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IPOs, the new must-have
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November 17, 2000: 11:17 a.m. ET
Luxury goods firms eye stock market listings to expand and shop
By Staff Writer Tara Duffy
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LONDON (CNNfn) - Next time you think of splurging a few hundred on a new handbag, you might consider putting the money in the designer's stock instead and watching your investment grow, rather than sporting it over your shoulder.
More and more European high-fashion and luxury-goods companies are setting their designs on the stock market to take advantage of historically high prices for shares of such companies. This way, they can raise funds to expand their distribution and do a little shopping of their own – on corporate acquisitions.
The companies involved are no small fry: Italian leather goods and fashion company Prada (formally known as I Pellettieri d'Italia SpA) recently confirmed it is considering floating between 25 and 30 percent of the firm next year, which analysts say could value it at around 15 trillion lira ($6.78 billion).
Great Universal Stores PLC, owner of the formerly stuffy trench coat maker Burberry's, is understood to be consider either floating or selling part of the
 now highly hip and profitable brand that puts its trademark tan, black and red checks on everything from bikinis to tiny jackets for your pet dog.
While fashionites generally pride themselves on being trendsetters, the luxe set have just starting to tune into the IPO boom, lagging high-technology companies by more than a couple seasons.
But they've chosen the right time to raise funds, analysts say.
"The reason companies want to go public now is that (luxury good stocks) are at record high valuations," said Claire Kent, luxury goods analyst at Morgan Stanley Dean Witter.
Shares in luxury goods firms have had a good year. Italy's high-end jeweler Bulgari SpA has risen some 75 percent in 2000, and at about  15.50 this week its shares change hands for about 50 to 65 times this year's earnings per share, based on analysts' estimates for this year's earnings.
Shares riding high
Other stocks in the sector also reflect investors' belief in their future earnings growth potential. Shares of French champagne-to-couture empire LVMH Moet Hennessy Louis Vuitton SA, meanwhile, trade on a price/earnings ratio of about 40 times, while Italian shoes and leather goods maker Gucci NV, which is listed in Amsterdam and New York, is worth about 28 times estimated earnings, based on Morgan Stanley forecast earnings for 2000. Investors use P/E ratios to assess the relative cheapness of a given share.
Italian leather goods maker Tod's SpA, owned by Diego Della Valle, recently made a splash in its debut on the Milan bourse, raising 300 million ($258 million) in an offering that was six times oversubscribed. The shares have risen by some 22 percent since their debut on the Milan bourse on Nov. 6. France's LVMH Moet Hennessy Louis Vuitton SA bought a 3.5 percent stake in the firm.
"Investors are clearly less enamored with the TMTs (technology, media, telecom shares) and are looking for other ways to replicate that high growth from other sources," said David Jennison, director of equity capital markets at investment bank Merrill Lynch, the financial advisor for Tod's IPO.
And analysts say more companies, including possibly Giorgio Armani SpA, owner of one of the world's most sought after fashion names, could be drawn into the market's fold over the next couple years either through share listings or by selling a stake to a company already traded on a stock exchange.
The rising prosperity of consumers in industrialized countries means the outlook for growth in the long term is positive.
 Sales in the sector have grown by between 7 and 8 percent over the last couple years. Companies like Gucci and LVMH, the maker of Moet et Chandon champagne and Louis Vuitton leather goods, are expected to far surpass that growth as more and more consumers are decking themselves out in the pricier, higher-quality, brand-name products from bags to boots.
"Customers are more interested in luxury items. Even people who are not rich are interested in luxury items. Gucci, Prada, Armani are now recognized in all sorts of places as a luxury brand," said Aurelio Matrone, analyst at Mediobanca.
"In the long term, there are many factors that will help the luxury market, the creation of new wealth and the Asian tourist boom," said Morgan Stanley Dean Witter's Kent.
To be sure, in the in the nearer term, companies aiming at a well-heeled audience may face the threat of a slowdown in economic growth in Japan, which analysts say accounts for some 40 percent of the luxury goods market, and the U.S.
Kent says she has a short term rating of neutral-to-negative on the sector.
"Any luxury company is susceptible to a slowdown in the U.S. or Japan," said Kent. "The macro issues are really more important for a luxury company."
Analysts also warn that luxury companies can be limited in their growth potential by the need to preserve the cachet of their brands: expanding too much can dilute the upscale image that explains a large part of their appeal.
Merger wrangles
Growing by takeovers, an approach common in sectors from banking to high-technology, may not be an ideal solution in the fashion and luxury business. The high rollers of this image-conscious world don't always mix.
Gucci is entangled in court cases with LVMH, which owns 20.6 percent of the firm, as two of Europe's wealthiest businessmen clash. Gucci, which is 42 percent owned by French retailer Pinault-Printemps-Redoute SA, is trying to kick LVMH out of the firm. LVMH wants the courts to annul a ruling that gave PPR control of Gucci.
LVMH Chairman Bernard Arnault and his family own 47 percent stake worth about 19 billion ($16.7 billion) in his firm. Against him, founder Francois Pinault's investment firm has a 45 percent stake in the retail giant, valued at more than 11 billion.
Gucci, which is sitting on some $2.5 billion in cash, is also looking to acquire other luxury goods companies, but has stayed mum on when and what.
Prada's head Patrizio Bertelli said the company doesn't plan a string of acquisitions to rival LVMH's reach.
"We do not have a strategy to become an empire," he said.
Others are wary of having to give up control through a listing or merger. Armani, named Italy's richest man earlier this month by Italian weekly magazine Panorama, has reportedly not ruled out a flotation, but also doesn't consider it a priority to take the company public or seek a merger.
"It would be very hard for me to do things somebody else's way," Armani has said.
Armani is ranked as the world's 70th most valuable brand, worth $1.5 billion according to a survey by Interbrand Newell and Sorrell and Citibank. LVMH comes in at number 34 while Gucci was ranked 44th, in the report, which values how much a company derives from its brand-related business.
--from staff and wire reports 
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