global luxury goods luxurygoods - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

13 May 2016Global

Equity ResearchLuxury Goods

Global Luxury Goods SECTOR REVIEWResearch Analysts

Guillaume Gauvillé, CFA44 207 888 0321

[email protected]

Christian Buss212 325 9667

[email protected]

Isis Wong852 2101 7109

[email protected]

Catherine Tillson44 20 7888 6052

[email protected]

Sara Shuler212 325 7643

[email protected]

Ivy Ji852 2101 7951

[email protected]

Mind the regional price gap■ Managing regional price gaps increasingly matters. Tourism spending

on luxury goods in Europe and the US is declining. Chinese consumers are now buying in China and the development of ecommerce has enabled easy comparison of prices across markets. Therefore, the concept of 'fair pricing' for the luxury industry in China has become more relevant than ever.

■ We analysed >1,000 handbag SKUs across six markets. Our proprietary analysis shows a wide disparity across brands regarding price gaps. The more affordable US brands like Michael Kors (N) and Coach (N) apply the largest premiums between China and the US at >80%. Among European brands, Tod's (U/P) shows the highest price gap at c.50% between China and Europe while LV, BV, SL, Prada seem to be more reasonably priced.

■ Price cuts in China may be necessary. Historically, brands have raised prices in their home markets to narrow the gap. However, they can no longer do this or they will face the risk of putting more pressure on an already-weak domestic consumption. Moreover by persistently keeping high price gaps, we think luxury brands simply forgo sales opportunities in China. Therefore the possible adjustment is to cut prices in China to the c.30% premium we deem necessary to cover duties and taxes. The potential price cuts in China certainly have negative margin implications.

■ LVMH (O/P) seems to be better placed. We believe companies with a greater exposure to affordable luxury will see more resilient organic growth in the current environment. Our proprietary analysis indicates that LV's ASP sits below its direct peers, Gucci and Prada. We estimate that c.50% of sales stem from canvas bags, which drive volumes. Regarding price gaps, the China vs. Europe premium does not exceed 30% and, therefore, we see limited risk of LV having to cut prices in China.

Figure 1: Price differentials between China and home markets (=100)

183 181

149140 139 132 128 126 121 119

Coach MichaelKors

Tod's Gucci Ferragamo Burberry LouisVuitton

Prada SL BottegaVeneta

Source: Company data, Credit Suisse research

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Global Luxury Goods 2

Mind the regional price gapRegional pricing increasingly matters Price differentials and Chinese consumer spending help drive organic growth. The topic of price differentials for luxury goods between regions has returned to the forefront of company and investor discussions. We saw a similar level of interest this time last year as price differentials between China and Europe peaked. In 1Q15 and 2Q15 the depreciation of the euro led to the largest product price gap we have seen over the past three years between the two regions. From our analysis of LVMH's Speedy 30 bag over time we can see how, swiftly after price differentials peaked, organic growth responded, recording the highest quarter in Europe since 2Q10 (see Figure 2). This was due to the spending habits of Chinese tourists, who capitalized on these extreme price differentials which created 'sale like prices'. The combination of price differentials between China and other regions and how Chinese tourists take advantage of them are key drivers of organic growth for our companies.

Figure 2: The Chinese clientele's chase for pricing advantage drives regional organic growth

Figure 3: Some recovery in Asia Pacific organic growth while growth in Europe it has weakened

Price gap between regions for Louis Vuitton Speedy 30 bags vs. organic growth in Europe (Y/Y % chg.)

Sector aggregate organic sales growth in Europe and Asia Pacific

37%

0%

2%

4%

6%

8%

10%

12%

14%

16%

20%

25%

30%

35%

40%

45%

50%

55%

60%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

China vs. France price premium for a Speedy 30 bag (lhs) LVMH organic revenue growth in Europe (rhs)

(20%)

(10%)

-

10%

20%

30%

40%2Q

07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

4Q12

2Q13

4Q13

2Q14

4Q14

2Q15

4Q15

2Q16

e

Europe Asia Pacific

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Handbags: a case study for categories sensitive to price-differential driven spending. Moncler, a largely luxury apparel business, targets a 60/65% price differential between China and Europe. Our understanding is that apparel brands are able to support higher price differentials like this, between China and other regions, without losing out on purchases in China or harming the brand. This is also true for other categories such as shoes, as these products require consumers to carry out the transaction for themselves as style and fit are critical. However, one example of a category that is more sensitive to price differentials is leather goods. We feel the category lends itself more easily for purchases on behalf of others. As such consumers are more likely to ask friends/family to purchase on their behalf in places where price differentials make purchases significantly cheaper than at home. It is therefore important for leather goods brands to maintain price harmonization across regions in order not to lose out on purchases in certain regions.

Chinese tourist spend has slowed in Europe. As the only company to explicitly talk about Chinese clientele spending as a whole (both domestic and tourist) we use the commentary from LVMH around LV as our barometer of Chinese demand (see Figure 4). From this we understand global Chinese spending has not seen the same level of growth over the past few quarters but remained resilient with no reported decline. However, the latest Global Blue data suggests VAT claims by the Chinese clientele fell in Europe by -36% in March while it only declined by -6% in Asia. We believe this is largely due to the tough comparatives of last year combined with the negative impact of the terrorist attacks

13 May 2016


in Paris and Brussels. Most luxury companies have noted tourist levels have still not returned to their previous levels.

Figure 4: Chinese demand overall remains resilient despite weakening global luxury sentiment LVMH commentary around Chinese clientele demand (both domestic and tourist) for LV brand

Period Commentary Growth1Q13 'Basically the Chinese client base is up mid-single digits, so a bit higher than what we had inH2 actually with domestic sales being flattish and

tourists sales being high single digit.' mid-single digit

2Q13 'On the Chinese customers for H1, altogether including domestic and travel retail is up something like mid-single digit. But the bulk of growth takes play with tourists. A slight improvement vs. Q1'

mid-single digit

3Q13 'So the growth rate with the Chinese customer is not really different from what it was at the end of June. It's a bit better. We've seen the touristic activities with Chinese customers being a bit better than it was in the 1H of the year. So all in all, we are still mid-single digit plus.'

mid-single digit

2013 'The Chinese consumer at Vuitton's up and LFL basis 5% versus last year' mid-single digit1Q14 'The Chinese did very well. The Chinese tourists did very well. So the Chinese customer altogether is growing about double-digit with very high

single digit domestically and double-digit in local currency outside of China. So very strong business with the Chinese customers.'double digit

2Q14 'The Chinese clientele, yes we were not optimistic, but we saw better numbers for Q1. We saw a little bit of a decline. Altogether the Chinese clientele is mid-single digit up in the first half of the year but it’s a lower number than what we had at the end of Q1.'

mid-single digit

3Q14 'Did you see a change in trends for Q3 vs H1? It was a bit lower. Remember Q1 was very strong, Q2 was less strong, and on average, we were a bit lower than H1. We were up a few percentage points compared to H1 which is up something like 5% or 6%.'

mid-single digit

2014 'A trend with Chinese customers that remained acceptable that's positive throughout the year'1Q15 'Chinese current base is growing in excess of 5%.' mid-single digit2Q15 'The growth of the business with Chinese customers in Q2 was low double digit. So we ended the semester with the Chinese customers, so

altogether in all geographies in local currencies being up slightly above 10%.'low-double digit

3Q15 'Chinese customer base altogether went down to something like flat numbers compared to almost double-digit or close to double digit for the first six months of the year. This is obviously connected with what happened in China in July and August in the stock market.'

flattish

4Q15 'We have more Chinese business. If you put together Chinese customers buying inside China and outside China, sales are up and so the fundamentals are good. '

mid-single digit

1Q16 'We saw Chinese demand being flattish. It was a bit more positive in Q4, and it was flattish in Q1. More balanced between domestic purchasing and tourist purchasing'

flattish

Source: Company data, Credit Suisse research

Capturing sales in Mainland China is becoming more important. As tourist flow into Europe sees little recovery and spending in Japan, another traditional spending destination for the Chinese tourist, starts to wane, we are seeing a shift of Chinese clientele spending back to Mainland China. It is therefore increasingly important for brands to have reasonable price differentials in the region in order to capture the consumer spending intentions. We argue Chinese domestic clientele demand is not strong enough to cope with excessively higher prices in the region.

c.30% price differential compared to Europe is required to cover taxes in China. Luxury goods imports in China are subject to three layers of tax: (i) import duties, (ii) consumption tax and (iii) sales tax or VAT. From our understanding the taxes due on leather goods are import taxes at 10%, consumption tax at 20% and VAT at 17% (see Figure 5). Given VAT is also charged in Europe, specifically at 20% in France and 22% in Italy, we believe the additional taxes charged in China vs. Europe come to just under 30%.

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Figure 5: Additional taxes charged in China for luxury goodsImport tariff, consumption tax and VAT on selected imported luxury products in China

Product category Import tax rate Consumption tax VATLeather handbag 10% 20% 17%Quartz watches 11% 20% 17%Mechanical watches 15% 20% 17%Diamond jewellery 20% 5-10% 17%Gold jewellery 20% 5-10% 17%Silver jewellery 20% 5-10% 17%Gem set jewellery 35% 5-10% 17%Leather shoes with leather soles 24% 0% 17%Source: Fung Business Intelligence Centre, China customs, Credit Suisse research

Strategies to cope with extreme price differentials have so far been varied. Prada, Kering and Hugo Boss are all examples of companies that are aware of the negative impacts extreme price differences can have. Moreover all three have recently chosen different methods for dealing with this problem. Prada for example recently announced at its full year results in April, that it was looking to employ a flat spread of 10% for all regions on new products. In the meantime, Kering decided to cut prices in Mainland China, HK and Macau of carry over products at BV by between 10 to 13%. Hugo Boss, at the start of this year, lowered prices by 20% in China, for the second time in 6 months following a 10% decrease in the second half of 2015.

Taking price cuts across products is not necessarily the answer. We believe lowering prices through new product launches is the most effective way of carrying out price harmonization without impacting the brand. However, a price differential of only 10%, as suggested by Prada, seems to be too extreme and will ultimately result in the company booking lower gross margins in the region as the company rather than the consumer takes the hit on taxes. Price cuts across all products are not as effective in our opinion. Using the example of Chanel, when it cut prices across all products in HK last year, we understand that the volumes uplift was disappointing. We realized that consumers took advantage of the fall in prices by making the difference on returning recent purchases and repurchasing the goods at the lower prices. This reduced the uplift the company expected from carrying out the price cuts.

Mere price increases to reduce price gaps may be hard to reproduce. As the need to reduce the price differential of Mainland China has increased, companies have only looked at decreasing prices in the region. Unlike the previous years, we are not seeing brands closing the gap by increasing the prices elsewhere, namely Europe. Additionally, we have seen Hermes, possibly one of the brands with the greatest pricing power, decide not to pass on full price inflation increases this year. This casts a shadow of doubt around whether brands can push through price increases as effectively as they used to in this current environment. Moreover if one considers in which regions these price increases could be pushed through, there seems to be very few options. After years of aggressive pricing actions (see Figure 6), we believe Europe, the US and Japan would struggle to cope with any further price increases as (i) Europe has just come out of a period of significant price increases, (ii) the US is now dominated by domestic demand and consumer interest appears to be low, and (iii) the Yen strengthening in Japan may drive the Chinese clientele away from this touristic market again and growth in the country will be more reliant on its more price-sensitive local clientele.

Online pricing transparency gives power to the consumer. A key question to ask is why/how have price differentials become so important for luxury brands. Admittedly the first part of the answer to this is purely because of the sheer influence of Chinese clientele on luxury goods demand and the fact that Chinese clientele react so acutely to them. The second part is due to the transparency online shopping has given to all consumers globally. Most large luxury brands now operate an ecommerce platform and it arguably

13 May 2016


does not take too much effort for the Chinese clientele to check the price of a handbag across different markets. Acting almost as a destructive influence over the past couple of years, it has given the prudent and sophisticated luxury consumer the power to pick and choose where to spend money in order to receive the best price.

Figure 6: Price increases in local currency for iconic LV products in key marketsMarket France United StatesBag style Speedy 30 Keepall 60 Evora MM Alzer 80 Speedy 30 Keepall 60 Evora MM Alzer 80Size (cm) 30x21x17 60x33x26 44x44x10 80x52x26

Q/Q % change30x21x17 60x33x26 44x44x10 80x52x26

Q/Q % change

31/03/2012 € 500 € 790 € 1,400 € 5,050 $775 $1,220 $2,130 $7,65030/06/2012 € 500 € 790 € 1,400 € 5,050 - $775 $1,220 $2,130 $7,650 - 30/09/2012 € 540 € 850 € 1,510 € 5,450 +8% $775 $1,220 $2,130 $7,650 - 31/12/2012 € 540 € 850 € 1,510 € 5,450 - $790 $1,250 $2,210 $7,950 +3% 31/03/2013 € 595 € 875 € 1,610 € 5,650 +6% $875 $1,290 $2,370 $8,350 +7% 30/06/2013 € 595 € 875 € 1,610 € 5,650 - $875 $1,290 $2,370 $8,350 - 30/09/2013 € 595 € 875 € 1,610 € 5,650 - $875 $1,290 $2,370 $8,350 - 31/12/2013 € 595 € 875 € 1,610 € 5,650 - $875 $1,290 $2,370 $8,350 - 31/03/2014 € 615 € 900 € 1,630 € 5,650 +2% $910 $1,330 $2,420 $8,400 +2% 30/06/2014 € 660 € 960 € 1,740 € 6,100 +7% $970 $1,410 $2,570 $8,950 +6% 30/09/2014 € 660 € 960 € 1,740 € 6,100 - $970 $1,410 $2,570 $8,950 - 31/12/2014 € 660 € 960 € 1,740 € 6,100 - $970 $1,410 $2,570 $8,950 - 31/03/2015 € 685 € 1,000 NA € 6,100 +3% $970 $1,410 NA $8,950 - 30/06/2015 € 760 € 1,050 NA € 6,100 +5% $970 $1,410 NA $8,950 - 30/09/2015 € 760 € 1,050 NA € 6,100 - $970 $1,410 NA $8,950 - 31/12/2015 € 760 € 1,050 NA € 6,100 - $970 $1,410 NA $8,950 - 31/03/2016 € 760 € 1,050 NA € 6,100 - $970 $1,410 NA $8,950 - 03/05/2016 € 760 € 1,050 NA € 6,100 - $970 $1,410 NA $8,950 -

Market China JapanBag style Speedy 30 Keepall 60 Evora MM Alzer 80 Speedy 30 Keepall 45 Evora MM Alzer 80Size (cm) 30x21x17 60x33x26 44x44x10 80x52x26

Q/Q % change30x21x17 45x27x20 44x44x10 80x52x26

Q/Q % change

31/03/2012 ¥6,100 ¥9,650 ¥16,800 ¥60,500 ¥73,500 ¥108,150 NA ¥724,500 30/06/2012 ¥6,100 ¥9,650 ¥16,800 ¥60,500 - ¥73,500 ¥108,150 NA ¥724,500 - 30/09/2012 ¥6,100 ¥9,650 ¥16,800 ¥60,500 - ¥73,500 ¥108,150 NA ¥724,500 - 31/12/2012 ¥6,100 ¥9,650 ¥16,800 ¥60,500 - ¥73,500 ¥108,150 NA ¥724,500 - 31/03/2013 ¥6,100 ¥9,650 ¥16,800 ¥60,500 - ¥88,200 ¥122,850 NA ¥829,500 +16% 30/06/2013 ¥6,350 ¥9,350 ¥17,200 ¥60,500 +1% ¥88,200 ¥122,850 NA ¥829,500 - 30/09/2013 ¥6,350 ¥9,350 ¥17,200 ¥60,500 - ¥95,550 ¥133,900 NA ¥908,250 +9% 31/12/2013 ¥6,350 ¥9,350 ¥17,200 ¥60,500 - ¥95,550 ¥133,900 NA ¥908,250 - 31/03/2014 ¥6,650 ¥9,700 ¥17,600 ¥61,000 +3% ¥98,700 ¥137,550 NA ¥908,250 +2% 30/06/2014 ¥7,450 ¥10,900 ¥19,700 ¥68,500 +12% ¥109,080 ¥152,280 NA ¥985,000 +10% 30/09/2014 ¥7,450 ¥10,900 ¥19,700 ¥68,500 - ¥109,080 ¥152,280 NA ¥985,000 - 31/12/2014 ¥7,450 ¥10,900 ¥19,700 ¥68,500 - ¥109,080 ¥152,280 NA ¥985,000 - 31/03/2015 ¥7,450 ¥10,900 NA ¥68,500 - ¥109,080 ¥152,280 NA ¥985,000 - 30/06/2015 ¥7,450 ¥10,900 NA ¥68,500 - ¥114,480 ¥159,840 NA ¥1,004,400 +4% 30/09/2015 ¥7,450 ¥10,900 NA ¥68,500 - ¥114,480 ¥159,840 NA ¥1,004,400 - 31/12/2015 ¥7,450 ¥10,900 NA ¥68,500 - ¥114,480 ¥159,840 NA ¥1,004,400 - 31/03/2016 ¥7,450 ¥10,900 NA ¥68,500 - ¥114,480 ¥159,840 NA ¥1,004,400 -03/05/2016 ¥7,450 ¥10,900 NA ¥68,500 - ¥114,480 ¥159,840 NA ¥1,004,400 -Source: Company data, Credit Suisse research

Credit Suisse pricing survey across six marketsOnline pricing survey of >1,000 SKUs across six different regions. In order to assess which brands are best positioned in which regions to capture Chinese luxury demand we carry out a pricing survey of over 1,000 SKUs across six different markets. From this we can calculate the price differentials relative to Europe. We have carried out this analysis for both European luxury names; Louis Vuitton, Gucci, Bottega Veneta, SL, Burberry, Tod's, Ferragamo, Prada and US premium brands; Michael Kors, Kate Spade and Coach

13 May 2016


where possible. The limiting factor is whether the brand has an e-store in each region (see Figure 7). When not possible, we have used net-a-porter or visited stores in China/HK.

Figure 7: Active websites in different regionsEurope UK China Japan US HK

Louis Vuitton

Gucci * * *Bottega Veneta

SL

Burberry

Tod's

Ferragamo

Prada + +Coach

Michael Kors / //

Kate Spade Source: Company data, Credit Suisse research, *data collected from net-a-porter, +data collected from store, /data collected from Forzieri, //data collected from Harvey Nichols

The survey captures the full range of price points. In the survey we record prices for the same product across the six regions. We attempt to capture all products on each brand's online portal. We exclude copies of the same bag with the same price but in different colours. Additionally, we do not include exotic leathers apart from python or where it is used in small amounts for detailing.

Louis Vuitton continues to screen as 'affordable luxury'We believe affordable luxuries will outperform. The luxury industry has relied for too long on price/mix to drive growth, in our view. This has worked out well during the years of the Chinese bubble but we now believe the brand elevation strategies seen across most categories, particularly handbags and watches, have largely played out. As Chinese spending continues to slow, we believe luxury brands will have to rely more on volumes and less on price/mix. Because the addressable market both in volumes and value get smaller as price points get higher, we favour luxury companies with a strong brand equity and more affordable price points than their direct competitors. Current trading commentary across the sector suggests lower price point small leather goods are faring better than higher price point products. For example, LVMH highlighted at their 1Q sales update that for LV, the 'only category that did really much better than the rest on a consistent basis is small leather goods'.

We therefore like LV's exposure to lower price points relative to Gucci or Prada. We like that fact that LVMH (OP, €168 TP) did not discontinue its entry-price canvas offering, unlike other brands like Gucci. As a result, the ASP of €1,395 we calculated across SKUs for LV in France is lower than its two direct and largest luxury handbag peers, Prada and Gucci (see Figure 9). Looking at the SKU distribution for LV (see Figure 8), the affordability argument does not seem obvious. Our analysis shows that 36% of SKUs at LV are priced >€2,000 against 37% at Prada and 31% at Gucci. However, LV's strength is to have a relatively narrow range of affordable handbags, namely the canvas monogram bags, accounting for c.50% of total brand revenue, on our estimates. These are handbags whose ASP is €1,150 according to our analysis.

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Figure 8: We prefer brands with exposure to lower price points like LV

Figure 9: BV sits well ahead of peers on ASP and LV is the lowest among the three largest brands

Distribution of SKUs by price point on their European online store ASP for luxury handbag brands on their European online store (in €)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Louis Vuitton

Gucci

Bottega Veneta

SL

Burberry

Tod's

Ferragamo

Prada

<1000 1000-2000 2000-3000 3000+

2,309

1,703 1,527

1,395 1,318 1,294 1,288 1,254

Bottega Veneta Prada Gucci Louis Vuitton Burberry Tod's Ferragamo SL

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Among US brands, Michael Kors (N, $57 TP) skews towards the low end of the price umbrella. Over 60% of core handbag styles at Michael Kors are initially priced below $300. Conversely, at Coach and Kate Spade, over 60% of styles are priced above $300. Equivalent to €342, the US names are clearly even more skewed to the accessible luxury space. We favour US brands which dominate this space with higher initial price points and believe that the ability to maintain a healthy pricing structure, with a combination of solid ASPs and limited markdowns, helps reinforce brand equity.

Figure 10: Michael Kors has over 60% of core line MMK handbags priced under $300 in the US

Figure 11: Among US brands, Coach has the highest ASP across all regions

Distribution of SKUs by price point on their US online store ASP for US handbag brands (in $)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Coach

Michael Kors

Kate Spade

<$200 $200-300 $300-500 $500+

349

528 545

741670

289325

367

474511

336378 384

569

USA Europe UK China Japan

Coach Michael Kors Kate Spade


Coach (N, $42 TP) maintains top pricing stance globally out of the affordable luxury set. In our analysis of three premium U.S. based handbag brands, initial price points were highest at Coach across all regions. Kate Spade ranked 2nd and Michael Kors was positioned with the lowest price point across all the geographies. We believe these affordable luxury brands work best when they strike an appropriate balance between the luxury and low end markets. We believe quality and brand status command pricing power, and our data indicates that Coach and Kate Spade have similar strong pricing structures, while Michael Kors falls toward the lower end of the “Accessible Luxury” brand curve.

The small Italian brands are exposed to wide price gaps BV and SL carry the lowest price differentials in China. From our analysis of the European luxury brands, BV and SL have the lowest price differentials between Mainland China and Europe, at 19% and 21% respectively (see Figure 12). This makes sense given Kering's recent focus around the topic and the 10-13% price cut taken at BV (on our

13 May 2016


numbers this would mean a 37% price differential prior to the price cut). Note however this puts the price differential below that required to cover taxes in the region, which could result in negative margin implications. We would note here that the analysis for Gucci might be slightly distorted as there is no e-commerce website for China. We have used net-a-porter and store checks.

Figure 12: Italian luxury names and US names carry significant price differentials

Figure 13: LV and SL have the smallest price gap between HK and China

Price differentials between China and their home markets (=100) Price differentials between China/HK and Europe (=100)

183 181

149140 139

132 128 126 121 119

Coach MichaelKors

Tod's Gucci Ferragamo Burberry LouisVuitton

Prada SL BottegaVeneta

140

126119

129 128120

112105

122 123

Gucci Prada Bottega Veneta Burberry Louis Vuitton

China HK

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates, other brands lack the relevant ecommerce sites to carry out the analysis.

LV has a healthy price positioning in China. Given LV has not needed to carry out a price cut like BV, it has one of the healthiest pricing differentials of the brands we looked at. The current price differential sits at 28%, in line with what is required to cover taxes. Therefore, we see limited risk of LV having to cut prices in China.

And LV's price gap between HK and China also seems healthy. Additionally we can compare the price differential of China vs. Europe to that of Hong Kong vs. Europe (see Figure 13). Brands on the left of the chart have a greater difference between the average price differential in Mainland China compared to Hong Kong, while those on the right have a smaller difference. Although brands on the left could perhaps benefit from increased demand in Hong Kong due to the greater price difference, brands on the right will benefit more in Mainland China. Given the current low traffic flow into HK, we prefer the later strategy.

The smaller Italian Luxury brands carry hefty price premiums. As highlighted in our downgrade of Ferragamo to Neutral (see Italian Luxury: Losing evidence for further outperformance Apr-2016) the Italian luxury names seem to be particularly poorly positioned. Our analysis suggests both Tod's and Ferragamo appear to carry prices in China c.50% higher than in Europe. We believe this will prove to be a strong headwind to volume recovery in the region, and both brands are likely to suffer as domestic Chinese consumer spending increases.

We carried sensitivity scenarios around price cuts. Brands most at risk of having to cut prices are the ones whose price gap between their home market and China is in excess of 30%, in our view. In European luxury, this is the case for Gucci, Ferragamo and Tod's. Therefore, we look at the direct financial impact of these three brands after lowering prices in China to be aligned with a 30% price differential. We carry out two scenarios: (i) assuming no volumes uplift and (ii) assuming half of the price decrease is recouped in volumes. The financial impact may seem fairly manageable at first (see Figure 14). But, the sales opportunity these companies forgo due to hefty price premiums in China, although is more difficult to assess, clearly curtails sales growth, in our view.

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Figure 14: Impact on the brand profit following price cuts in ChinaGucci Tod's Group Ferragamo

No volumes uplift scenario (2%) (3%) (3%)Volumes uplift scenario (1%) (2%) (2%)Source: Company data, Credit Suisse estimates

Price differentials in Japan and the US look less favourable for LV. For Japan and the US, LV has the second highest price differential. However, admittedly we are less concerned around this as Chinese tourist flows to both regions have started to suffer over the past few quarters. Burberry has the highest price differential in Japan, and this is compounded by its relatively small retail presence but probably in part due to the brand elevation strategy the company has been deploying. Tod's stands out again in the US with prices 39% higher than in Europe, double the average of the peer group at 17%.

Figure 15: Burberry has the most extreme price gap in Japan, Gucci the lowest Figure 16: Tod's has a considerable price gap in US Price differentials between Japan and their home markets (=100) Price differentials between the US and their home markets (=100)

132 130 127 126 125114

105

Burberry Louis Vuitton Bottega Veneta Prada SL Ferragamo Gucci

139

119 119 117111 111 110 108

Tod's Louis Vuitton SL Ferragamo Gucci Prada Burberry Bottega Veneta


Price differentials vs. home market are much larger for US names vs. European. Our data set indicates that U.S handbag brands are putting about an 80% premium on products in China and about 65% premium on products in Japan compared to the home U.S. market. This is much higher than European luxury brands with a 34% premium in China and about 22% in Japan.

Figure 17: US brands still carry hefty premiums… Figure 18: … well above European brandsRelative average handbag price relative to the US market (=100) Relative avg. handbag price relative to the European market (=100)

100

134 134

183173

100

122135

181166

100

128 130

156

100

128 133

182

165

USA Europe UK China Japan

Coach Michael Kors Kate Spade Average

100 103

131 122

116 116

Europe UK China Japan US HK


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Global Luxury G

oods10

Figure 19: European luxury brands pricing survey dataAverage price in local currency unless stated Average price level compared to Europe Standard deviation as % of average price level

Europe UK China Japan US HK Europe UK China Japan US HK Europe UK China Japan US HKLouis Vuitton 1,395 1,163 14,426 218,325 1,889 14,870 100 105 128 130 119 123 NA 2% 9% 4% 5% 10%Gucci 1,527 1,184 $2,287 $1,750 1,909 14,789 100 98 140 105 111 120 NA 4% 11% 11% 8% 10%Bottega Veneta 2,309 1,881 21,123 356,251 2,847 20,554 100 103 119 127 108 105 NA 6% 7% 10% 10% 3%SL 1,254 1,004 11,821 196,119 1,715 13,266 100 101 121 125 119 116 NA 3% 10% 11% 5% 7%Burberry 1,318 1,027 12,299 216,971 1,592 14,695 100 98 129 132 110 122 NA 4% 16% 7% 5% 8%Tod's 1,294 1,169 13,357 N/A 2,058 N/A 100 114 149 N/A 139 N/A NA 3% 1% N/A 2% N/A Ferragamo 1,288 1,138 12,288 214,445 1,633 N/A 100 103 139 114 117 N/A NA 10% 8% 16% 5% N/A Prada 1,703 1,351 19,345 258,059 2,170 20,389 100 100 126 126 111 112 NA 6% 17% 10% 8% 6%Source: Company data, Credit Suisse estimates

Figure 20: European luxury brands pricing survey dataNumber of SKUs Price buckets by brand in Europe, €

Europe UK China Japan US HK <€1000 €1000-2000 €2000-3000 €3000+Louis Vuitton 198 198 173 182 179 179 22% 43% 18% 18%Gucci 134 134 26 27 110 28 19% 50% 24% 7%Bottega Veneta 43 43 43 40 42 32 0% 26% 53% 21%SL 49 49 49 49 49 47 22% 71% 6% 0%Burberry 98 98 71 97 78 97 22% 58% 15% 4%Tod's 61 61 27 N/A 53 N/A 20% 64% 11% 5%Ferragamo 100 100 29 52 54 N/A 27% 54% 16% 3%Prada 122 122 12 96 107 11 2% 61% 30% 7%Source: Company data, Credit Suisse estimates

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Figure 21: US luxury brands pricing survey dataAverage price ($) using spot FX conversions Premium to US prices

USA Europe UK China Japan USA Europe UK China JapanCoach 349 528 545 741 670 100 134 134 183 173Michael Kors 289 325 367 474 511 100 122 135 181 166Kate Spade 336 378 384 N/A 569 100 128 130 N/A 156Source: Company data, Credit Suisse estimates

Figure 22: US luxury brands pricing survey dataNumber of SKUs Price buckets by brand in US, $

USA Europe UK China Japan <$200 $200-300 $300-500 $500+Coach 69 26 24 48 47 7.2% 30.4% 36.2% 26.1%Michael Kors 86 18 23 10 15 10.5% 51.2% 38.4% 0.0%Kate Spade 104 61 61 0 52 7.7% 27.9% 51.0% 13.5%Source: Company data, Credit Suisse estimates

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Companies Mentioned (Price as of 11-May-2016)Burberry Group (BRBY.L, 1169.0p)Coach Inc (COH.N, $38.18)Hugo Boss (BOSSn.DE, €55.89)Kering (PRTP.PA, €144.35)LVMH (LVMH.PA, €146.45)Liz Claiborne, Inc. (KATE.N, $22.17)Michael Kors (KORS.N, $44.01)Moncler SpA (MONC.MI, €15.66)PRADA S.p.A. (1913.HK, HK$27.15)Salvatore Ferragamo Spa (SFER.MI, €19.94)Tod’s Group Spa (TOD.MI, €61.0)

Disclosure AppendixImportant Global Disclosures Guillaume Gauvillé, CFA, Christian Buss and Isis Wong each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activitiesAs of December 10, 2012 Analysts’ stock rating are defined as follows:Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings DistributionRating Versus universe (%) Of which banking clients (%)Outperform/Buy* 57% (37% banking clients)Neutral/Hold* 33% (24% banking clients)Underperform/Sell* 9% (44% banking clients)Restricted 1%*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Referendum. This material does not constitute, and should not be interpreted as, a recommendation by Credit Suisse as to the merits of a particular outcome of the Referendum.See the Companies Mentioned section for full company names The subject company (LVMH.PA, PRTP.PA, BRBY.L, 1913.HK, COH.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (LVMH.PA, PRTP.PA, BRBY.L, TOD.MI, 1913.HK, COH.N) within the next 3 months.As of the date of this report, Credit Suisse makes a market in the following subject companies (COH.N, KORS.N, KATE.N).As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (BRBY.L).For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.The following disclosed European company/ies have estimates that comply with IFRS: (PRTP.PA, BOSSn.DE).As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.Principal is not guaranteed in the case of equities because equity prices are variable.Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.Credit Suisse (Hong Kong) Limited ................................................................................................................................................Isis Wong ; Ivy JiCredit Suisse International ...................................................................................................................Guillaume Gauvillé, CFA ; Catherine TillsonFor Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

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