Folli Follie Group, (ATH: FFGRP) Current Market Price: 13.76 Address Folli Follie Group (HELLENIC DUTY FREE SHOPS S.A.) 23rd Km., N.R. Athens-Lamia, 145 65 Ag. Stefanos- Attica, Greece Tel: +30 210 6269400 Fax: +30 210 6269600 Website Exchange Industry Market Cap http://www.dutyfreeshops.gr ATHENS STOCK EXCHANGE Retail (Specialty) 923.89 52 Week Range 3.18-14.40 Beta 1.39 Price/Book 0.0 Price/Earnings (Forward-2012) 7.2 Price/Earnings 4.4 (at current prices) Fundamental Analysis Industry Analysis A department store typically sells items such as clothing, cosmetics, footwear, and jewelry making it a subset of the larger retail industry. Companies in the department stores industry operate physical retail establishments usually within individual departments. Retail & wholesale industry is one of the prominent in Greek economy accounting for 19 percent of total GVA and 18 percent of employment. Since the crisis started in 2007, the apparel/footwear market alone shrank by 50 percent in Greece. The fear of a Eurozone meltdown faded the optimism. Economic growth plummeted with the economy slipping into recession. However the first quarter of 2012 witnessed improvement in the retail business with positive retail spending trends. From retail industry point of view, spending appeared reasonably well and was aided by promotions and sales made through online channels. Department stores in particular outperformed with growth strengthened by the electrical sector. Although in other categories underlying demand has remained weak with spending related to household market. According to provisional data of Hellenic Statistical Authority, the turnover index in retail trade at its current prices, excluding automotive fuel, recorded a decrease of 17.2 percent in November 2012 compared with November 2011. While the volume of retail trade (i.e. turnover in retail trade at constant prices), excluding automotive fuel, decreased by 16.9 percent in November 2012, compared with November 2011. Again the turnover index in retail trade of department stores decreased by 4 percent to 85.9 percent in November 2012 compared to 89.7 percent in November 2011. According to a ReportLinker report, specialty stores market growth in expected to grow to an annual rate of slightly more than 1.5 percent between 2010 and 2015, bringing the market to $524 billion by 2015. Moreover according to Global Industry Analysts, the global footwear market is expected to reach $195 billion by 2015. Market growth is predicted to rebound as consumer confidence builds in the post-recession economy. According to Euro monitor s Apparel in Greece report, Greek consumers are indicating a preference for international brands. McKinsey in its 2012 report Greece: Ten Years Ahead estimated that the retail productivity could increase by 22 per cent over the next decade, and annual retail sales, which include groceries, apparel, and appliances could increase by 1.5 billion euros.
According to BDO Retail Forecasts 2013, the outlook for 2013 looks uncertain. Although there are some signs of anticipated economic recovery, this optimism was tempered by several false dawns; in 2009 similar optimistic signs were displayed and quickly faded the recovery optimism. Moreover consumer confidence is expected to suffer as a result of further austerity measures. According to Cushman & Wakefield s, Greece's retail snapshot outlook, trading conditions will be highly challenging in the coming months, and occupier and investor demand are expected to be subdued for the foreseeable future. According to AT Kearny Global Expansion retail report, the retail industry is expected to witness growth in most of the countries of the world such as China, India, Turkey, Japan and many other Asian countries like UAE, Indonesia, Malaysia etc. There is also a prospect of e-retailing in the coming years. With household penetration of internet retailing is growing, non-store retailing is set to contribute most to growth in retailing. Customers will appreciate the price levels and convenience of internet retailing, as well as the low cost that comes from shopping from home. Industry PEST Analysis Key growth drivers of FOLLI FOLLIE GROUP
The company s various segments contribute to its strengthening of revenue. 1. Jewelry, Watches and Accessories- the Company has brands like Folli Follie and Links of London, with a strong presence in Asia, Japan, Europe and the U.S. Folli Follie is a Greek brand which designs, manufactures and distributes jewelry, watches and fashion accessories. While Links of London is the iconic international jewelry brand that captures London s wit, spirit and heart. In the nine months period of FY2012, the segment contributed 51.2 percent of the total revenue. This segment registered revenue increase by 18.5 percent compared to the same period of FY2011, throughout all regions. The segment also added 13 new POS in its kitty which now stands to 508 POS. 2. Hellenic Duty Free Shops -Travel Retail- Hellenic Duty Free Shops offers travelers the most amazing shopping experience. The branded products, always available at competitive prices, list Hellenic Duty Free Shops is the No 1 shopping destination for Greek and foreign travelers, visiting Greece. HELLENIC DUTY FREE SHOPS S.A. is the exclusive duty free operator in Greece. This segment contributed 28.6percent of the total revenue in the nine months period of FY2012. The segment also witness 5.1 percent increment in revenue compared to the same period of previous fiscal amid fall of passenger departures by 6.1 percent while there was increase of passenger departures by 8.4 percent the same period of 2011. Duty Free Sales reached 62.3 percent against 37.7 percent during the nine months period ended September 2012. 3. Department Stores the Group is active in the retail field with department stores and Outlet stores. In the nine-month period, the segment s contribution amounted to 10.6 percent. During the nine-monthsperiod of FY2012, this segment registered a decline in revenue by 4.7 percent compared to same period of FY2011. However in Q3 revenue increased by 1.4 percent. 4. Wholesale and Retail - FF Group is active in the wholesale and retail field and exclusively introduces and distributes aspiring fashion apparel, footwear and accessory brands in the Greece, Cyprus, Romania and Bulgaria. It has an impressive retail network in Greece, Romania and Bulgaria comprising of concept stores, mono-brand boutiques and multi-brand fashion stores. Meanwhile a network of exclusive Converse stores is under development. This segment contributes 9.2 percent of the total revenue in the nine-month period ended Sept 2012. This segment witnessed decline in revenue by 8.6 percent in the nine-month period of FY2012 compared to same period of FY2011 due to reluctance of private consumption. 5. Other Activities-this segment includes a wide product range. It represents the Italian firm TechnoGym in Greece. It also represents and sells motorcycles and accessories of Harley-Davidson and Buell, whereas it has developed an autonomous commercial department which deals with the import and distribution of surveillance and security systems. Planaco yacht yard also comes under this segment. This segment is not a major contributor of revenue and contributes a meager 0.4 percent to the company's total revenues during the nine months period of FY2012. The segment also did not perform quite well during the last nine-month period ended Sept 2012 registering a decrease in revenue by 26.8 percent compared to the same period of previous fiscal. SWOT Analysis of FOLLI FOLLIE GROUP
Company Analysis Folli Follie Group is an Athens based diversified retail group and has a presence in the most fashionable streets of the world s major cosmopolitan cities such as London, Hong Kong, New York, Dubai, Athens, Beijing, Seoul, and Honolulu. It designs, manufactures and distributes jewelry, watches and fashion accessories. It creates fashion in 24 countries with more than 488 points of sale worldwide. It has Hellenic Duty Free Shops S.A. under the distinctive title FOLLI FOLLIE Group (FF Group). Folli Follie operates more than 54 points of sale, in Athens and in the rest of Greece several shopping Centers. Folli Follie Group has consistently performed well despite operating in harsh economic conditions especially in Greece and other challenging European countries. It continued its enhanced performance for the last one year. In its Q3 FY 2012 report, the company registered a strong nine- month s performance where sales revenues year on year increased by 8.5 percent amounted to 841.5m compared to 775.5 million of the corresponding period of previous fiscal 2011.
The company s jewelry, watches and accessories business registered revenue increase by 18.5 percent, throughout all regions, at constant currency rates. Following the path of jewelry, watches and accessories business, its travel retail business also registered an increase of 5.1 percent in revenue in the nine-month period of FY 2012 amounted to 240.7 million against 229 million in the previous year same period, amid decline in in passenger departures. Duty Free Sales rose to 62.3 percent against 37.7 perecnt indicating dominance in sales mix. Further in this segment spending by customer increased by 4.2 percent from 39.36 in 9M 2011 to 41.02 in 9M 2012. Folli Follie brand also added 13 new POS which now totaled to 508 POS as of September 2012. However Retail & Wholesale, Department Stores and Other Activities reported negative revenue growth of -8.6 [percent, -4.7 percent and -26.8 percent respectively in the nine-month period ending September 2012 against the corresponding period of FY2011. The decline in retail Retail/Wholesale is contributed to the reluctance of private consumption, owing to the implementation of further harsh fiscal measures, remuneration, coupled with a persistent rise in unemployment. Department stores Q3 revenues increased by 1.4 percent, compared to a decline of 3.4 percent in Q2 and a decline of 11.5% in Q1, impacted by Attica North which contributed with 6.3m to revenues since its start in early March 2012. The Jewelry, Watches Accessories segment contributed a whopping 51.2 percent to the total revenues of the group, while Travel Retail, Retail/Wholesale, Department Stores and other activities made contribution of 28.6 percent, 9.2 percent, 10.6 percent and 0.4 percent respectively to the total revenues of the group. The Group reported an increase of 7.0 percent in EBITDA which amounted to 171.9 million in nine month s period ended in September 2012 against 160.9 million reported in corresponding period of previous fiscal. Profit before tax increased by 10.2% to 114.2 million in nine months period of FY 2012. In the Q3 report, the group also reported considerable increase in costs. The company registered Selling expenses up by 4.1 percent which amounted to 224.8 million. Administrative expenses also increased by 36.1% totaled at 52.8 million against 38.8 million reported in corresponding period of previous fiscal.
The group also registered an increase in income taxes by 15.5 percent amounted to 24.6 million in nine months ended September 2012 compared to 21.3 million for the same period of previous fiscal. Amortization and Depreciation also increased by 9.9 percent during the period in consideration. The group's share of net profit increased by 8.8 percent to 88.7 million in nine months period of 2012 against 81.5 million reported in same period of previous fiscal. On assets and liabilities side, the company reported marginal increase total assets as of Sept 12 compared to same in December 2011. Cash and cash equivalents also registered an increment of 13 million. The total liabilities also witnessed marginal increase of 12 million as of Sept 2012 compared to respective balance in December 2011, while the current liabilities reported witnessed significant increase of 116 million compared to the respective balance as of December 31, 2012. However, the non-current liabilities also witness significant decline of 109 million as of September 2012 compared to December 2012 respective balance. Moreover the company s trailing twelve-month net margin increased by 8.46 percent and return on assets by 5.35 percent as per 2010 figures. The share of the company registered year on change in prices at 72.00 percent. However Folli s PE is lower than the industry average while its PE stands at 4.4 whereas industry average stands at 344.8. The company s TTM financial leverage stands at 2.23. George Koutsolioutsos CEO of the Group said, Our Group continued to successfully implement its strategy, which again yielded results. We remain very confident for the entire year, as already in first 9 months of 2012; Group net profits reached 88.7 million, approaching 2011 full year s level with reported net profits of 89.5 million. The management is optimistic about another positive year despite harsh economic conditions. It is expected the group will significantly improve upon the last years result. Source: FT Website The above graph reflects that the stock is consistently showing improved performance - barring some incidences where stock witnessed downward movement. The stock touched its lowest level somewhere in June 2012 and then regained its lost momentum. However since July 2012, the stock returned to the growth trajectory performing consistently well. The company expects to strengthen its bottom line for the entire year with addition of three more Folli Follie brand POS. Further the company s sale of 51% of the travel retail business to Dufry A.G. will give impetus to its strengthening of business. We believe the stock will continue its improved performance at least till the end of this fiscal. (unaudited) Q3 ended Sep 30, 2012 in 000 s (unaudited) Q2 ended 30 June 12 in 000 s (unaudited) Q1 ended 31 Mar 12 in 000 s (unaudited) Year ended 31Dec 11 in 000 s Revenue Earnings per share Euro (Basic) Book Value Per Share Euro Operating Margin Return on Equity Return on Assets Net Margin Asset Turnover Leverage 308,650 303,581 229,305 1,021,417 1.36 0.549 0.460 0.335 0.011 - - - 19.26% 16.38% 18.62% 17.03% 4.42% 3.80% 2.99% 12.34% 2.01% 1.71% 1.28% 5.30% 11.86% 10.17% 9.66% 8.94% 0.17 0.17 0.13 0.59 2.20 2.23 2.34 2.33
Key Data DuPont Analysis ROE=Net Profit Margin x Total Asset Turnover x Leverage The return on equity in Q3 FY 2012 increased marginally due to the significant increase in its net margin. Quarter to quarter asset turnover has not changed but net margin propelled ROE to increase. However leverage decreased marginally, while the operating margin registering increase compared to Q1 & Q2 and even the full year 2011. Net margin is also up in Q3 compared to the net margin of periods in table consideration. It is expected that this pattern will continue and leverage and return on assets will go up with increased sale from additions of stores and improved economic conditions in Greece in particular and other economies in general where the company operates especially European economies. Important Highlights 3Q FY2012 Financial Highlights Revenues in 9M FY2012 increased by 8.5% to 841.5 million from 775.5 million compared to previous corresponding period. Gross profit increased by 8.6% to 417.5 million. Operating profit up by of 6.4% amounted to 151.8 million against 142.7 million in 2011. Cash and Cash equivalents increased to 148,773,009 in September 30, 2012 compared to 135,501,551 in Dec 31,2011 Profits before taxes reached 114.2 million in Q3 2012 against 103.7 in Q3 2011 registering an increase of 10.2%. EBITDA amounted to 171.9 million up by 6.9%, from 160 million previous fiscal s nine months period EPS increased to 1.34 in 9M FY2012 against 1.22 in the corresponding period of 2011. Cost of revenues increased by 7.9% million totaled at JPY 40,961 million in 1H FY2012 compared to JPY 37,971 million in 1H FY2011. Selling, General and administrative and R& D expenses increased marginally by 1.4% to JPY 6,885 million in 1H FY2012. Jewelry, watches and accessories revenues increased significantly by 18.5% to 430.6 million in 9M FY 2012. Retail sales of the travel retail segment increased by 5.1% to 240.8 million in September 2012 from 229 million of the corresponding period of 2011. Wholesale sales for the Q3 2012 declined by 15% to 15.2 million from 17.9 million of the corresponding period of previous fiscal Department store revenues down by 4.6% to 89.5 million in Q3 2012. Retail/Wholesale of footwear and apparel revenues down by 8.6% to 77.7 million Addition of three more Folli Follie brand POS which now reached to 508 POS Operational Highlights Relative Valuation Industry FFGRP 5JB KSS M JWN SRHGY WLWHY
Market Cap $923.89 Revenue (2011) 1,021 Euro Price/Earnings TTM $980.6 490 Euro $10.6 Billion 18,391 USD $15.8 Billion 25,003 USD $11.2 Billion 9,700 USD $11 Billion 72,298 ZAR $6.4 Billion 25,582 ZAR 4.4 10.0 10.5 12.2 17.0 31.0 25.8 Price/Book 0.0 1.7 1.7 2.8 5.9 7.6 12.4 Price/Sales TTM 0.0 2.0 0.6 0.6 1.0 1.1 1.8 Rev Growth (3 Yr Avg) EPS Growth (3 Yr Avg) Operating Margin % TTM Net Margin % TTM 11.9 6.6 4.7 2.0 8.3 11.7 9.3-14.3 4.1 14.2 0.0 19.7 15.2 19.4 15.8 24.2 10.6 9.4 10.8 5.5 9.4 8.5 19.7 5.6 5.0 5.9 3.7 7.2 ROE TTM 13.9 18.6 16.9 23.6 36.4 30.3 47.3 Debt/Equity 0.3 0.3 0.7 1.2 1.7 0.3 0.0 Price/Earnings 344.8 4.4 10.0 10.5 12.2 17.0 31.0 25.8 Price/Book 2.2 0.0 1.7 1.7 2.8 5.9 7.6 12.4 Price/Sales 0.4 0.0 2.0 0.6 0.6 1.0 1.1 1.8 Price/Cash Flow 8.6-13.2 6.4 7.0 11.0 28.1 31.8 Dividend Yield % 1.6 - - 2.8 2.0 1.9 - - (Data Source: www.morningstar.com)
In spite of the challenging environment in Greece, Folli Follie Group has grown considerably over the years. As evident from the above table, its Operating Margin TTM, net margin TTM, ROE TTM is considerably good compared to its peer companies. It has even outperformed the industry in Revenue Growth (3 Year Avg.). Its debt to equity ratio is also not so bad considering the challenging situation the firm confronting. It has the second highest Operating Margin TTM and net margin TTM. The company has considerably good performance with respect to debt to equity. It is expected that Folli Follie will continue its improved performance and even better off in near future with improved economic conditions in Greece. Fair Price Calculation Profit and Loss Estimates Thousan ds of Euro except per share amounts Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Conserv ative Full Year 2012 Optimist ic Turnover 414115 617109 632947 9,89,60 1 1021417 1196484 1211916 Cost of goods -203358-315103 -331640-491095 -504899-602685 -607144 Gross Profit 210757 302006 301306 498506 516518 593799 604773 Other operatin g income 15310 25950 26293 33056 26420 28509 25323 Administ ration expense s -34418-40398 -39198-55526 -56618-75696 -73364 Selling expense s -127852-197259 -203686-297811 -305676-334830 -335610 Other operatin g expense s -2284-6515 -4539-6552 -6668-6333 -6167 Operatin g income 61513 83784 80176 171673 173977 205448 214952 Financial income -5862 1983 1501 23575 15574 4666 8148 Financial expense s -23305-19280 -70536-67613 -54680-64595 Profit/Lo ss (before the tax) 55651 62462 62397 124712 121938 155370 158441 Income tax -21015-15330 -24568-39607 -30649-37769 -35790 Deferred Tax 73 73 Profit/Lo 34635 47131 37828 85105 91289 117673 122725
ss (after the tax) Deprecia tion & amortiza tion 8323 13137 15324 21675 24771 27970 29019 Net of taxes other compreh ensive income( Loss) -5240-64 15967 25197 1469 8319 Total compreh ensive income after taxes 41892 37764 101072 116486 113205 131043 Profit is attributa ble to: Sharehol ders of the parent compan y 33632 43106 35426 83279 89519 115629 121197 Non controlli ng interests 1003 4026 2402 1825 1770 2044 1528 Total 34635 47131 37828 85105 91289 117673 122725 Growth rates and Cost of Equity Calculations ROA 5.6% Retention Ratio 80.0% Debt/equity 2.65 Interest rate 8.0% Tax Rate 30.0% Fundamental Growth Rate 4.6% Income Growth Rates Forecast High Growth Period Weight Analysts (Source) FT.Com 28% 0.2 10 Years CAGR 20% 0.3 Fundamental Growth Rate 5% 0.5 Weighted Average Forecasted Growth Rates 13.86% Expected Debt Ratio 0.71
Beta 1.38 Risk Free Rate 3% Return from Market 13% 3 Yr Avg Return S&P500 Cost of equity 17% Free cash flow to equity and Fair Price Calculation Free cash flow calculatio n (Pessimis tic) All Figures in '000s except per share data High Growth Stable Year 2012 E 2013 E 2014 E 2015 E 2017 Onwards Growth in Revenue 13.86% 13.86% 13.86% 4.0% Net Sales 11,96,484 16,06,649 17,33,622 18,70,630 20,18,465 Depreciat ion 27,970 35,909 38,747 41,809 45,113 Net Income 1,17,673 1,26,973 1,37,008 1,47,836 1,59,519 CAPEX 14,190 48,116 51,918 56,022 60,449 Change in Non Cash Working Capital 18,302 82,845 89,392 96,457 1,04,080 Cash Flow to equity 1,19,005 1,54,952 1,67,198 1,80,412 1,94,670 Cost of Equity 17% 17% 17% 17% 17% Terminal value $ 14,70,138 Present value of cash flows 1,01,504 1,12,729 1,03,750 7,45,109
FCFE (In '000) 10,63,092 No of shares (in '000) 66,015 Share price per share acc to valuation Conservat ive 16.10 Current Market Price 13.76 Return 17% Free cash flow calculation (Optimisti c) All Figures in '000s except per share data High Growth Stable Year 2012 E 2013 E 2014 E 2016E 2016 Onwards Growth in Revenue 13.86% 13.86% 13.86% 4.0% Net Sales 12,11,916 13,79,908 15,71,187 17,88,980 18,60,539 Depreciati on 29,019 33,465 38,104 43,386 45,121 Net Income 1,22,725 1,23,329 1,40,425 1,59,890 1,66,285 CAPEX 14,520 49,321 56,158 63,942 66,500 Change in Working Capital 19,098 71,153 81,016 92,247 95,936 Cash Flow to equity 1,24,078 1,48,941 1,69,587 1,93,094 2,00,818 Cost of Equity 17% 17% 17% 17% 17%
Terminal value $ 15,16,570 Present value of cash flows 1,05,831 1,08,355 1,05,232 7,71,795 FCFE (In '000) 10,91,214 No of shares (In '000) 66,015 Share price per share acc to valuation Conservati ve 16.53 Current Market Price 13.76 Return 20% RISK ANALYSIS Mean Monthly Return = 1.36% Standard Deviation = 12.2% Beta = 1.39 VaR (Value at Risk) Analysis Comments: On analyzing the monthly return data of last 3 Years, the results are as per the standards of the retail industry. The mean monthly return is found to be 1.36 percent. The VaR at 95 percent confidence is found to be -25 percent as shown in the chart above. This shows that there is 5% chance that an investment made in the stock might lose more than 25 percent in a month. Considering the risk in this cyclic retail industry, we find lower risk to an investor when compared to the expected returns from our analysis.