SINGAPORE (May 13): Following an acquisition spree between 2012 and 2016, luggage maker Samsonite International has cemented its position as the market leader in the industry. With multiple brands and product ranges, the company’s focus now is to build on each of these acquisitions and grow a larger customer base.
Besides its core Samsonite brand, the company owns Tumi, American Tourister and other brands such as Lipault and Gregory. “We own the top three luggage brands in the world today. So, if you ask me…I don’t see why we should acquire -anything else [in the luggage space],” says Subrata Dutta, the company’s president for Asia--Pacific, in an interview with The Edge Singapore.
The acquisitions helped boost top-line growth. The US$1.8 billion ($2.5 billion) acquisition of Tumi, in particular, made a significant impact. From FY2015 — the year before the acquisition — revenue rose 56% to US$3.8 billion in FY2018. Between FY2017 and FY2018, however, it hit a speed bump. While revenue grew 8.8%, higher overheads, distribution and marketing costs led to a near-30% y-o-y drop in earnings to US$236.7 million.
To assuage investors’ concerns, Hong Kong-listed Samsonite is paying a higher dividend of 8.73 US cents for FY2018, up from 7.71 US cents in FY2017. Year to date, Samsonite’s shares have lost 2.92% to close at HK$21.60 on May 6, giving the company a valuation of HK$30.9 billion ($5.4 -billion). At this level, the shares are trading at a historical price-to-earnings ratio of 16.5 times and forward PER of 13.6 times.
The company was founded in Colorado in the US 109 years ago. Private-equity firm CVC Capital Partners acquired it for about US$2 billion in 2007. In 2011, the company was listed on the Mainboard of the Hong Kong exchange. The listing venue was a clear indication of where the company saw its future. Millions of consumers in emerging markets such as Asia are not only starting to travel, but travelling with growing frequency.
In FY2018, Asia generated a total of US$1.3 billion, or nearly 35% of the company’s total revenue. Expanding at a pace of 10% between FY2017 and FY2018, the region had the highest growth.
Latin America, another emerging market, outpaced other markets with a 15.5% y-o-y increase to US$176 million. Europe, despite being a mature economy, managed to grow 8.6% to US$810 million in the same period.
The US, its home ground, brought in the highest revenue — about US$1.48 billion, or 39% of total revenue.
Focus on Asia
Dutta hopes for the Samsonite brand to continue to grow in Asia. “Asia will have people with the resources and will continue to have people who are fashion-oriented.”
While the Samsonite brand will remain the company’s core focus, Dutta says there are plans to grow Tumi and Lipault — two brands that have been performing well since their introduction to the region in 2016. Tumi caters to a younger demographic while the Parisian Lipault targets the “fashionable woman”. Both brands performed well in Asia in FY2018, with demand for Tumi’s bags growing nearly 30% y-o-y. China was the country in which the group’s sales picked up the most — nearly 7% y-o-y.
“In China, Tumi is grossly underleveraged. So, with direct control of distribution since April 2017, demand has improved, but we are working on developing it further to capture the big market the country [represents],” says Dutta. He is confident that when Tumi gains traction elsewhere in Asia, the region’s contribution to Samsonite’s overall revenue will reach 40%.
The company’s optimism on Asia stems from the growth potential underpinned by long-term trends that are well underway. According to the International Air Transport Authority (IATA), more than half of new passenger traffic between 2015 and 2035 will come from Asia-Pacific. Growth is particularly strong in China, which is seen to displace the US as the world’s largest aviation market come 2024.
India, Indonesia and Vietnam are also expected to have higher passenger traffic. IATA projects an additional 1.8 billion passengers, or 18% of total passengers, will be transported to, from and within Asia-Pacific, bringing the region’s travel growth to 4.7% a year.
Presumably, with more passengers taking to the skies, there will be increased growth in demand for luggage cases. Besides the bigger addressable market, Samsonite observes that consumers are changing their luggage cases more often: It used to be once in five years in 2015, but is now once in two years.
Such upbeat expectations mean that events such as Brexit and the US-China trade war that are a concern for other companies have, at most, a marginal impact on the company. “You can’t hold people back anymore; travel is going to grow. Our company has a presence at every possible channel, price point and subcategory, so we have not [felt] much of an effect,” says Dutta. More recently, Samsonite Malaysia, a wholly-owned subsidiary of Samsonite, announced a collaboration with e-commerce enabler Synagie Corp on May 6. The Mainboard-listed company will manage and automate the online sales of Samsonite’s brands in Malaysia through its integrated cloud-based platform.
The key challenge for Samsonite is to address the big differences in tastes and preferences among consumers in the region, and adjust its production and distribution systems accordingly. “Tastes in China are so different from Japan and South Korea. Likewise, Southeast Asian tastes are so different,” says Dutta, adding that this is a happy problem the company “is overcoming” through its diverse brands.
Besides riding the trend of higher travel demand, Samsonite is seeking out other fashionable ideas too. For one, it is trying to be “green” in the manufacturing of its products. For example, its factory in Nashik, West India is installed with a 1.46 million kWh solar cell that can provide about a third of its annual energy consumption. In addition, its eco-friendly range, Recyclex, is made of 100% post-consumer recycled plastic (PET) bottles. Depending on its size, each bag uses two to three PET bottles. The process of obtaining, refining and processing the PET bottles is arduous, but the company will not charge customers a premium. “Even if it were to cost us more, we will constantly use innovation to minimise that incremental cost,” says Dutta.
The company is putting more thought into the design process too. “Innovations would be on durability, the weight-to-strength ratio, the… features that would make the bag [suit] your personal requirements as well as the overall design,” he adds.
Samsonite wants consumers to think of luggage cases as a way to make a point. “Think of the characteristics that personify you, then look at various bags and check the fit. Ultimately, the bag is an extension of you,” says Dutta.
Downgrades by analysts
Sell-side analysts covering the stock are not as optimistic as Dutta, though. Following Samsonite’s 1Q earnings drop, brokerages such as HSBC, Morgan Stanley, DBS Bank, Deutsche Bank and Guotai Junan Securities have downgraded the stock to a “hold” or an “accumulate”. As at May 6, there were five “buy”, four “hold” and two “sell” calls on the stock.
Terry Hong of Guotai Junan Securities in Hong Kong notes that, besides traditional physical retail outlets, Samsonite is reaching out to more consumers in more markets via new sales platforms. Still, the company is growing below expectations. “Our outlook for its business development in 2019 is more pessimistic than our previous forecasts because the company expects 2019 revenue to grow y-o-y in a mid-single-digit percentage, which is lower than our previous forecasts,” writes Hong in a report. He has trimmed his price target to HK$28, from HK$31.
Anne Ling of Deutsche Bank agrees, adding that the year will not be smooth for the group. “Marginal declines in sales growth in 1QFY2019 and macro uncertainties in Europe, China and South Korea, in particular, could dampen the outlook in 2019, with weakness in consumer sentiment.” She adds that these issues may remain an overhang on the share price.
