Get documents about "IT Holding
Document Sample
IT Holding
Price: €4.00 HOLD
Y/E December 1998 1999 2000 2001E 2002E 2003E
Sales €m 336 371 433 516 590 720
Net profit €m 28 26 5 13 18 23
EPS € 0.139 0.129 0.026 0.066 0.088 0.116
EPS adjusted € 0.137 0.102 0.030 0.066 0.088 0.116
CEPS € 0.178 0.177 0.143 0.199 0.238 0.299
DPS € 0.026 0.026 0.026 0.066 0.087 0.116
P/E x 29.2 39.1 N.M. 60.6 45.6 34.4
P/CF x 22.5 22.7 27.9 20.1 16.8 13.4
Yield % 0.6 0.6 0.6 1.6 2.2 2.9
Market capitalisation: €801m Comit Index: 1,722 Rel perf: 1m -4%
52-week range: 4.60-3.58 3m +16%
Major shareholders: GTP, 70% Reuters: ITH.MI 12m +5%
• IT Holding’s investment in the development of own brands and the consolidation of
the licensing business will weigh on the bottom line in the medium term. According
to our multiple comparison, IT Holding is fairly valued (the valuation excludes the
potential consolidation of the Gianfranco Ferre’ business). We maintain our HOLD
recommendation, with a €3.8 target price.
• We believe that the acquisition of 90% of Gianfranco Ferre’ by GTP Holding, IT
Holding’s parent company, should benefit IT Holding by taking the group further
up-market. Gianfranco Ferre’ is one of the most prestigious global pure luxury
griffes, and Mr. Ferre’ is set to remain the creative director.
• IT Holding will present its business plan outlining the future prospects of Gianfranco
Ferre’ by June. Currently, the most likely outcome seems to be the gradual
consolidation of the Ferre’ business, as its licensing agreements expire. In the longer
term, we believe that IT Holding could list the division on the stock market.
• IT Holding’s plan to decrease the relative dependence on licences is proceeding as
planned. In 2000, we estimate that licences accounted for 65% of total turnover (vs.
our 1999 estimate of 78%). Management has set a target of 50% of turnover from
licences as a medium-term goal (2002/03).
• We believe that less dependence on licences will improve operating margins in the
longer term, once the restructuring and re-launch of the own brands business is
completed. We estimate that licensed products will still make a dominant contribution
to operating profit, however.
• IT Holding’s 2000 results reflected the costs of restructuring its brands, in particular
Malo. EPS adjusted decreased to €0.030 (vs. €0.102 in 1999). The operating margin
was 4.9% (vs. 7.5% in 1999).
• In 2001E, we expect a gradual improvement in the gross operating margin to 11.4%
(10.3% in 2000), as IT Holding starts to exploit production synergies within the
group, with 19% sales growth due to a solid performance of the own brands business.
Marta Caprini Milan, 39 02 7751 2613
caprini@bancaimi.it 10 April 2001
VALUATION1
IT Holding trades a We have compared IT Holding with peers in the luxury goods sector.
premium to its peers As the table below shows, IT Holding’s multiples are above the sector
average. However, we regard the shares as fairly valued given the
excellent long-term potential for exploiting the brands.
Table 1: Valuation comparison
EV/Sales EV/EBITDA EV/EBIT P/E PEG
Stock Price 2000 2001E 2002E 2000 2001E 2002E 2000 2001E 2002E 2000 2001E 2002E 01-03
Bulgari € 11.2 5.0 4.2 3.6 22.5 18.4 15.7 27.8 21.6 18.5 30.8 26.5 22.9 0.97
Gucci $ 83.6 2.8 2.5 2.3 13.8 11.1 9.6 19.4 19.2 15.5 20.5 24.4 19.8 0.61
Tod's € 43.8 4.3 3.6 2.9 17.6 14.2 11.4 26.9 19.6 14.6 65.9 38.7 29.0 0.56
Hermès € 141.0 4.8 4.3 3.8 19.6 16.7 14.9 22.6 19.2 16.9 35.3 30.0 26.4 -0.30
LVMH € 57.4 3.1 2.8 2.5 14.3 12.2 10.6 17.7 15.0 13.0 31.2 25.9 21.3 1.22
Hugo Boss € 355 2.2 1.9 1.7 11.1 9.5 8.3 12.6 10.8 9.3 24.9 21.5 18.8 0.64
IT Holding € 4.0 2.1 1.8 1.6 21.2 16.1 13.6 44.0 29.8 24.3 N.M. 60.6 45.6 0.80
Marzotto € 13.2 1.4 1.2 1.1 8.2 7.1 6.2 10.6 9.1 7.9 15.9 12.8 11.6 0.57
Burani € 7.0 1.6 1.2 1.0 19.5 11.6 9.3 45.3 19.1 13.8 N.M. 33.8 23.1 0.35
Average 3.0 2.6 2.3 16.4 13.0 11.1 25.2 18.1 14.8 32.1 30.5 24.3 0.60
Source: Banca IMI estimates, IBES consensus estimates
Valuation does not Our valuation does not include the potential consolidation of the
reflect the potential Gianfranco Ferre’ business. This is because management will present a
consolidation of Ferre’ business plan by June; as yet, there is no visibility on the method and
timing of the consolidation of the licensing business, or the related costs
for the re-launch or possible restructuring of the fashion house (see
section on Gianfranco Ferre’, on page 9).
DCF: €3.84 per share Our DCF valuation is €3.84 per share, on the following assumptions:
Table 2: DCF assumptions
Market capitalisation (€m) 801
Net debt 124
Company value 925
Equity 87%
Debt 13%
Post-tax interest rate 4.0%
Risk-free rate 5.1%
Equity risk premium 3.5%
Beta 0.92
Required return 8.3%
Discount rate 7.8%
Source: Banca IMI estimates
Table 3: DCF valuation summary
Value of forecast cash flow (€m) 269
Terminal value 624
Total net present value 893
Net cash/(debt) (124)
Total value 769
Number of shares (m) 200
Value per share (€) 3.84
Source: Banca IMI estimates
Share price data updated to 6 April 2001
All references in this document to Banca IMI refer to Banca d’Intermediazione Mobiliare IMI SpA
2
Table 4: Sensitivity
Rate/growth 2.0% 2.5% 3.0% 3.5% 4.0%
6.8% 4.28 4.65 5.12 5.74 6.58
7.3% 3.77 4.06 4.41 4.85 5.43
7.8% 3.35 3.57 3.84 4.17 4.59
8.3% 3.00 3.18 3.39 3.64 3.95
8.8% 2.70 2.84 3.01 3.21 3.45
Source: Banca IMI estimates
Figure 1: Share price performance
ITTIERRE HOLDING
5.20 FROM 6/ 4/00 TO 6/ 4/01 DAILY
5.00
4.80
4.60
4.40
4.20
4.00
3.80
3.60
3.40
APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR
PRICE HIGH 4.60 20/4/00, LOW 3.58 20/12/00, LAST 4.06
PRICE REL. TO MILAN COMIT GENERAL Source: DATASTREAM
Uncertainty over Mr. Luigi Giribaldi, an Italian financier based in Monaco, has gradually
Giribaldi’s stake raised his stake in IT Holding and has now a 20% holding (vs. 10% in
July 2000). Mr. Giribaldi’s interest in the luxury goods sector is not
new, and he has often been at the centre of market speculation in the
sector. Given his reputation, which is that of a purely financial investor,
we do not believe that he has a real industrial interest in the group.
There is uncertainty over the impact on the share price, particularly if
Mr. Giribaldi should decide to take a profit.
Recent market rumours have also reflected concern over the potential
expiry of the Dolce & Gabbana licence (which we estimate represents
20% of total turnover). We believe that the rumours are unfounded, as
the licence is to expire in 2004 and negotiations for renewal will start in
2002.
3
STRATEGY: A TWO-PRONGED ATTACK
IT Holding’s strategy is divided into two parts:
• Develop its own brands. In 1999, the company acquired Malo,
GentryPortofino, Romeo Gigli (and Husky, which the company
considers as its own brand). With Exte’, IT Holding’s own creation,
launched in 1996, and the potential future consolidation of
Gianfranco Ferre’, the group has a total of six major brands which
have been, or are in the process of being, re-launched.
• Consolidate its core business with existing licensers (i.e. Versace,
Dolce & Gabbana, Roberto Cavalli and Husky), while at the same
time signing up and developing new licences. The main focus is to
develop the product lines distinctly, through a parallel production
system but avoiding cannibalisation and overlap of product styles.
Building its own-brand IT Holding has established a more stable position by building up a
portfolio portfolio of brands of its own. Indeed, we believe that to date the
group’s relative dependence on licensing agreements has been a
disadvantage, even if the long-term nature of the licensing agreements
(see Table 9 on page 11) and IT Holding’s role as an integrated ‘one-
stop shop’ provide considerable protection.
IT Holding’s newly acquired own brands should bring a number of
advantages, such as:
• Reducing the group’s dependence on its licensers.
• Commanding higher margins, not least because no royalty
payments have to be made (up to 15% of sales, on average).
• Taking the group further up-market, in part because of the nature of
the brands acquired. Also, brand ownership is perceived by the
stock market as providing a more stable revenue base.
• Offering plenty of development potential, both by increasing
geographical reach and by broadening the product range.
Aiming to reach 50% of IT Holding’s plan to decrease the relative dependence on licences is
total revenues proceeding as planned. In 2000, we estimate that licences accounted for
around 65% of total turnover (vs. our 1999 estimate of 78%).
Management has a target of 50% of turnover from licences as a
medium-term goal (2002/03).
Broadening the product IT Holding has plans to develop each brand by expanding the presence
range, while exploiting into other product categories, particularly in high-margin accessories
production synergies and perfumes, but also − thanks to the recent acquisitions which have
brought important production know-how to the group − in cashmere
and knitwear, through Malo, and eyewear, through Allison.
• Accessories. The group has already expanded the Malo brand into
accessories – highly effectively, in our view, as such accessories
typically command higher margins and returns on capital than
clothing, an argument which explains their increasing importance
for the other brands as well.
4
• Knitwear and cashmere. IT Holding intends to concentrate the
manufacture of high-quality knitwear (across a range of brands) at
its Malo plants. At the same time, the Bologna plant produces for
Exte’, Romeo Gigli and Malo.
• Eyewear. The acquisition of Allison (see page 12) has given IT
Holding direct manufacturing capacity and a distribution network
for eyewear, which can be used for all the company’s brands
(owned and licensed). In particular, Allison is the licensee for
production of Romeo Gigli and Exte’ eyewear.
• Perfumes. The group is currently considering potential joint
ventures or partnerships for the production of perfumes to be
extended to Ferre’, Malo, Romeo Gigli and Husky.
Table 5: IT Holding’s brand positioning
Level Brands
High luxury Malo
Fashion luxury Exte’
Creative luxury Romeo Gigli
Contemporary luxury GentryPortofino
Technical luxury Husky
Source: IT Holding
Expanding the direct While IT Holding is likely to continue to distribute a large part of its
retail distribution goods through third-party multi-brand retailers (see the chart below),
we expect it to place growing emphasis on direct retail distribution.
Acquisitions in 1999 have taken important steps in this direction with
the monobrand boutiques for Malo and Gigli, but also with the six
monobrand retail outlets acquired in Hong Kong linked to Ferre’, Dolce
& Gabbana and Versus (Versace).
We expect IT Holding to further strengthen Malo’s direct retail
distribution, opening five or six monobrand shops. For the other brands,
the group will continue to apply the multi-brand boutique formula.
Figure 2: 2000 sales breakdown by retail network
Multi-brand boutiques
82%
Importers/distributors/others
11%
Single-brand boutiques
8%
Source: IT Holding
A website for each brand Husky started online sales in July 2000 in Italy and, depending on its
success, the company will extend internet commerce to each brand.
Products are highly recognisable, such as jackets and helmets for
motorbikes, and are offered in standard sizes. Prices are in line with the
retail offer and no competition is seen with traditional retail, from
which the company derives 99% of revenues.
5
IT HOLDING: A WHOLE NEW ROLE
Rapid business IT Holding has come a long way in a short time. Founded in the early
development 1980s as a producer principally of jeans and related clothing, the
company has blossomed to become the trusted partner of a number of
Italy’s most celebrated design houses, creating and distributing for them
a full range of clothing and accessories under licence.
Table 6: IT Holding – main events since listing
Date Event
1996 IT Holding listed on the Milan Stock Exchange
1998 Romeo Gigli’s first collection (under licence initially)
1999 Mac Malo (cashmere) acquired for Lit 100bn (€51.6m)
1999 Romeo Gigli brand name purchased for Lit 60bn (€31.0m)
1999 Allison & Optiproject (eyewear) acquired for a total of Lit 18.3bn (€9.5m)
1999 Licence agreement signed with Roberto Cavalli
1999 Exclusive worldwide licensing rights to the Husky brand acquired
1999 GTP (IT Holding’s parent) purchased a 21% stake in Gianfranco Ferre’
2000 GTP signed a letter of intent with Tin.it to develop its internet interests
2000 GTP (IT Holding’s parent) purchased a 90% stake in Gianfranco Ferre’
Source: IT Holding, Banca IMI
Group reorganisation IT Holding has reorganised the group in terms of location, management
and production structure, to reflect the transition into a multi-brand
group. In particular, last year the group changed its name from Ittierre
to IT Holding, to reflect through the word Holding the group’s focus on
the creation and development of owned brands, and head office was
moved from the provincial town of Isernia (Molise) to Milan, to be
closer to the fashion business.
Relative importance of IT Holding no longer breaks down its sales by licensed brand, but we
licensing business set to estimate that Versace accounted for just over 36% of 1999’s total
decrease as own brands turnover, while the faster-growing Ferre’ reached 14% and Dolce &
are consolidated Gabbana just over 26% (see Figure 7). Acquisitions during 1999
significantly reduced the relative importance to the group of licences, as
shown below.
Figure 3: Breakdown of sales in 1999 and 2000
Licences
Licences 64%
78%
Own brands
22%
Own brands
36%
Source: Banca IMI estimates
6
Figure 4: 2000 breakdown of sales by product category
Suits
Skirts 7%
3% Trousers
Jackets 6%
11% Jeans
Shirts 16%
6%
Other
6%
Knitwear Glasses
6%
33%
Accessories
6%
Source: IT Holding
Europe accounts for In terms of geographical coverage, IT Holding, with around three
76% of turnover quarters of its sales in Europe, including 39% from Italy, is exposed less
to the Far East and the US, and more to Europe, than almost all other
quoted luxury goods groups (for whom Europe typically accounts for
less than half the total).
The most important European countries for IT Holding at present are,
unsurprisingly, Italy, the UK, Germany, France, Spain and Switzerland,
while Japan and Hong Kong are the major contributors to sales in the
rest of the world.
Figure 5: Geographical breakdown of sales in 2000
Italy
39%
Other
Europe 11%
37%
Americas
13%
Source: IT Holding
Production is developed The six divisions are developing the product lines horizontally, for both
in parallel... the licences and owned brands. Avoiding cannibalisation between lines
is the main priority, minimising potential product and style overlaps
between different licences. Each brand is assigned a dedicated in-house
team, which develops the product collections directly, in close
consultation with the licenser, while maintaining physical and
operational separation from all the other brands.
…through outsourcing Production is then outsourced (almost all of it on the basis of orders
received) to some 300 independent sub-contractors. Many of them work
exclusively for IT Holding, which maintains direct control over certain
critical phases of the production process and is responsible for overall
quality control.
7
Table 7: Acquisitions in 1999
Acquisition Date Details Sales (€m) Cost (€m)
Mac Malo 30 March 1999 Cashmere: Malo and GentryPortofino brands 52 52
Romeo Gigli 14 April 1999 Romeo Gigli brands acquired - 31
Allison 7 May 1999 Eyewear 7 6
Optiproject 7 May 1999 Eyewear 7 4
Source: IT Holding
Figure 6: IT Holding Group
IT Holding
Production Licences Maisons Market
ITR SpA Versus Malo Italy
Versace
MGM SpA Jeans couture Romeo France
Gigli
Mac MALO D&G UK
Exte’
ITC SpA
Just Cavalli Gentry Switz
Allison G Ferre’
Jeans Husky USA
Far East
Other
Source: IT Holding
8
THE GIANFRANCO FERRE’ ACQUISITION
Gianfranco Ferre’ is a IT Holding has already taken a big step forward, as it is now compared
pure global luxury griffe with the pure luxury global players. Gianfranco Ferre’ is one of the few
pure global luxury griffes, renowned worldwide and with enormous
potential for expansion. Moreover, we believe that the designer himself,
Mr. Ferre’, will add considerable value as he will remain the creative
director.
Acquisition cost not a GTP Holding of Tonino Perna, IT Holding’s parent company, is the
burden for IT Holding actual acquirer of 90% of the maison. The cost of the acquisition was
not officially disclosed, but widely circulated market and press rumours
are that it was around Lit 350bn.
The acquisition was the successful result of long-standing negotiations
by Tonino Perna to convince Gianfranco Ferre’ to sell its stake. The
maison was split between Franco Mattioli, a partner of the stylist, and
Gianfranco Ferre’ himself. In December 1999, GTP Holding bought
21% of the maison from Mr. Mattioli, and it took one year to be able to
purchase the rest.
The official business The official business plan for Gianfranco Ferre’ will be presented to the
plan will be presented by financial community by June 2001. At the moment, there seem to be
June two potential outcomes for the Italian maison:
• Consolidation into IT Holding’s accounts.
• Listing on the stock market.
Currently, the most likely outcome seems to be consolidation of the
Ferre’ business, while considering a potential listing of the division in
the longer term. We believe that either plan would require a phased
re-launch of the Gianfranco Ferre’ brand.
Gianfranco Ferre’, Completely dependent on licensing agreements for its production, the
a licensing business Ferre’ business should enjoy significant synergies as licences expire and
are brought in-house. In 2000, Gianfranco Ferre’ revenues were around
Lit 98bn, while the total business, which includes licence revenues, is
estimated to be around Lit 400bn.
We expect consolidation to start in 2002, when the first licences start to
expire, and to be completed in 2004. The most significant licence is
held by Marzotto, for the production of five clothing collections,
expected to expire completely in 2003.
In need of re-launch, but We believe that the restructuring of the Ferre’ business should be
not restructuring limited, as IT Holding has the production capacity to bring production
in-house, especially for apparel, eyewear and even perfumes, should it
announce a joint venture soon. However, we believe significant
investments in the brand’s re-launch will be necessary in terms of
advertising and control of the distribution.
9
MANAGING THE BRANDS
The licensing business
‘One-stop shop’ for The role that IT Holding undertakes for its licensers is that of a ‘one-
designers stop shop’, encompassing and integrating the work that would
otherwise be done by numerous suppliers, from initial design through to
final distribution.
IT Holding has built its reputation as a strategic partner for prominent
fashion houses. The group has demonstrated its ability to develop and
manage second-line collections for fashion houses, such as Versace,
Dolce & Gabbana, Gianfranco Ferre’, Roberto Cavalli and Husky.
The table below shows the brands for which IT Holding currently holds
the licence.
Table 8: IT Holding’s brands under licence
Brand Age Style Main competitors
Versus Gianni Versace 22-35 Strong colours, innovative Emporio Armani, cK, Oliver by
Valentino
Versace Jeans Couture 18-30 Jeans sportswear, casual fashion Armani Jeans, Moschino Jeans
Versace Jeans Signature 30-50 Luxury prêt à porter Chanel, Dior
D&G, Dolce & Gabbana 18-32 Mediterranean colours, provocative Emporio Armani, Miu Miu, DKNY
Gianfranco Ferre’ Jeans 22-40 Spirited but classic Polo Jeans
Gianfranco Ferre’ Sport 22-40 Classic sportswear Polo Sport, Tommy Hilfiger
Just Cavalli 18-40 New generation, colourful and Armani Jeans, DKNY, Moschino
flamboyant Jeans
Husky 30-60 Classic English countrywear Barbour
Source: IT Holding
Figure 7: Breakdown of sales by brand, 1999E and 2001E
Versace D&G
37% Versace
21% 26%
D&G
26%
Eyewear (Allison)
3% Ferre'
10%
Eyewear (Allison)
GentryPortofino 7%
Ferre' 2% Cavalli GentryPortofino
15% 8%
Malo 1%
4% Husky
2%
Malo
Gigli 13%
3% Exte'
8%
Gigli
Exte' 5%
10%
Source: Banca IMI estimates
The Versace, Dolce and Gabbana licences date back to the early 1980s
and early 1990s, respectively, and have contributed strongly to building
up the company’s reputation. The Gianfranco Ferre’ licence has just
been acquired. We now look at details of the last two licence
agreements signed, which have consolidated the group’s licence
business.
Roberto Cavalli licence The five-year world-exclusive licence agreement with the designer
Roberto Cavalli (renewable for a further five years) has strengthened IT
Holding’s traditional licence-based business, by bringing on board one
of Italy’s brightest up-and-coming designers.
10
Dedicated to ‘new generation fashion’ for men and women, sales began
with the autumn-winter 2000 season. IT Holding estimates that turnover
during the first five years should exceed Lit 200bn (€103m, or some 4%
of group sales).
Husky Husky is actually a licence, but IT Holding treats it under all criteria as
an owned brand. This is because Husky has long-term strategic
importance within IT Holding, which intends to purchase the brand at
the contract’s expiry. The agreement is significantly long-term, 16
years, and covers the entire Husky range, from clothing to accessories
and perfumery.
Husky is the first foreign brand (UK) in IT Holding’s licence portfolio,
and also the first one with a classic style, although IT Holding already
operates directly in that sector with its owned brands, Malo and
GentryPortofino. IT Holding has sub-divided the brand into three:
Husky, Siberian Husky and Golf Husky.
Table 9: Licence expiry dates
Licence Start Initial length When Expiry date Negotiations on renewal
date (years) renewed (autumn) (years to expiry)
Versus Gianni Versace 1989 5 1996 2002 1
Versace Jeans Couture 1989 5 1996 2002 1
Versace Jeans Signature 1989 5 1996 2002 1
D&G, Dolce & Gabbana 1993 5 1997 2004 3
Gianfranco Ferre’ Jeans 1995 10 - 2006 Automatic
Gianfranco Ferre’ Sport 1997 8 - 2006 Automatic
Just Cavalli 2000 5 - 2005 5-year extension clause
Husky 2000 16 - 2016 1
Source: IT Holding
Own brands
Malo IT Holding has an ambitious plan to develop Malo into an all-Italian
pure luxury brand (equivalent to the French Hermès). Malo is therefore
seen as the jewel in the crown and is the group’s main priority.
With Malo, IT Holding has achieved in a short time the successful
repositioning and expansion of the brand. Indeed, when it was acquired
in 1999, Malo was not a well-known brand, despite its market-leading
position and products’ premium positioning. We believe that the
group’s development plan is proceeding successfully to date:
• IT Holding has strengthened Malo’s market visibility through
increasing advertising spending, which was previously practically
non-existent.
• Malo has been extended from its knitwear niche to other new
products, such as clothing, leather goods, shoes, accessories,
houseware and childrenswear.
• Retail distribution is expanding with the opening of five or six
monobrand shops per year, similar to the flagship store in Milan.
In 1999, cashmere accounted for the majority of turnover, with knitwear
making up most of the rest. In 2000, we expect this breakdown to
change significantly. Malo (together with GentryPortofino) came into
the group with the March 1999 acquisition of Manifatture Associate
Cashmere (Mac), a company renowned for the high quality of its
cashmere knitwear (in which it claims world leadership).
11
The acquisition also included Mac’s three integrated plants (in central-
northern Italy: Florence and Piacenza), with 500 employees and
technological and production know-how and capacity (easily
expandable), which is now being put to work for IT Holding’s other
luxury brands.
Table 10: Malo monobrand stores
Italy Europe America
Bologna (Galleria Cavour) Munich (Maximilianstrasse) Aspen (East Durant Street)
Capri (Via Vittorio Emanuele) Paris (Avenue Montaigne) Bal Harbour (Collins Avenue)
Cortina (Corso Italia) St. Moritz (Platza del Mulin) Chicago (N. Michigan Avenue)
Forte dei Marmi (Via Carducci) Sylt (Hauptstrasse) New York (Wooster Street)
Milano (Via della Spiga) Lugano (Via Nassa) New York (Madison Avenue)
Porto Cervo (Piazzetta del Cervo) Palm Beach (Worth Avenue)
Portofino (Calata Marconi)
Porto Rotondo (Via del Molo)
Venezia (Calle delle Ostreghe)
Source: IT Holding. The following stores are franchised: Capri, Porto Cervo, Porto Rotondo, Venice, St. Moritz, Lugano.
GentryPortofino Relative to Malo, GentryPortofino is small, with around Lit 20bn
(€10m) of annual sales.
IT Holding’s main priorities for GentryPortofino include extending the
distribution network through multi-brand retailers and expanding the
product range away from its knitwear roots to embrace other kinds of
clothing, although remaining in tune with the brand’s young, sporty and
informal image.
Romeo Gigli IT Holding’s collaboration with Romeo Gigli started in 1997 with a
licensing agreement with the designer, and culminated in the acquisition
of the Romeo Gigli brand name in April 1999. An exclusive contract
with the designer has ensured his collaboration for the next twenty years
in designing the collections.
IT Holding plans to resolve Romeo Gigli’s licensing agreements and
verticalise production, by bringing the production in-house. For the
women’s collection, it is utilising its production facilities at Bologna
(which also produce for Exte’ and the couture collection for Romeo
Gigli).
We expect IT Holding to take the following steps:
• Increase IT Holding’s exposure to the important Japanese market,
where the Romeo Gigli brand name is especially well regarded. At
present, however, the licence for that country remains in the hands
of Takashimaya.
• Augment Gigli’s presence in other product categories. The group is
already producing eyewear under the Romeo Gigli brand name, and
will expand it to perfumes and accessories as well.
Allison With the acquisition of Allison, IT Holding has acquired an in-house
base to expand its production and sales of eyewear, in particular for its
own brands. For example, Allison has developed the Gigli and Exte’
range of eyewear, and expects to do the same for Malo.
Table 11 shows the main features of the two companies, whose
activities are complementary. Allison’s production capacity and skills
mesh well with Optiproject’s strengths in design, distribution and
management.
12
Table 11: Allison and Optiproject at a glance
Allison Optiproject
Produces over a million frames per annum Strong distributor of eyewear
Allison house brand, third-party production for Nike Two groups of agents serving over 3,000 outlets in Italy
No limits and Body Glove brands under licence Exclusive agents and distributors for major foreign markets
Will develop eyewear for Romeo Gigli, Exte’ and Malo Works mostly with own brands (e.g. extra-light Try)
Two integrated full-service production plants (ISO 9001) Uses third parties for manufacturing
Founded 40 years ago Founded three years ago by experienced management team
150 employees 30 employees
Based near Mantua (Volta Mantovana) Based near Padua
1998 turnover of Lit 13.3bn 1998 turnover of Lit 13bn
Source: IT Holding
Exte’ Exte’ was launched directly by IT Holding in 1996, and by 1999 it had
already reached sales of some €38m, or 10% of the consolidated group
total. Characterised by avant-garde design, combined with the use of
innovative materials, Exte’ has successfully carved itself a distinctive
market niche, or really three niches, as the sub-brands are presented
separately as Exte’, J’s Exte’ and Acht Exte’.
Fundamental to the success of Exte’ success has been the intuition and
skills of IT Holding’s in-house designers, in particular Antonio Berardi,
who is the chief designer in overall control of the brand, and charged
with giving the label greater authority and visibility. Exte’ has
consistently refused offers to license its name to third parties, preferring
to maintain total control over the brand.
Strengthening the product range and the distribution network with the
re-styling of the existing monobrand stores is the main area for strategic
development of this brand. Exte’ has already been extended to high-
margin accessories, such as eyewear, now produced in-house by
Allison. We believe that the brand could be extended further to
encompass perfumes and watches. In terms of geographic expansion,
Exte’, which is currently present only in Europe, is expected to enter the
US market soon.
Table 12: Exte’ monobrand stores
Location
Milan Via della Spiga
Capri Via Camerelle
Tokyo N.A.
Source: IT Holding. Note: the Rome store is franchised.
Table 13: IT Holding’s principal own brands
Brand Age Style Main competitors
Exte’ 22-35 High-end; asymmetrical designs Jenny, Byblos, Calvin Klein
J’s Exte’ 22-35 Creative, urban, innovative Armani Jeans, Calvin Klein Jeans
Acht Exte’ 22-35 Innovative use of unusual fabrics Polo Sport, Tommy Hilfiger
Romeo Gigli 30-55 Luxury prêt à porter Gucci, Ferragamo, Prada, Armani
Gigli 20-35 Young prêt à porter Armani Jeans, Moschino Jeans
Malo 35-70 Luxury cashmere Ballantyne
GentryPortofino 20-40 Natural precious fabrics Numerous and various
Source: Banca IMI
13
2000 RESULTS
2000 net profit decreased to €5m (vs. €26m in 1999), impacted by a
higher than expected tax rate of 35% (vs. 20% in 1999).
4Q impacted by Operating margins decreased to 4.9% (vs. 7.5% in 1999), affected by
restructuring costs
• Higher depreciation and amortisation costs (€24m, vs. €16m in
1999).
• A seasonal factor, due to 2Q and 4Q having lower revenues in
combination with higher costs related to the restructuring of the
group. IT Holding was working to integrate and reposition the
newly acquired brands, in particular expanding Malo.
Table 14: 2000 quarterly results
(€m) 1Q 1Q 1H 3Q 4Q 2000
Turnover 115 93 208 137 88 433
Operating costs (102) (82) (184) (121) (83) (388)
Gross operating profit 13 11 24 16 5 45
Amortisation & depreciation (6) (4) (11) (6) (7) (24)
Operating profit 6.5 7 13 10 (2) 21
Net interest & other N.A. (3) (3) (6) (4) (13)
Pre-tax profit N.A. 10 10 4 (7) 8
Tax N.A. N.A. N.A. N.A. (3) (3)
Minorities N.A. N.A. N.A. N.A. (0) (0)
Net profit N.A. N.A. N.A. N.A. (9) 5
Turnover growth - - - - - +17
Operating profit growth - - - - - -24
Net profit growth - - - - - -80
Gross margin (%) 11.0 11.9 11.4 11.8 5.7 10.3
Operating margin (%) 5.7 7.2 6.3 7.3 -2.4 4.9
Net margin (%) - - - - - 1.2
Source: IT Holding, Banca IMI
Sales up 17% Consolidated sales increased by 17%. We estimate that there was a flat
performance from the licence business and a strong increase from own
brands, boosted by the full consolidation of Malo and Allison.
Net financial position Group net debt reached €125m (vs. €80m in 1999), representing a
debt/equity ratio of 90%, compared to 56% in 1999. The higher net debt
position was the result of higher investments, in line with company’s
expansion strategy.
Dividend The group announced a dividend of €0.026 per share, the same in 1999.
14
ASSUMPTIONS AND OUTLOOK
The 2000 results came in below our expectations, indicating that despite
a significant sales growth (+17%), the group may need to wait a little
longer for synergies to come through. We expect an adjusted net profit
this year of €13m (vs. €6m in 2000).
Revenues driven by own We expect revenues to rise by 19% in 2001, driven by the own brands
brands and in particular by double-digit growth for Malo, Allison and Romeo
Gigli. In licences, we expect Roberto Cavalli to contribute strongly,
with full-year consolidation and a solid performance as the brand
benefits from its ongoing sales momentum. Like-for-like, we expect
licences to grow by 8% and own brands by 20%.
Forecasts do not include The potential consolidation of Ferre’ is not included in our forecasts, as
Gianfranco Ferre’ we are waiting for the official business plan, which we believe will also
be significant in terms of IT Holding’s future priorities in brand
development.
Gradual improvement in Gross operating margins are forecast to improve gradually, thanks to
margins better leverage of synergies, which we believe would be further
enhanced by the potential announcement of a joint venture for
expansion in the perfumes product category. In 2001, we expect gross
operating margins to improve to 11.4% (vs. 10.3 % in 2000).
Higher tax rate The tax rate in 2001 is forecast to be over 30% (vs. 20% in 1999). This
reflects the unfavourable mix of higher labour costs and lower financial
income, which already impacted the 2000 results.
Capex to support the We expect €25m of investments to support the expansion strategy,
expansion strategy including Malo shop openings and potential brand restructuring.
Working capital to sales We forecast that working capital/sales will rise to 11.2x (10.7x in
should increase 1999), due to increasing involvement in direct retail distribution.
Stable net debt Following these investments, we expect net debt this year to stabilise at
€120m, approximately the same as last year.
Figure 8: IT Holding’s margin trend
%
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1998 1999 2000 2001E 2002E
Gross operating Operating Net
m argin margin m argin
Source: IT Holding, Banca IMI estimates
15
FINANCIAL FORECASTS
Table 15: Profit & loss account
(€m) 1998 1999 2000 2001E 2002E 2003E
Turnover 336 371 433 516 590 720
Operating costs (289) (327) (388) (457) (520) (634)
Of which labour costs (24) (44) (58) (70) (80) (97)
Gross operating profit 48 43.2 45 59 70 86
Depreciation & amortisation (9) (16) (24) (28) (32) (39)
Operating profit 39 28 21 31 38 47
Net interest (4) (6) (11) (12) (12) (12)
Foreign exchange 2 5 (2) 0 0 0
Associates 2 0.6 0 0 0 0
Extraordinary items 1 7 (1) 0 0 0
Pre-tax profit 40 33 8 19 26 35
Tax (12) (7) (3) (6) (8) (12)
Minorities (0) (1) (0) (0) (0) (0)
Net profit 28 26 5 13 18 23
Number of shares (m) 200 200 200 200 200 200
EPS (€) 0.139 0.129 0.026 0.066 0.088 0.116
Adjustments (0) (5) 1 0 0 0
Adjusted net profit 27 20 6 13 18 23
EPS adjusted 0.137 0.102 0.030 0.066 0.088 0.116
Cash earnings 36 35 29 40 48 60
CEPS 0.178 0.177 0.143 0.199 0.238 0.299
Dividend 0.026 0.026 0.026 0.066 0.087 0.116
Turnover growth (%) 7 10 17 19 14 22
Gross operating profit growth (%) 13 -9 4 32 18 23
Operating profit growth (%) 21 -28 -24 47 23 24
Pre-tax profit growth (%) 27 -15 -76 137 37 35
Net profit growth (%) 22 -7 -80 154 33 33
Adjusted net profit growth (%) 29 -25 -70 117 33 33
Earnings per share growth (%) 23 -25 -70 117 33 33
Cash earnings per share growth (%) 15 -1 -19 38 20 26
Dividend growth (%) 0 0 0 154 33 33
Gross operating margin (%) 14.1 11.7 10.3 11.4 11.8 11.9
Operating margin (%) 11.5 7.5 4.9 6.0 6.4 6.5
Pre-tax margin (%) 11.7 9.0 1.9 3.7 4.4 4.9
Net margin (%) 8.2 7.0 1.2 2.6 3.0 3.2
Adjusted net margin (%) 8.1 5.5 1.4 2.6 3.0 3.2
Tax rate (%) 29.3 20.3 34.6 30.0 32.0 33.0
Return on capital employed (%) 26.9 13.7 8.1 11.0 13.3 16.7
Return on equity (%) 26.2 16.0 4.4 9.3 11.9 15.2
Source: IT Holding, Banca IMI estimates
16
Table 16: Cash flow
(€m) 1998 1999 2000 2001E 2002E 2003E
Net profit 28 26 5 13 18 23
Non-cash items 13 21 27 27 30 36
Minorities 0 1 0 0 0 0
Funds from operations 41 48 32 40 48 60
Working capital (28) 10 (1) (10) (14) (23)
Tax 0 4 0 0 0 0
Other items (13) 29 4 5 6 11
Dividends paid (5) (5) (5) (5) (13) (17)
Free cash flow (6) 85 29 29 27 31
Capital expenditure (8) (27) (7) (25) (18) (18)
Investments 0 (1) (8) 0 0 0
Intangibles (5) (80) (25) 0 0 0
Surplus after capex (19) (22) (11) 4 9 13
Sale of assets 4 (0) 0 0 0 0
Share issues (1) 1 0 0 0 0
Consolidation changes (0) (26) (6) 0 0 0
Other (2) 9 (28) 0 0 0
Net funds inflow (19) (38) (45) 4 9 13
Net cash/(debt) (41) (79) (124) (120) (111) (99)
Net debt/equity (%) 36 56 90 82 74 63
Source: IT Holding, Banca IMI estimates
Table 17: Balance sheet
(€m) 1998 1999 2000 2001E 2002E 2003E
Fixed assets 71 191 207 207 196 180
- Financial 3 7 9 10 12 14
- Tangible 26 48 49 66 76 84
- Intangible 41 136 149 130 109 82
Current assets 248 237 294 367 460 595
- Stocks 47 64 98 119 149 197
- Trade debtors 89 78 73 90 112 148
- Other debtors 76 68 87 94 98 105
- Cash and deposits 36 27 36 65 101 145
Total assets 320 428 501 574 656 775
Shareholders' funds 116 141 138 146 151 157
- Capital and reserves 116 139 138 146 150 156
- Minorities 0 2 0.4 0 0 0
Long-term liabilities 9 18 18 20 22 24
- Severance fund 4 9 10 11 11 11
- Other liabilities 4 8 8 9 11 13
Total debt 78 106 160 184 212 244
- Long-term debt 34 16 58 66 76 88
- Short-term debt 43 90 103 118 136 156
Current liabilities 118 164 184 223 271 350
- Trade creditors 86 103 125 152 190 251
- Other creditors 32 61 60 71 81 99
Total liabilities 320 428 501 574 656 775
Source: IT Holding, Banca IMI estimates
17
NOTES
18
NOTES
19
Banca d’Intermediazione Mobiliare IMI SpA co-ordinates the investment banking activities of the Gruppo Bancario SANPAOLO IMI.
Worldwide, these activities are conducted through the following companies:
BANCA Corso Matteotti 6 IMI BANK (LUX) SA 8 avenue de la Liberté
D’INTERMEDIAZIONE 20121 Milan 1930 Luxembourg
MOBILIARE IMI SPA Italy Luxembourg
Tel: (39 02) 7751 3999 Tel: (352) 4045751
Fax: (39 02) 7751 84071 Fax: (352) 494198
Dealing: (39 02) 7751 5600 Dealing: (352) 404575340
BANCA Wren House BANCA IMI SECURITIES CORP 245 Park Avenue
D’INTERMEDIAZIONE 15 Carter Lane 35th Floor
MOBILIARE IMI SPA London EC4V 5EY New York NY 10167 USA
LONDON BRANCH
Tel: (44 20) 7454 4800 Tel: (1 212) 326 1100
Fax: (44 20) 7894 4215 Fax: (1 212) 326 1188
Dealing: (44 20) 7894 4222 Dealing: (1 212) 326 1150
INTERNET: http://www.bancaimi.it
Distributed by Banca d’Intermediazione Mobiliare IMI S.p.A., Milan, an authorised bank, in Italy. Distributed by and approved by: Banca
d’Intermediazione Mobiliare IMI S.p.A. – London Branch, a member of the London Stock Exchange and regulated by the Securities and
Futures Authority for the conduct of investment business in the UK and Banca IMI Securities Corp., a member of the NYSE and NASD in
the USA. The information and opinions contained in this document are based on sources believed to be reliable and in good faith but no
representation or warranty, express or implied, is made by any member of the Gruppo Bancario SANPAOLO IMI as to their accuracy,
completeness or correctness. All opinions expressed herein are subject to change without notice. This document is for information purposes
only, descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is
not, and should not be construed as, an offer to buy or sell any securities. Neither member companies of the Gruppo Bancario SANPAOLO
IMI nor any of their directors, representatives or employees accepts liability for any direct or consequential loss arising from use of this
document. Member companies of the Gruppo Bancario SANPAOLO IMI, their directors and/or representatives and/or employees and/or
families may have a long or short position in any of the securities mentioned in this document at any time and may make a purchase and/or
sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise, and may also have
performed, are performing or seeking to perform investment services for companies mentioned herein and may also have acted upon
research recommendations or other information before publication, in each case either as principals or as agents.
Residents in Italy: This report is based upon information and data from sources that we believe reliable, but whose accuracy is not
guaranteed. Its main goal is to offer accurate and up-to-date information: it is not intended, therefore, as an offer or a solicitation to buy or
sell securities. Banca d’Intermediazione Mobiliare IMI Spa and others associated with it may have positions in, and may effect transactions
in securities of companies mentioned herein may also perform or seek to perform investment banking services for those companies.
Residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers
under the rules of the SFA.
US Persons: US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in
the U.S. Banca d'Intermediazione Mobiliare IMI SpA and its non-U.S. affiliates may, to the extent permitted under applicable law, have acted
upon or used this research, to the extent it relates to non-U.S. issuers, prior to or immediately following its publication.
Furthermore, this document may not be reproduced, distributed or published for any purpose. By accepting this document you
agree to be bound by all of the foregoing provisions.
20
