The highly rated winter clothing brand Moncler has been listed on the exchange exactly five years ago now and has shown an impeccable trajectory since.
In terms of operations, the sales have doubled since 2013 - from 581 million to 1.2 billion euros - without the cost of this remarkable expansion penalizing the operating margins which have remained stable at 28%.
This kind of performance places Moncler on top of the list of most profitable textile brands, a few points behind the invincible Hermès, but still far ahead of more directly comparable brands like Prada, Ralph Lauren, and Burberry.
Moncler's flagship product - the company’s famous winter jacket - incarnates, of course, a capitalist dream in itself: its chain production is easy and it’s particularly cheap to manufacture. The jackets benefit since a few years from an excellent reputation among the clients and easily sell for a very high price (Moncler coats often cost more than 1000 euro).
This exceptional configuration is reflected in the company’s accounts: while a company that’s growing usually consumes more capital than it generates profits, Moncler continues to stack cash on its balance sheet, to reduce its debt, and to keep a limited need for operating capital.
The company’s financial position is thus excellent, with all of the 445 million euros of liabilities covered by the 712 million of current assets, two-thirds of which are composed of cash and equivalents.
It’s exactly this cash generation that doesn’t lag behind.: the company’s activity is little capital-intensive and generates a free cash flow - meaning the profit generated in cold hard cash - that’s almost identical to the accounting profit, or more or less 240 million euros for the previous financial year.
We clearly see the profits that pile up on the balance sheet year after year, because the capital allocation remains oriented towards the growth, and the distribution of dividends stays minimal - to approximately 20% of the profit.
The profitability of the equity could, however, get a significant boost if the management decided to return the excess cash to the shareholders. The management doesn’t seem to want to do this (yet?) though, which indicates that they believe that the growth ceiling still hasn’t been reached and that they think it’s wiser to keep a maximum of resources at their disposal.
Coupled with a large - two-thirds - floating capital, this situation makes Moncler an ideal target for a hedge fund. However, the company’s iconoclastic and talented CEO Mr. Remo Ruffini won’t be easily intimidated: haloed by the incredible success story of the brand since he acquired it, he owns a quarter of the capital and isn’t the type of person that let’s people dictate him in which direction he needs to steer his ship.
Despite the recent fall of the share price, the trend for the first nine months of the year 2018 remains promising: the sales increased by 23%, the number of new stores is multiplying and the online sales are hitting new records.
Just like for many other luxury brands, it’s Asia - particularly China, Japan, and Korea, where European brands can fully benefit from the pricing power advantage - that is the growth driver, with sales that are up +36% for the last quarter.
The winter season, usually the most profitable one for Moncler, should hit new records again this year.
This overexposure to Asia - 40% of the sales vs. only 14% in Europe - and the possibly transient effect of fashion - some of the Moncler coats are being sold at almost 10 000 euros! - have however whetted the appetite of short sellers. Among them the famous hedge fund Bridgewater.
At 29 euros per share, excess cash subtracted, the value of the company - market capitalization plus net debt, pension schemes, provisions, and minority interest payments included - reaches almost 7.4 billion euros, a multiple of 30 times last year’s profits and 25 times the profits expected for 2018 (Note: the PER below is compared to the market capitalization).
This valuation offers an excellent entry point if Moncler maintains its impressive growth rate. However, the operating leverage obliges, a compression of the multiple would be inevitable if the brand were to go out of fashion and the profits would decrease.
The market is familiar with success stories in the fashion industry that are as phenomenal as they are ephemeral - like for example Hugo Boss, L Brands, Abercrombie, Burberry, and Michael Kors, to name a few recent examples. As such - as we’ve seen - the market can quickly go from euphoria to skepticism.
This kind of turnaround represents, of course, the main risk of this investment. A disappointment in terms of the company’s results or the expectations of the analysts who follow the company would, therefore, result in an immediate exit.
Article published on 12/08/2018 | 19:40