Searching for Value Creating Growth in the Industry for Luxury Goods: A Valuation of Tod’s S.p.A.

Ingrid Ringen & Hedda Marie Dale

Student thesis: Master thesis

Abstract

This thesis assesses the performance of the Italian Group Tod’s and its likely developments in the future, as the company face new industry dynamics and macroeconomic challenges. Being prone to the economic cycle, the luxury goods industry is slowing. Lower organic growth, declining profitability and high volatility in sales-results are recurring feature among big and small players in the industry. An uncertain global economic environment, weaknesses in key markets and digitalization are the defining features. Responses identified are changes in distribution trends, continued consolidation and attempts to grow through portfolio momentum. Valuation consequences of the Group’s attempts to source profitable growth in this context are explored. Historical financial analysis reveals that Tod’s has experienced deteriorating profitability, accompanied by a decreasing share price, as a result of the aforementioned pressure. First, through an intrinsic valuation approach, a base case value for the company is determined. Modest growth is forecasted, but it is found that the value of securing ownership of a licensed asset increases prospects for growth in the long-term. However, the market value of the company does not significantly change, due to the high investment the purchase requires. The resulting share price is 60€/share, 1,5€ below the closing price on the valuation date. Results are checked for sensitivity, which highlights the large valuation consequences of changes in the model’s assumptions. As expected, alterations in WACC and growth rate cause large movements in the share price. In addition, the EBITDA margin is shown to have a large impact on company value. Secondly, a relative valuation approach extended the possible range of values. The price-based multiple implies a MVE in line with the base case DCF valuation. The price multiple calculated for Tod’s is in line with the harmonic mean for the peer group, while the EV multiples for the Group is below the harmonic mean. The company’s strategy to grow profitably in a challenging industry is further explored through a scenario analysis. From the strategy to expand a small product segment, six scenarios with different likelihood of occurrence were constructed. This resulted in a larger range of values. The expected value of these outcomes exceeds the base case valuation; a consequence of the large upside potential attached to successful diversification. However, the downside is deemed more likely to occur. It is concluded that Tod’s possesses the firm-specific expertise to succeed; however, they lack the necessary creativity and innovation to successfully leverage growth in the segment. Tod’s has long term potential, while in the medium-term it is not expected that Tod’s can defend its current price in the market. The future of the company hinges on a range of uncertainties that should be explored in further scenario analyses

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages167