 5.4%

0%1%2%3%4%5%6%7%8%9%

10%


Sales Growth



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


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%

Coa

ch

Tum

i

Pra

da

Her

mès

Salv

ator

eFe

rrag

amo

Mon

cler

Tiff

any

Luxo

ttic

a

Ric

hem

ont

Safil

o

LVM

H

Bei

ersd

orf

Cot

y

Shis

eido

Esté

eLa

uder

L'O

réal

Luxury companies Cosmetics companies

Average 6.6%

Average 25.1%

2.7% 3.1%

23.2% 23.5%

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Selected companies — advertising expenses as a percentage of sales, FY14A/E



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 andleather goods

Perfumes andcosmetics

Watches andjewelry

Wines andspirits

Selectiveretailing

Eliminations Total

34.710.9

3.1

4.4

4.4

(0.4)

12.2

57%

7%5%

20%

16%

-5%

Fashion andleather goods

Perfumes andcosmetics

Watches andjewelry

Wines andspirits

Selectiveretailing

Eliminations Total

6.61.1

0.3

0.5

1.3

(0.3)

3.7

55%

8%5%

22%

14%

-4%

0%

Fashion andleathergoods

Perfumesand

cosmetics

Watches andjewelry

Wines andspirits

Selectiveretailing

Elimination Total

100.6

5.2

8.0

22.6

55.1

13.9

(4.4)

0.3

Surplusassets

Luxury products(excluding spirits)



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



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69%

7.829%

0.3 11.30.03.2

3.0%0%

Gucci Group Puma Other brands Eliminations Total

97%

1.9 8%

.00 2.0

(0.1)

0.2

1.0%

-6%


100%

28.1 8%

0.2 28.1

(2.4)

2.2

1.0%

-8%


Luxury Sport and lifestyle Luxury Sport and lifestyle Luxury Sport and lifestyle



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



61%

22%

7%

10%


1.90.2

0.1

0.4

1.2

54%

25%

9%

12%


28.13.3

2.4

7.0

15.3


L’Oréal:segmentanalysis

• 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


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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 ProductsL’Oréal Luxe Active CosmeticsBody Shop

22.1 22.5

25.1

27.626.3

CAGR7.8%

CAGR4.6%

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 2017EProfessional Products Consumer ProductsL’Oréal Luxe Active CosmeticsEliminations Body Shop

3.8

4.94.6

4.4

3.9

CAGR8.9%

CAGR5.5%



Levelofmultiplesillustratesthestill-highattractivenessoftheluxury 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

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.


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)



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E Trading multiples

2.6x2.5x

2.3x

2.8x2.6x

2.3x

0

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

2014A/E 2015E 2016E

Average Median

15.6x14.4x

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


EY luxury and cosmetics sample: summary of EV/sales multiples

Source: Data based on consensus of several brokers reports for each companyNote: Market capitalization is based on a one-month average as of 31 March 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%


EV/sales (FY14A/E)3.0x


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%


EV/sales (FY15E)

2.8x


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%


EV/sales (FY16E)2.6x


EY luxury and cosmetics sample: summary of EV/EBITDA multiples


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E Trading multiples

Source: Data based on consensus of several brokers reports for each companyNote: 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%


EV/EBITDA (FY14A/E)

13.8x


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%


EV/EBITDA (FY15E)

12.5x


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%


EV/EBITDA (FY16E)

11.3x





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.


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

LVMHTod's

Ralph Lauren

Coach

Hugo Boss

Safilo

Hermès

Tiffany Swatch

Shiseido

Salvatore Ferragamo

L'Oréal

Richemont

Luxottica

Estée LauderBeiersdorf

Brunello CucinelliMichael Kors

CotyJimmy 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%

2015

EV

/sal

es

2015 EBITDA margin

L'Occitane

Natura

Moncler

Tumi

Kering

Chow Tai

Hengdeli

Burberry

LVMHTod's

Ralph Lauren

Coach

Hugo Boss

Safilo

Hermès

Tiffany

Swatch

Shiseido

Kering

Salvatore Ferragamo

L'Oréal

Richemont

Luxottica

Estée LauderBeiersdorf

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%

2016

EV

/sal

es

2016 EBITDA margin

NaturaChow Tai

Michael Kors

Prada

L'Occitane

Hengdeli

Moncler



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Transaction multiples in the luxury industry remain at a significantpremiumtomanyothersectors

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.


1.6x1.5x

1.9x

1.4x

2.0x1.8x

1.3x1.2x

1.6x1.8x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

2011 2012 2013 2014 1Q15Average Median

15.3x

12.0x13.5x

11.7x

13.5x12.3x

10.7x 11.5x10.2x

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)



The M&A deals in the cosmetics industry show a similar trend as the luxury industry


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

0.9x1.0x

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

10.0x10.1x

11.7x

16.6x

11.1x10.1x

8.8x10.2x

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)



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Analysis of worldwide M&A transactions in the luxury industry since 2011


• The number of completed deals on global scale is still significant, despite the financial crisis. The M&A 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

4852

62

44

18

0

10

20

30

40

50

60

70

FY11 FY12 FY13 FY14 1Q15

No.

of d

eals

37

44 42

31

12118

20

13

6

23%

15%

32%

30%

33%

0%

5%

10%

15%

20%

25%

30%

35%

05

101520253035404550

FY11 FY12 FY13 FY14 1Q15Corporate PE PE/total

No.

of d

eals

Italy30%

United States28%

France12%

Switzerland14%

UK8%

India3%

HK1%

China2%

Germany

1%Netherlands

1%



Analysis of worldwide M&A transactions in the cosmetics industry since 2011


• The number of deals completed in 2014 and in the first quarter 2015 illustrates a return to a sustained level of M&A 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.

of d

eals

22

31

14

10

58

83

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.

of d

eals

Corporate PE PE/total

United States36%

France23%

Italy8%

Germany7%

South Korea7%

United Kingdom5%

Spain4%

Japan4%

Canada3%

China3%

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)

The luxury and cosmetics fi nancial factbook 2015

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Industry overview

Global luxury goods marketG

Global cosmetics marketH

Points of view from EY’s global sector specialists and outside expertsI


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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

Glossary

Contact us

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.

XSales 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. X Increased demand through innovative products will cater to underserved emerging markets. X 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.

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Sample selection

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Sources: Altagamma/Bain and other selected researchNote: 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.


159

170

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173192 212

218 224

250 - 2658%

7%

- 2%

- 8%

13%

11% 10%

3% 3%

-10%

-5%

0%

5%

10%

15%

-200

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2006 2007 2008 2009 2010 2011 2012 2013 2014e 2017e

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Worldwide personal luxury goods market trend1

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Page 38 DCF and valuation parameters Page 38


Industry overview

Global personal luxury goods market, by channel and format (2014E)2


• 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 researchNotes: 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

2015

F gr

owth

Nationality Area

29%

27%

25%

9%

5%5%

Monobrand stores Department storesSpecialty stores Off-price storesAirport Online

Luxury goods demand growth by nationality and by area (2015F)1

Luxury goods market by geography and channel

Glossary

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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


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 researchNotes: 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

€bi

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72.0

23.217.9

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1020

3040

5060

7080

US China and HongKong

Japan

€bi

llion

Second position globally after including Hong Kong

23%27%

49%

40%

28%32%

39%36%

25%

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30%

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50%

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Middle class Affluent High net worth

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Accessories remain the biggest category, and it is the fastest growing


• 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 researchNotes: 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.

Accessories29%

Apparel25%

Hard luxury22%

Beauty20%

Others*4%

15%

4%

9%

5%

11%

0% 5% 10% 15% 20%

Others*

Beauty

Hard luxury

Apparel

Accessories

CAGR 10-14E

29

3436 37

11 12 13 14

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2011 2012 2013 2014E

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Luxury leather goods Luxury shoes

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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.


Page 42 Industry overview

Glossary

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The global cosmetics market continues to grow steadily …

Source: L’Oréal Annual Report 2014 and other selected researchNote: 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%

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

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Cosmetics market Growth %

Skincare35%

Hair care23%

Makeup17%

Fragrances13%

Hygiene11%

Other1%

Asia, Pacific35%

Western Europe

22%

North America

21%

Latin America

12%

Eastern Europe

7%

Africa, Middle East

3%

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…andremainsasupply-drivenmarketunderpinnedbyinnovationGlobal 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 researchNote: 1) L’Oréal estimates of the worldwide cosmetics in net manufacturer costs, excluding soaps, oral hygiene, razors and blades as well as currency effects.

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Industry overview

The Italian luxury market from an M&A and investor perspectivePoints of view from EY’s global sector specialists and outside expertsI

Roberto Bonacina EY Lead Advisory M&A 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.M&A 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 M&A market was characterized in the recent years by the foreign acquisition of Italian brands. In 2014, the so-called inbound M&A 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.





17 12 17 125

31 40

45

32

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FY11 FY12 FY13 FY14 1Q15

No.

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Italy Global

4852

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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

02468

1012141618

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.

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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.




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.

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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.

Page 51DCF and valuation parameters Industry overview Page 51


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


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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 2015The 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-addedtax(VAT)reformintothereal 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





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

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Industry overview


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.




Challenges of the Swiss watch industryPoints of view from EY’s global sector specialists and outside expertsI

Amaury Bonnaire Executive Director, TAS — Geneva

Watches are one of the iconic products made in Switzerland, and watchmaking is a key industry for the country, with nearly 60,000 people employed in 2013. The Swiss watchmaking industry is currently facing macro-economic and market challenges that are likely to last after 2015 and will be changing the industry durably.

By the numbers …Last year, Switzerland shipped nearly 30 million watches. Mechanical watches, typically the most valuable, represented approximately 25% of the volume but almost 80% in value. The industry remains among the top three export sectors for the Swiss economy (the export value of watches was CHF22.2b in 2014, compared to gross exports of CHF107.6b in 2014 for Switzerland as a whole). The industry rode a very strong rebound after the dip in 2009 (13% CAGR over 2009–2013). But Swiss watch exports have seen decelerating growth (+1.9% in 2014, same in 2013).1 Recent trends are a challenge to the Swiss exporters and magnify some of the evolutions that were already at play.Time does not stand still for Swiss watchmakers.Innovation is at the heart of the craft, with new products, new markets, new forms and metals, and new industrial processes constantly being embraced.

Yet it is Apple and its smartwatch that have been the talk of the town. Could the Silicon Valley wreak havoc on the Watch Valley(s) and could the industry relive the existential threats of yesteryear? Experts and would-be experts have discussed at length the success of the Apple Watch and its future iterations, and we do not pretend to have a clearer view. We do however have an opinion: this challenges the industry to step up its game and is likely to favor those products that are distinctive, at the expense of the less exceptional.

现在几点 (Xiàn zài jī diăn) [What time is it]Hong Kong and mainland China have been leading the growth story, and while they remain the main markets of Swiss exporters, they have shown signs of stalling that are another challenge to the industry. A recent trade agreement between China and Switzerland has been a positive sign. But distributors are looking at historically high inventories, and some watchmakers have announced price cuts (Panerai, Patek Philippe for prices in HKD). While the underlying global trends are favorable, and emerging wealth in other parts of Asia and the world are a significant opportunity, it is yet unclear which markets can provide a second wind to the industry. This has profound implications, as the level of

1Sources: Fédération de l’industrie horlogère suisse, Bundesamt für Statistik

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Challenges of the Swiss watch industryPoints of view from EY’s global sector specialists and outside expertsI

investment — both in marketing as well as verticalization capex (e.g., for monobrand stores) and M&A (for the integration of distribution) — is sizable, and this adds complexity to capital allocation decisions.

Riding the CHF tsunamiAt the start of the year, the Swiss National Bank has released the floor it had hitherto maintained against the euro, sending the Swiss franc to new heights (currently at or around 1.05 CHF/EUR, or approximately 15% higher than the previous 1.20 minimum exchange rate). While the shock effect has passed, the repercussions of this event will long be felt. Some watchmakers have quickly announced price increases (Patek Philippe in EUR, Rolex and Omega, Longines for instance), but margins in the industry will continue to be under pressure. For example, Richemont’s operating result on the watchmaking segment decreased from 26.1% in the year ending 31 March 2014 to 23.4% in the year ending 31 March 2015.2 And this affects the full value chain, from distributors to watchmakers to their suppliers. Again, we believe this will be contributing to the accelerated transformation of the industry.

The future of the manufactureIt might almost seem old news, but the industry is still feeling the effects of both the more stringent “Swiss Made” requirements (60% of the cost) and the phasing out of the supply of movements and assortments by ETA3 (Swatch Group) in the second half of the decade. In recent years, this has driven the verticalization of production. And while the strongest players have taken steps to adapt — also at the cost of significant investment (design of internal movements, construction of production capacities and more) — this continues to challenge the smaller and independent players.

Location SwitzerlandThe home country of the watchmakers is known for its friendly attitude towards businesses. And people seem to react positively as Switzerland has been voted the happiest country in the world in a recent poll. Yet, there is currently some degree of political and economic uncertainty affecting the Swiss watch industry and Swiss industry as a whole. The uncertainties stems in particular to the popular vote on 9 February 2014 in favor of the initiative aiming at restricting immigration, while a significant part of the people of the trade are not Swiss citizens or cross-border commuters.

Of course, the industry is also closely watching the tax reform (RIE III4), which is expected to be debated in the second half of 2015.

Time is up!We have looked at some of the challenges that the Swiss watchmaking industry faces. Those challenges all combine to exert pressure on the industry. Will this pressure create diamonds? We believe that the forces at play require a renewed and relentless focus on what makes the industry unique: a distinctive watch and a distinctive brand. Those who do not possess such attributes risk becoming irrelevant. This will fuel transformation and concentration, and we expect to see strong interest for M&A activity, not least among the suppliers to the watchmakers.A generation ago, the quartz crisis all but wiped out the low-end segment in Switzerland, with China now being by far the largest producer. Today, the challenges magnify the importance of the most distinctive watchmakers (mainly, but not only, the high-end, as distinctive organizations are also well-equipped to resist and to thrive) relative to those whose proposition is less compelling, those stuck in the middle. However, this is a trend observed in many industries; it is called the hourglass effect.

2Source: Richemont 2015 annual report 3ETA is Switzerland’s dominating manufacturer of movements and watch parts and is part of Swatch Group, which decided in 2009 to reduce supplying of mechanical movements to competitors.

4Tax reform resulting from EU and OECD critics on the Swiss favorable tax policy for certain types of corporations (including holdings)




Back to Italy: reshoring is not for everyonePoints of view from EY’s global sector specialists and outside expertsI

David Pambianco Vice President, Pambianco Strategia d’Impresa

Reshoring is becoming a central topic in economical discussions in main industrialized countries, including Italy. The so called “back to Italy” phenomenon can be analyzed dividing companies in three main groups: • Italian luxury groups, which strengthen their production plants bringing back part of production in Italy

• International luxury groups, which increase their production in Italy, outsourcing it or acquiring productive companies

• Medium-sized companies, which operate in the medium/high segment, which bring part of production back to Italy

With regard to the first two types of operators, the key to the increase of the share of production made

in Italy is tied to the growth in the luxury market, which has grown, mainly thanks to Asia, at a 30% rate in the last five years and which will grow of another 17% in the next four years according to market forecasts. In the luxury world, quality is one of the key factors of success of the brand, given that for the international consumer, ‘‘Made in Italy’’ is a synonym of quality, it is obvious that this is leading the big Italian luxury groups to the decision to bring back production in Italy in order to have a product in which the ‘‘Made in Italy’’ brand becomes a certification of superior quality. Made in Italy is particularly important for some product categories more than other. The image below shows the main production districts per product category.

Puglia (Casarona), Marche, Veneto (Riviera del Brenta), Lombardia (Vigevano), Emilia Romagna (Fusignano-Bagnocavallo, San Mauro in Pascoli)

Toscana (Firenze, Pontassieve, Scandicci, Valdarno), Marche (Tolentino), Campania (Napoli)

Campania, Veneto, Lombardia Emilia Romagna (Carpi), Umbria (Perugia), Toscana (Prato), Veneto

Veneto (Belluno)

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Back to Italy: reshoring is not for everyonePoints of view from EY’s global sector specialists and outside expertsI


This is true for the larger luxury groups, but what about the medium-sized Italian companies? To understand how the latter are positioned on reshoring Pambianco carried out a research through questionnaires and interviews, considering a panel of 45 companies (revenues on average €100m) which have an overall market value of €4.5b.Twenty-seven percent of the panel declares it produces everything in Italy while 71% declares it has a mix of production between Italy and foreign countries. In terms of trend, in the last three years, these companies only slightly increased their share of production in Italy, going from 52% to 53%. When asked what they expect the production mix to be in the next three years, companies gave different answers depending on whether their positioning is in the high or low segment. Seventy-six percent of the companies positioned in the high luxury segment, which already produce 83% in Italy, said they will keep their share of production in Italy stable; only a minority (24%) declared they will increase it. Answers coming from companies positioned in the medium luxury segment were more varied: 39% said they will keep the production mix stable, 35% that they will increase the share of production in Italy and 26% that it will diminish.

This means that companies in the high luxury segments could increase their share of production made in Italy, while those in the medium segment have to make a strategic choice: improve their positioning with a more-qualified offer by increasing the share of goods made in Italy or lower their positioning aiming at a more accessible price positioning.According to the research, reshoring, i.e., the trend of bringing back production to Italy, is still marginal. This could be due to a scarce flexibility of companies, which are thus slow in changing their production strategy, but also to the fact that production costs in Italy continue to be very high, and this is a strong factor in slowing down the process of reshoring. This is true particularly for smaller companies, which, having lower margins, can’t afford to have higher production costs as a consequence of reshoring. For big Italian and foreign luxury groups on the other hand, the made in Italy factor is very strong, and the increase in costs are more than offset by the benefits of image and quality of the product.




#digital beauty: how to make a new model an opportunity — the challenge of captivating a technological shopper


Lucia Fracassi General Manager, Deborah Group

Social media has radically changed the traditional relationship between brand and consumers, introducing new actors and changing the perception that the consumer has of himself and of the brand. In beauty, like in no other market segment, the consumer has officially become a “prosumer.”

“Prosumer” is a mashup of the terms producer and consumer. The concept is not new, but rather dates back to the ‘80s. Today though, in the world of internet 2.0, the concept has a new edge to it. More specifically, today’s prosumer is a consumer who wants to be a protagonist.

As a matter of fact, the prosumer not only expects to play an active role in consuming the product, but also on the phases that are upstream in the process. In other words the prosumer wants to participate actively in the creation, production and distribution of the product.

Producer Consumer+

Prosumer

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This has implied a considerable change in marketing strategy for cosmetic companies, which have shifted from product-oriented marketing to consumer-oriented marketing. Cosmetic companies have decided to pursue this one-way path knowing that the journey will have some risks but will on the other hand offer incredible opportunities. Numbers show that the cosmetics world has been reinterpreted by the digital arena: there are more than 15 billion views overall on YouTube on the topic “beauty,” 10 billion of which are focused on makeup. Every month, there are around 700 million1 new views on beauty, which is a 133% increase from 2010.2 This data proves 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. In the described context, beauty brands control only 3% of the 15 billion views and they appear only in 2.5% of the searches per keyword on YouTube. On the other hand, the top 25 beauty bloggers have 2,600% more comments than beauty brand’s channels. This means that 97% of the conversations on beauty are controlled by bloggers and haul girls.3

Therefore, beauty is one of the most active and competitive sectors in social media. According to some market research, the effectiveness of communication and the share of voice of brands on social media is not directly proportional to the available advertising budget, leaving significant opportunities for low-spender dynamic and proactive brands (earned media vs paid and owned media).

There have always been more or less efficient ways to raise awareness on the web, but if at the very beginning of digitalization, making noise, no matter how, was sufficient, today more than ever, the actual quality of word of mouth is vital to succeed.

12013 Data2©2014 Pixability, Inc.3See note 1

Digital marketing trifectaEarned, owned and paid media

Propel sharing and engagement with paid promotion

Earned media

Paid media

Owned media

Advertising (ADS) • Pay per click • Display ADS • Retargeting • Paid influencers • Paid content promotion • Social media ADS

Leverage owned, earned and paid media for a comprehensive marketing strategy

Gain more exposure to web properties with SEO and pay per click (PPC)Web properties

• Website • Mobile site • Blog site • Social media channels

Sharing • Mentions • Shares • Reposts • Reviews

Search engine optimization (SEO) and brand content

drive earned media (sharing) and traffic.






The most effective communication comes from those brands that have acknowledged the shift from consumer to prosumer and have consequently set up a level playing field with the prosumers by focusing on listening to the consumer’s needs. As the Cluetrain Manifesto states, in beauty “markets are conversations.” However, the opposite is true as well. Listening to the buzz online and creating bonds with bloggers/vloggers/influencers in order to reach a huge audience that would be otherwise hard to reach with traditional media not only translated into a strong improvement of online brand reputation, but also allows off-line business opportunities. So, in such a complex context, how can a beauty company remain competitive? There is evidence of how the most successful firms are those who listen to the online buzz (listening to comments on products, valuation of opportunities of improvement, etc.) and those who meet and interact constantly with bloggers, because in this way, they succeed in transferring all the preferences and opinions that come from social media into the product. Today, the key to success is the relationship with the consumer who has become more demanding and mature, who appreciates hearing the equity story of the brand through multimedia, and who asks for highly innovative products and looks for the ability of cosmetics companies to anticipate his needs.

The winners will thus be the all-line companies that know how to reach the perfect mix of digital community, influencers, brand and point of sales by linking the online and off-line world. Companies have to exploit all the data that the web offers, using social media as a way to anticipate market trends and to create offers made to measure for each type of client. This can be achieved only by adding new professionals in the company, like a chief digital officer or a shopper marketing manager, who know how to combine the know-how deriving from marketing and IT, from retail and trade marketing as well as neuroscience applied to consumer behavior.The goal for beauty brands in the last years has been to shift younger targets’ behavior, pushing them to purchase in stores instead of online.

Traditional cosmetics have shown signs of weakness appearing almost in a mature phase especially with regard to retail makeup brands with a low price/young positioning. Pushing digital has been a fundamental driver to relaunch traditional cosmetics. For example, meet-and-greet events in which followers meet their favorite bloggers in point of sales or couponing activities with made-to-measure promotions online and in the stores have allowed companies to reach this goal. The most effective promos are those that go online, because that they bring new consumers in addition to the most loyal consumers of perfumes. The digital world (earned, but also owned and paid) is linked to the point of sale and to the consumer. This never-ending circle brings benefits to a business that at this point is not only digital (anymore).

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Methodology



Sample selection

Focus on Jimmy Choo

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Sample selection

Focus on Jimmy Choo

MethodologyPage 64

The entirety of the data utilized in this factbook is publicly disclosed information. The TAS teams of EY who participated in drafting this document have not had access to any confidential information.

If the information used turns out to be incomplete or incorrect, EY will not be held responsible for any impact this may have on the results or the analyses presented in this document.

It must be noted that the information provided in this study is based on the latest available financial statements of each company as at 31 March 2015. Market data has been considered as of 31 March 2015, unless stated otherwise or apart from subsequent pieces of information included in this survey. Any modification of the analyzed group’s financial performances or any evolution of the financial markets that occurred since 31 March 2015 could lead to partially or completely different conclusions.

Please note that we have presented the actual 2014 figures for the companies, that have already released their 2014 annual results as of 31 March 2015.

For the companies that have diversified activities (LVMH, Kering, L’Oréal), we performed a sum-of-the-parts analysis to isolate the pure luxury segment and to better understand its characteristics as well as its contribution to the company’s performance.

This analysis was not possible for Swatch, Beiersdorf and Shiseido as no accurate data was available.

SOTP analyses

ApproachThere are many criteria to analyze the operating and financial performances of listed companies.The aim of this survey is not to conduct a detailed analysis of the selected companies. The approach implemented in this fifth edition of the luxury and cosmetics financial factbook essentially relies on three types of information: • Several standard valuation parameters and operating aggregates • Industry characteristics (in terms of growth forecasts and drivers) • An overview of 29 major actors of the industry

Even though this data is important and essential to the analysis, it must be stressed that other criteria or parameters could also have been analyzed.



Methodology Page 65


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The sample analyzed is composed of 29 listed companies from the luxury and cosmetics industry, of which 22 were mostly in the luxury business and 7 were in the cosmetics segment.

To select these companies we proceeded as follows:

• We firstly identified pure players of the luxury sector: Brunello Cucinelli S.p.A. (Cucinelli), Burberry Group (Burberry), Coach Inc. (Coach), Chow Tai Fook Jewellery Group Ltd (Chow Tai Fook), Hengdeli Holdings Limited (Hengdeli), Hermès International S.C.A. (Hermès), Hugo Boss AG (Hugo Boss), Jimmy Choo PLC (Jimmy Choo), Kering SA (Kering), LVMH Moet Hennessy Louis Vuitton S.A. (LVMH), Micheal Kors Holdings Ltd (Michael Kors), Moncler S.p.A. (Moncler), Prada S.p.A. (Prada), Polo Ralph Lauren Corp. (Ralph Lauren), Compagnie Financière Richemont S.A. (Richemont), Salvatore Ferragamo S.p.A. (Salvatore Ferragamo), Swatch Group AG (Swatch), Tiffany & Co. (Tiffany), Tod’s S.p.A. (Tod’s) and Tumi Holdings Inc. (Tumi).

• We completed this first list with other players in cosmetics: Beiersdorf AG (Beiersdorf), Coty Inc. (Coty), Estée Lauder Companies Inc. (Estée Lauder), L’Occitane International S.A. (L’Occitane), L’Oréal S.A. (L’Oréal) and Shiseido Co. Ltd (Shiseido).

• We also added companies that are in direct relation with luxury companies, such as Luxottica Group S.p.A. (Luxottica) and Safilo Group S.p.A. (Safilo).

• Finally we decide to include an actor, not part of the luxury environment, but acting as the largest cosmetics company from the emerging markets, Natura Cosméticos S.A. (Natura), to enlarge the geographical coverage.

Sample selectionPlease note that the sample has been adjusted in this fifth edition. Actually, one company was added: Jimmy Choo PLC, as it has recently been listed on the London Stock Exchange.

Sample selection

MethodologyPage 66

Focus on Jimmy Choo Jimmy Choo: overview

We included Jimmy Choo in the sample as it was listed on the London Stock Exchange on 17 October 2014.

Key facts:

• Founded in 1996, Jimmy Choo is a luxury accessories brand focused on designer shoes that has expanded to include handbags and small leather goods over the years

• The company operates through three segments: retail (including online), wholesale and other

• Retail revenue is generated via the company’s directly operated stores and the group’s website. Wholesale revenue is generated through sale to distribution partners, multi-brand department stores and specialty stores worldwide. Other revenue is predominantly through receipt of royalties from the group’s global licensees of Jimmy Choo branded fragrance, sunglasses and eyewear products.

IPO details:

• Total offered shares: 110.6m, all secondary shares, including 9.6m additional shares upon exercise of over-allotment option (out of 15.1m initially made available)

• Final offer price: £1.40:

• The stock had a modest return of 2.9% on its listing date and closed at £1.44 on first trading day.

Share trading pattern (since October 2014)

Source: Capital IQ Note: 17 October 2014 = 100

Source: Capital IQ Note: Financial figures are at 31 December n.m = not meaningful

90

100

110

120

130

Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15

Jimmy Choo PLC FTSE All Share Index


Keyfinancials(in€m) FY13A FY14A FY15E FY16E FY13–FY16 CAGR

Sales 389 414 474 530 10.8%EBITDA 59 69 86 100 18.8%EBITDA margin 15.2% 16.8% 18.1% 18.8% n.mEBIT 43 51 62 72 18.6%EBIT margin 11.1% 12.4% 13.1% 13.6% n.mNet profit -24 -15 43 51 n.mCapex ratio 7.7% 9.1% 7.9% 8.1% n.mNet debt 169 174 145 109 -13.5%


OPENING

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We have seen many luxury houses respond to the challenges of the new kind of customer by slowly developing a digital strategy. This is not just a web presence to manage brand content and deal with online sales. It is an integrated approach that harnesses social media, and connects mobile and tablet applications with back-office logistics to deliver a viable e-channel. The channel can provide an alternative to retail and wholesale, or complement the more traditional routes to market.

1. Sustaining development: maintaining the quality and supply of crucial raw materials, such as increasingly rare skins and ethically traceable gems, is a big challenge for some houses. It has led to an increase in vertical acquisitions in the supply chain. For example, crocodile farms in Australia and African ostrich ranches have been on the acquisition menu of larger luxury groups. But the challenge is not just to secure supply. The focus is on sustainable development in all its forms. It is important to consider the ethics behind the products and images of luxury; the perceived and actual wastage in production processes and packaging; and the carbon footprint and water impact of the end product.

Global luxury goods market A

Global cosmetic goods marketB

Global luxury goods market C

Focus on Brunello Cucinelli and Michael KorsD

• Sustainable luxury

• China — can Western luxury tame the Red Dragon’s desire?

• Focus on the American market

• Focus on the Italian market

• Counterfeit issues facing the industry

• Focus on marketing and advertising in the luxury industry

• Focus on licensing in the luxury industry

• Focus on digital in the luxury industry

Sample selection


mary

DCF and valuation

parameters

Industry overview

Methodology

and disclaimer

Glossary

Contact us

CAGR: compound annual growth rate

Capex: capital expenditure

DCF: discounted cash flow

EBIT: earnings before interest and taxes

EBITDA: earnings before interest, taxes, depreciation and amortization

EV: enterprise value

FY: financial year

GDP: gross domestic product

LTGR: long-term growth rate

M&A: mergers and acquisitions

SOTP: sum of the parts

WACC: weighted average cost of capital

YOY: year on year

Glossary

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Glossary Page 67

Page 68 Opening

Executive summaryWelcome 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.

Laurent Bludzien

Full Name

Contact us

EY TAS Italy Fashion & Luxury team

Flavie LacaultFactbook global coordinator, Fashion & Luxury — [email protected]+39 366 578 7676

Roberto BonacinaDirector, Lead Advisory M&A, Fashion & Luxury — [email protected]+39 335 138 1950

Marco Pier MazzucchelliPartner, Head of TAS MED — [email protected]+39 334 818 0103

Paolo Lobetti BodoniMED RCP Advisory Leader — [email protected]+39 335 760 0436

Amaury BonnaireExecutive Director, TAS — [email protected]+41 58 286 5517

Ivan ChanPartner, Tax — Honk [email protected]+861 05920751307

Stephane RinkinPartner, Tax — [email protected]+86 21 2228 8888

EY contributors to the 2015 factbook


Contact usPage 68

EY | Assurance | Tax | Transactions | Advisory

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

How EY’s Global Consumer Products Sector can help your business

Consumer products companies are operating in a brand-new order, a challenging environment of spiraling complexity and unprecedented change. Demand is shifting to rapid-growth markets, costs are rising, consumer behavior and expectations are evolving, and stakeholders are becoming more demanding. To succeed, companies now need to be leaner and more agile, with a relentless focus on execution. Our Global Consumer Products Sector enables our worldwide network of more than 17,500 sector-focused assurance, tax, transaction and advisory professionals to share powerful insights and deep sector knowledge with businesses like yours. This intelligence, combined with our technical experience, can assist you in making more informed, strategic choices and help you execute better and faster.

© 2015 EYGM Limited. All Rights Reserved.

EYG no. EN0704 ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

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Seeking Sustainable Growth: The luxury And Cosmetics

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