Market Performer Price:¤2.5 Stretchy but not Ladder

Transcription

Initiation of Coverage
Market Performer
Price:¤2.5
29 October 2001
Sector
Market Cap
Free Float
Reuters Code
12-Mth Range
Textiles
¤62.2m
49%
CSP.MI
¤1.97-4.79
¤m
2000
2001E
2002E
2003E
Sales
EBITDA
160.4
19.3
172.6
21.1
185.0
27.0
198.2
30.8
EBITDA margin
EBIT
12.0%
7.4
12.2%
7.4
14.6%
12.0
15.6%
15.5
4.6%
2.9
0.3
4.3%
2.1
2.1
6.5%
4.8
4.8
7.8%
7.0
7.0
EBIT margin
Net Profit
Adj Net Profit
Cash Earnings
14.7
15.9
19.8
22.2
EPS (¤)
CEPS (¤)
0.12
0.60
0.09
0.65
0.20
0.81
0.28
0.91
DPS (¤)
0.05
0.05
0.05
0.05
P/E (x)
P/CF (x)
21.7
4.2
29.5
3.9
12.9
3.1
8.9
2.8
P/BV (x)
0.9
1.0
0.9
0.9
EV/Sales (x)
EV/EBITDA (x)
0.81
6.7
0.77
6.3
0.66
4.5
0.56
3.6
EV/EBIT (x)
17.5
17.9
10.3
7.1
67.3
97.5%
70.3
111.2%
59.8
89.6%
48.1
66.8%
ROCE
6.1%
5.5%
9.2%
12.6%
ROE
No. of Shares (m)
5.1%
24.5
3.4%
24.5
7.4%
24.5
10.0%
24.5
Net Fin. Pos.
Gearing Ratio
Stock Performance
5 .0 0
P R IC E R E L . T O M IL A N C O M IT G E N E R A L
4 .5 0
Stretchy but not Ladder-Resistant
Following a period of strong growth and stock market
glory, the unlucky timing of its ¤40 million investment
plan and a secular trend of shrinking hosiery
consumption have put pressure on CSP since 1998.
Diversification into the more lucrative underwear sector
and the achievement of higher efficiencies could
trigger growth and profitability. However, mediumterm visibility is low, hence despite an appealing
valuation we rate the stock a Market Performer.
¤CSP, a leading hosiery producer with its core business in
tights, is also increasingly active in underwear. The
tights sector has been facing a tough recession, while
underwear still offers good growth opportunities.
¤In
recent years, CSP has offset the sharp decrease in
global tights consumption and the crisis of the Russian
economy, which represented 25% of total turnover,
through a sound diversification strategy. External
diversification in underwear and the internal
development of seamless technology, together with the
partial recovery of the Russian market, should sustain
revenues. Inter-group synergies in production,
distribution and marketing should improve profitability.
¤Our projections are based on 7% 2000-03 CAGR in sales
4 .0 0
and a recovery in EBIT margin from 2002, that should
reach 7.8% in 2003. We have forecast a compound 34%
increase in net profit to ¤7.0 million in 2003.
3 .5 0
3 .0 0
2 .5 0
C S P IN T E R N A T IO N A L
¤Due
2 .0 0
1 .5 0
O CT
NO V DEC
JA N
FEB
M A R APR
M A Y JU N
JU L
AUG
SEP
O CT
Source: Datastream
1mth
Absolute %
4.2
Relative %
-4.9
Average Trading Volumes:
3mth
-20.4
-9.5
12mth
-46.4
-21.8
23.1 (000s)
Francesca di Pasquantonio
Tel: +39 0 2 8862 2482 – francesca.dipasquantonio@ubm.it
to lack of visibility in the hosiery market and the
on-going integration and reorganisations weighting on
2001 profitability, it is unlikely that the equity story will
offer any special short-term boost. We believe this
despite the appealing valuation (a price to book ratio of
1x) and the valid strategy of diversification into
underwear, which, according to our calculations,
should produce an IRR (pre-tax) of 10%.
Antonella Frongillo
Tel: +39 0 2 8862 3713 – antonella.frongillo@ubm.it
CSP International – 29 October 2001
UniCredit Banca Mobiliare
Contents
¤1. Investment Case ..........................................................................3
¤2. A Recap on CSP ...........................................................................4
¤3. CSP Today....................................................................................9
¤4. How CSP Competes in a Difficult Market ...................................16
¤5. Strategy.....................................................................................24
¤6. Financials...................................................................................29
¤7. Detailed Financial Data ..............................................................37
¤8. Valuation...................................................................................43
2
1. Investment Case
¤ Notwithstanding CSP’s realistic strategic plans for the future, the
uncertain development of the hosiery sector continues to deserve
caution
A diversification
strategy to contrast the
difficult hosiery market
¤
CSP International is an established player in the hosiery market with a leading
position in Italy and Europe. Up until the crisis throughout the hosiery sector in 1998,
CSP enjoyed a double-digit growth rate in sales (+23.8% CAGR in the 1995-1997
period) and impressive profitability (16.1% EBIT margin in 1997). In the late 1990s,
however, the competitive environment changed: after a ten-year period of sustained
growth, the global hosiery sector entered into recession, with global consumption
declining from 7,800 million pairs in 1990 to 6,000 million in 2000.
In 1996, CSP started investing extensively in the upgrading of its production capacity
and reduced the weight of outsourcing. In hindsight, it turned out that the company
had been unlucky, having under-estimated ailing demand, which then started to slide
downhill.
In an expanding market, CSP represented an appealing investment opportunity
thanks to its high manufacturing skills, efficient market segmentation by brands and
distribution channel and the premium price of its products. However, in recent years,
the company has been forced to seriously re-think its strategy to counterbalance the
decline in tights demand, the consequent under-utilisation of the production capacity
and the premium price policy, which in the current market circumstances, has proven
somewhat limiting.
The 1999-2001 acquisition campaign is to be interpreted within this framework. The
acquisition of the French company Le Bourget was pursued in order to enhance
critical mass in the European tights sector, while the acquisition of the Italian
underwear manufacturer Lepel was instrumental in the rapid diversification into the
higher margins, higher growth underwear sector.
CSP today
¤
The Group is presently organised into four companies: CSP SpA, one of the Italian
leaders in the tights sector with its major brands Oroblù and Sanpellegrino; Le
Bourget, the third player in the French hosiery sector; Lepel, one of the leading
companies in the Italian underwear business, specialised in bras; and finally
Sanpellegrino Polska, a subsidiary located in Poland and specialised in low capital
intensive production.
Notwithstanding the
sustainable strategy,
future growth remains
uncertain
¤
The acquisition strategy provided a boost for the top line, without properly solving
the growth and profitability issues. However, the exploitation of the production and
distribution synergies among the companies in the group should improve profitability
starting from 2001. Moreover, the company hopes to re-align margins to the precrisis level through repositioning the brand on the market, the direct control of the
LOD channel (Large-scale Organised Distribution), the development of mono brand
shops and the increase in the licensing agreement. Our forecasts provide for sales,
EBIT and net profit to grow at a 2000-03 CAGR of 7%, 28% and 34%, respectively.
We give an overall positive valuation to CSP’s strategy, as the diversification into the
underwear business should add value. However, despite the current appealing
valuation (2001 P/B ratio of 1x and 2002 EV/EBITDA of 4.5x), the lack of visibility on
the hosiery market’s future growth demands caution. We consequently start our
coverage with a Market Performer rating.
3
2. A Recap on CSP
¤ CSP International is the second largest hosiery company in Italy and the
third in Europe
¤ From starting off as tights-only producer, the company is now pursuing
a sound diversification strategy in underwear
2.1 CSP at a glance
CSP is one of the
established players in
the Italian hosiery
business
¤
With consolidated sales of ¤172 million in 2000, CSP International is one of the most
important European companies in the hosiery market. It has been operating in this
field for more than 30 years and now, and with its 1500 employees, it produces more
than 100 million pairs of tights per year. CSP International is the second largest Italian
hosiery company, the third largest in Europe and the eighth in the world.
Following recent acquisitions, the Group is now organised over four companies:
¤ CSP SpA, one of the Italian leaders in the tights sector with its major brands
Oroblù and Sanpellegrino;
¤ Le Bourget, the third player in the French hosiery sector;
¤ Lepel, one of the leading companies in the Italian underwear business, specialised
in bras;
¤ Sanpellegrino Polska, a subsidiary located in Poland and specialised in labourintensive production.
Hosiery products still account for some 83% of consolidated sales. The majority of the
Group’s sales (c. 50%) are generated in foreign markets, mainly in Western Europe
and Eastern Europe, which account respectively for 11% and 15% of sales (2000).
In July 1997, CPS was listed on the Milan Stock Exchange. Following the listing, the
Bertoni family, who founded the company, still have a 51% stake. Nevertheless, a
well-structured management team made of members outwith the family is in charge
of the ordinary management and is also empowered with all the decision-making
concerning strategy and extraordinary issues. Mr Massimiliano Retta, who joined the
company in May 2001 and who has strong experience in marketing and sales of
mass-market products, presently heads the management team. The change in
leadership will translate into greater focus on the core business and on the
diversification and extension of historical brands.
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Board of directors
Market Float
48%
Bertoni family
52%
General Manager
Massimiliano Retta
Admin.
and Finance
Source: Company data
4
EDP
Production
Sales
Marketing
Product
Development
HR
2.2 Recent events
CSP has increased its
production capacity...
¤
On the back of strong turnover (28.5% CAGR in total sales in 1994-1997) the
company planned a ¤40 million five-year investment plan for the upgrading of its
production facilities. Through the increase in production capacity and automation of
the plants, the company aimed on the one side to satisfy the growing demand for
tights, and on the other to limit the incidence of outsourcing on total production. As
a matter of fact, reliance on third party manufacturing grew to 65% in 1997. In
addition, in 1998 CSP established a manufacturing subsidiary in Poland, Sanpellegrino
Polska, taking advantage of the lower labour costs to manufacture the low-value
added products for distribution to the local Polish market, to Italy and the other
Western European countries.
As a result of the investments made, CSP can now rightly be described as one of the
companies with the most efficient, state-of-the-art equipment for the manufacturing
of hosiery products, which also includes a sophisticated seamless technology. The
investments also allowed a sharp improvement in company productivity.
…while the market
moved on a downward
trend …
¤
However, the market developments of the late 1990s took CSP by surprise: demand
for tights dropped sharply and in particular Russian demand (which accounted for
one fourth of total sales in 1997) shrank heavily due to the country’s economic crisis.
cX¦H V rcH« H6r; H6Ho
ro¦j|croHo?~jcffcro|#c
cX¦H rcH« H6r; rf¦jH co
#f«#o?co¦r|H
10000
1998
1999
2000
8000
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
6000
4000
2000
0
1990
1996
Western Europe
Italy
1998
N-America
2000
Entire World
Europe
Source: CSP International
The contraction in turnover (-9.7% in 1998 and –7.5% in 1999) and the higher
incidence of COGS on sales (68% in 1998 against 63.2% in 1997 as a result of the
larger reliance on outsourcing) caused a drop in the EBIT margin from 16.1% in 1997
to 8.2% in 1998, and then to 4.6% in 2000.
cX¦HSr¦|uppa¤®®®H¦f
180
18%
160
16%
140
14%
120
12%
100
10%
80
8%
60
6%
40
4%
20
2%
0
0%
1996
1997
1998
Net sales (lhs)
1999
2000
EBIT margin (rhs)
5
… and so did CSP’s
market share
¤
In addition to the problems linked with a shrinking worldwide demand, in recent
years CSP has even been under-performing the domestic hosiery market, where CSP’s
market share decreased to 8.3% in 2000 from 10.1% in 1998. In our view, this decline
could be partly explained by the company’s high premium price policy in a difficult
market. An analysis of past trends evidences the inverse relationship trailed between
market share and premium price (Figure 6). In the years of declining premium prices
(from 27.6% in 1996 to 19.8% in 1998) the CSP market share grew in terms of
volume (from 8.7% to 10.1%) and value (from 11.1% to 12.1%). As the premium
price increased (to 22.9% and 23.7% in 1999 and 2000 respectively) the market share
decreased to 8.3% in volume and to 10.3% in value in 2000.
cX¦H#eH`#H#o?Hjc¦jc6HHf#cro`c|
14%
30%
12%
25%
10%
20%
8%
15%
6%
10%
4%
5%
2%
0%
0%
1996
1997
Market share in volume (lhs)
1998
1999
Market share in value (lhs)
2000
Premium Price (rhs)
A few strategic moves to
reverse the situation
¤
In order to regain volumes and profitability, the group had to take some bold
decisions.
¤ The first step was the acquisition of the French hosiery producer Le Bourget,
which was aimed at increasing critical mass in the core tights business. As the
market is becoming global and competition is intensifying, the importance of
economies of scale in production is growing.
¤ At the end of 1999, the acquisition of Le Bourget was followed by the
diversification into the underwear sector both internally (through the
development of the seamless technology) and externally (through the acquisition
of Lepel in 2000).
2.3 The acquisition of Le Bourget
CSP increased its
critical mass in its core
business thanks to the
acquisition of Le
Bourget
¤
In 1999 CSP announced the acquisition of Le Bourget Group, the third largest hosiery
manufacturer in France with total sales of ¤43.8 million in 2000. The total
consideration of the operation was ¤12.9 million, representing an EV/Sales and an
EV/EBIT multiple of 0.3x and 8.0x, respectively.
At the time, the group operated through three brands: Le Bourget (medium-high
market level), Bomo (bottom end) and Yves Saint Laurent (top of the range). The YSL
license was discontinued at the beginning of 2001.
Through the acquisition, CSP gained a 15% share of the French market and brands
characterised by strong awareness, high-perceived value added and good brand
loyalty in France. Incidentally, in terms of value France is the third European hosiery
6
market after Italy and Germany, hence the strategic appeal of establishing a direct
presence there.
The benefits resulting from Le Bourget’s acquisition can be summarised as follows:
¤ The creation of important economies of scale in production, following the
reorganisation of Le Bourget’s manufacturing. Le Bourget used to outsource three
quarters of its production while CSP’s sophisticated production capacity was
under-exploited at the time. As such, manufacturing for Le Bourget could absorb
the excess production capacity of CSP plants and synergies could guarantee cost
savings for both players. As an initial improvement, Le Bourget’s gross margin in
2000 rose to 35.7% from 35.1% in 1999. As most of the integration is to be
finalised, improvements should be even more visible in future years.
¤ The creation of economies of scale in distribution: CSP was present in 50 foreign
countries and Le Bourget in 40, hence the joint distribution provided scope for
large rationalisation. We expect that the synergies between CSP and Le Bourget
will guarantee an overall reduction of SG&A costs from 31.4% of sales in 2000 to
at least 29% in 2003.
¤ The extension and rationalisation of the range of products offered, of the
distribution channel used and of the target markets.
So far, the acquisition has had a negative impact on CSP’s accounts, due to Le
Bourget’s negative results and the difficulties of a quick turnaround in profitability.
Despite the recent margin’s reduction, we believe the turnaround to be achievable
within three years, with Le Bourget’s EBIT margin improving to 5.3% and the Group
EBIT margin to 7.8%.
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Founding date: 1927
Brands: Le Bourget, Bomo
Units sold: 35 million tights
Market share: 15% France
Export: 10% of total sales in 40 foreign countries
Subsidiaries: Belgium
2000 Sales: ¤47.77 million
2000 EBIT margin: -0.29%
2000 Net Losses: -¤1.31 million
2.4 The acquisition of Lepel
A bold step towards
product diversification
¤
In 1997, CSP started to diversify into the underwear market through the internal
production of lingerie collections mainly for the Oroblù brand. In June 2000, the
acquisition of a 55% stake in Lepel gave strong acceleration to this diversification. The
investment was of ¤11.3 million, valuing the whole company ¤20.6 million. In June
2001, CSP acquired the remaining 45% with a total investment of ¤9.5 million.
Lepel has a strong position in the hosiery market in Italy, with an offering ranging
from pants to bodies and lingerie and a particularly strong expertise in bras. Founded
in 1956, the company is headquartered in Modena where it internally produces about
25% of its offering. The remaining 75% is divided between Italian and foreign subcontractors.
7
In 2000 Lepel recorded total revenues of ¤26.7 million, a 41.6% gross margin, a 4.1%
EBIT margin (impacted by the brand re-valuation that caused around ¤1.1 million
additional depreciation) and ¤1.25 million of pre-tax profit.
The aggressive marketing strategy on traditional media with well-known testimonials
guarantees a good presence on the Italian market. Lepel ranks third in terms of
market share by volume and fourth by value (Source: Nielsen). It enjoys strong brand
awareness and an efficient price/quality ratio.
The offering is segmented through the use of three brands: Lepel, the most important
one, is distributed through wholesale and LDOs channels, Pretty Lepel is dedicated to
the Large-scale Organised Distribution and Claudia Lemes, the lowest price collection,
is also distributed through large retailers and wholesalers. Pretty Lepel is being
discontinued.
The acquisition of Lepel has offered CSP the opportunity to gain quick access into the
appealing underwear market. In contrast with the tights business, underwear
demand in Italy is still growing (at an estimated 4% growth rate in terms of volumes)
and is characterised by a healthy gross margin of around 50% (against an average of
30-35% in the tights business). This difference can be explained by the customers’
perception of the high value added content in the underwear production and
consequently the justification of a price premium. Moreover, as underwear
production is traditionally labour intensive, the sector’s players reduce costs through
the de-localisation in low labour cost countries.
Other key benefits from the acquisition of Lepel can be summarised as follows:
¤ The possibility for CSP to apply its seamless technology to Lepel’s production
¤ Exploitation of CSP’s and Le Bourget’s distribution channels facilitating Lepel’s
entrance into France and Russia, which are already successfully covered by the two
companies and the geographical expansion into new foreign markets.
¤ Strong complementarity of target markets with CSP’s existing offering. Lepel
targets the middle segment of the market and distribution is mainly directed to
wholesalers and to the Large-scaled Organised Distribution (LOD). This fits in well
with the higher positioning of both Oroblù and Sanpellegrino. Furthermore
Oroblù is sold mainly through the independents’ channel. The only risk of overlap
in terms of distribution could be between Sanpellegrino and Lepel, both
distributed via the LOD. However, the brands respond to customers’ different
needs and tastes while the pricing and brand policies are also diverse.
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Total sales: ¤27.0 million in 1999
Total sales: ¤26.7 million in 2000
Pre-tax profit: ¤2.53 million in 1999
Pre-tax profit: ¤1.25 million in 2000
Total shareholders fund: ¤15 million
Inventories constantly lower than 15% of total sales
No financial debt
8
3. CSP Today
¤ From one core activity, to two synergic businesses with strong
complementarity
¤ A multi-brand strategy: CSP Group offers more than 10 different
brands segmented by market and distribution channel
¤ A solid company with state-of-the-art manufacturing, a strong
marketing angle and a premium-price policy
After the acquisitions in 1998-2001, CSP Group is now structured into four
companies: CSP International SpA, Le Bourget, Lepel and Sanpellegrino Polska (50%
held by CSP and 50% by a local distributor).
cX¦Hpr¦|¦6¦H
&63,QWHUQDWLRQDO6SD
6DQ3HOOHJULQR3ROVND
/H%RXUJHW
/HSHO
Source: CSP
CSP SpA remains the Group’s main company. Le Bourget accounts for 25% of total
sales but its contribution to the Group’s EBIT is almost irrelevant. On the other hand,
Lepel represents 15% of consolidated sales, but has higher profitability. Sanpellegrino
Polska is still very small, with insignificant turnover and margins at least for the time
being.
cX¦H u® r* #fH H#e?r©o
~¤®®®
cX¦H uu ,« rj|#o« ~¤®®®
~>j
9.0
Lepel
15%
S P Polska
4%
8.0
7.0
6.0
5.0
4.0
Le Bourget
25%
CSP SPA
56%
3.0
2.0
1.0
0.0
-1.0
Source: CSP International * Includes Intercompanies
CSP SPA
Le Bourget
Lepel
S P Polska
9
3.1 Business segments
Over the years, CSP has
pursued a strategy of
product
diversification…
¤
As shown in the figures below, tights still represent the core business and account for
83% of total sales. On the other hand, as a result of its diversification into the
underwear sector, both through external acquisitions and the development of
internal production, underwear is rapidly growing in volume. If in 1999 it only
accounted for a negligible portion of total sales, in 2003 it is expected to rise to 24%.
cX¦Hu¤#fH,«HXjHo~¤®®®
cX¦Hucj#H? r #Xco,«
¦coHcoH~
60%
50%
17%
40%
30%
20%
83%
10%
0%
Tights
Hosiery
Underwear
Underwear
Source: UBM
Source: UBM
3.2 Products and Brands
A multibrand strategy
¤
As detailed in Figure 14 below, CSP offers a wide range of brands differentiated by
price and quality.
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Price
Quality
Low
Low
High
New Opportunities
Private Labels
Bomo
Lepel
Sanpellegrino
High
Star Way
Le Bourget
Oroblù
Source: UBM
Oroblù is the brand with the highest quality and image level. It is sold in the best
department stores and in the first class boutiques. Although the offering of tights is
still predominant, Oroblù also offers outwear and lingerie collections. The premium
price guarantees a healthy gross margin of around 50%. It enjoys a stable 2% market
share in terms of volume and 4-5% in terms of value.
Sanpellegrino is the brand with the best price/quality ratio in the middle range of the
hosiery market. The Sanpellegrino brand is available in three different collections for
three different sales channels: wholesale, department stores and retail. The
consolidated market share is around 7.1% in volume and the gross margin obtained
around 35%.
10
Star Way is the youngest brand. It is sold in the qualified retail and in the best
department stores, and addresses the medium-high end of the market.
New Opportunities is the Group’s discount brand. It is now marginal and is
produced primarily for export markets.
Le Bourget is a brand of great and consolidated tradition on the French market of
socks and tights with a 15% market share. It targets the medium-high end of the
market.
Lepel is a specialised brand of underwear.
Bomo is the discount label in France.
cX¦HuSr?¦6#o?cª
Brand
Tights
Underwear
Oroblù
Sanpellegrino
Star Way
Le Bourget
Lepel
Existing
Under development
No plans
Legend
Source: UBM
cX¦Hu#fHH#e?r©o,«#o?
Others
4%
San
pellegrino
37%
Bomo
4%
cX¦Hur#Xco,«#o?
60%
Le Bourget
17% Star Way
2%
Oroblù
15%
Private
Lepel Labels
7%
14%
50%
40%
30%
20%
10%
0%
Oroblù
San
Le Bourget
pellegrino
Lepel
Source: UBM on CSP International
cX¦H uI #eH `#H rQ r¦|
#o?Lrf¦jH
cX¦H up #eH `#H rQ r¦|
#o?L#f¦H
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Group
Sanpellegrino
Group
Sanpellegrino
Oroblù
Star Way
Oroblù
Star Way
Source: Sita Nielsen
Source: Sita Nielsen
11
3.3 Production
While tights production
is highly capital
intensive…
¤
CSP’s production is organised into four plants in Italy (Ceresara, Rivarolo del Re,
Tintoria di Ceresara and Carpi) and one in both France and Poland. The CSP
production structure is among the most modern in the world, with flexible and
adaptable production systems and a completely automated production cycle, which
guarantees control of top quality and the entire output.
In the past five years, CSP has invested ¤44.3 million in the innovation and
automation of the plants, thus reducing the reliance on outsourcing, which peaked at
65% in 1997 with 52 external producers. The high level of the price/quality mix
guaranteed by this production system is one of the major strengths in CSP’s strategy.
cX¦H
¤®
o¨HjHo
r?¦6cro#|#6c«
#o?
cX¦H ¤u HcX` rQ ¦r¦6coX ro
r#fr?¦6cro
20
10
70%
15
8
60%
6
50%
4
40%
5
2
30%
0
0
20%
10
1996
1997
1998
1999
2000
Investments (lhs)
10%
0%
1997
1998
1999
2000
Production capacity m/dozen (rhs)
Le Bourget realises one third of the production in the plant of Fresnoy le Grand, one
third in CSP’s Italian facilities and the remaining 33% is sub-contracted. The on-going
reorganisation of Le Bourget’s production capacity should increase the number of
tights produced per year (from 8 million pairs in 1999 to 11 million pairs in 2000 and
an estimate of 15 million in 2001). The production capacity will be extended with no
need to increase the number of workers or make investments in new machinery.
Moreover, the company is reducing its reliance on outsourcing by further enlarging
the Italian facilities’ share of production.
…the underwear
business remains labour
intensive
¤
If, on the one hand, underwear and tights share the same business model for
marketing and distribution, production is very different. In the case of tights, vertical
integration and high levels of automation are necessary for the business to be
profitable and labour costs only represent an average of 15% of the total cost of
production. The main players have therefore made massive investments in the
production structure.
On the contrary, underwear production is still highly labour intensive (around 50% of
total costs) and the de-localisation of production in the low labour cost countries
provides important competitive advantages. Lepel’s organisation of production
reflects this issue: more than 40% of manufacturing is de-localised to low labour
costs countries in North Africa, Eastern Europe and the Far East. The remaining
production is divided between Lepel’s plant in Modena and Italian sub-contractors.
Lepel still retains control over design and cutting, which are the critical aspects of the
manufacturing process.
The dissemination of seamless technology may modify production in the underwear
business. Differently from traditional underwear products, seamless production
requires a high level of automation, thus giving a competitive edge to hosiery
manufacturers. Major players including Sara Lee (Playtex and Lovable) have moved to
cover this segment of the underwear sector. The more comfortable seamless products
will not completely replace traditional underwear, although some substitution is
likely.
12
3.4 Sales and Distribution
Sales and distribution
are a key marketing
advantage for CSP
¤
CSP SpA
Together with product innovation, sales and distribution are two of CSP’s major
strengths. In Italy and France, CSP SpA’s salesforce is organised as follows:
10 sales organisations structured by brand, collection and distribution channel
150 agents with up-to-date training
13 agents
150 merchandisers in super/hypermarkets and 150 sales assistants in shopping
malls
In other countries, CSP operates through exclusive distributors, while in Russia there
are 10 direct dealers.
¤
¤
¤
¤
A selective distribution policy has become key to the group’s successful expansion in
hosiery. The multi-brand product range sold by CSP is addressed at all distribution
channels, with target customers and pricing policy being differentiated according to
the channel used. In fact, CSP’s distribution strategy focuses on meeting different
customers’ needs through different brands and channels. Thanks to the wide range
of brands on offer on the market, the company can be present on various distribution
segments without generating confusion on the different products.
cX¦H¤¤HXjHo#crorQcc,¦cro`#ooHf
Brands
Boutiques Shopping
Malls
Oroblù
Le Bourget
Star Way
Sanpellegrino
X
X
Retailers
X
X
X
X
X
X
X
Wholesalers
Super-Hyper
market
X
LOD
(non food)
X
X
X
X
X
Lepel
X
X
New Opportunities
X
X
Notwithstanding the efficiency reached by its distribution structure, CSP is working
on shortening the chain in order to strengthen the relationship with the final
retailers. For example, CSP is reducing the role of wholesalers in the distribution to
the Large-scale Organised Distribution by replacing the wholesale intermediaries with
a direct relationship. The mono-brand store network project (see section 5.5) is
another example of CSP’s idea of establishing a direct relationship with the final
consumer. This project is only in its test phase now, and while the company does not
expect any immediate result, it suggests a positive development in the medium-term.
CSP’s sales breakdown by distribution channel reflects general market trends. From
1998 wholesalers have reduced their importance in the hosiery sector and the share
of specialised retailers has remained nearly unchanged through the years. On the
contrary, in a rush to close the gap with other European countries, the LOD is rapidly
increasing in volume and, in the case of CSP, this has become the most important
distribution channel in 2000. These evolutions suggest a change in the profitability
mix. The increase in the Group’s foreign presence, however, should bring beneficial
effects on the Group’s profitability in virtue of the higher mark-ups, which are
traditionally applied in foreign countries.
13
cX¦H ¤V H #fH ,« cc,¦cro
`#ooHf
cX¦H ¤ cj#H? rQc#,cfc« ,«
cc,¦cro`#ooHf~rcH«#f«*
1998
1999
Wholesalers
31%
26%
2000
21%
12%
Foreign
retailers
LOD
19%
15%
17%
10%
18%
20%
30%
6%
Super/Hyper
17%
20%
17%
4%
Specialised
retailers
Private label
11%
12%
12%
2%
8%
0%
4%
7%
3%
Wholesale
High-end
specialised
retailers
Private
lables
LOD
Source: UBM estimates
Le Bourget
Le Bourget’s distribution organisation is organised according to its two collections.
The French company has two collections, which it distributes through two separate
sales forces: one is addressed to boutiques and high-end department stores, the
other is distributed in supermarkets and hypermarkets. In addition, Bomo competes
in the low-end of the market in supermarkets and hypermarkets.
Lepel
Lepel’s distribution chain is organised by brand. Both Lepel and Claudia Lemes are
sold through wholesalers and LOD, but with a different positioning by price and
quality. From 2002 Lepel will have the licence to produce and distribute the
underwear line for the Sanpellegrino brand.
3.5 Marketing
Traditional A&P
expenditure is still
important
¤
In the overcrowded hosiery sector, product positioning, brand awareness and
customer loyalty can be secured only through an aggressive communication strategy.
CSP has a focused marketing policy developed through the use of traditional media
(which accounts for 66% of total advertising expenditure) and also direct advertising
in the selling points. The marketing strategy aims on one hand at re-enforcing the
brand awareness among target customers by using well-known testimonials in its
commercials, on the other hand it is focused on the communication of innovations to
the market. Since autumn 2000, communication has been focusing on the launch of
Oroblù and Sanpellegrino seamless hosiery.
While CSP SpA and Le Bourget advertising expenditure on total sales are stable at
around 8-10%, Lepel’s aggressive advertising investments are around ¤5-5.4 million
per year, or 20.3% of sales. Lepel’s advertising appears on television, magazines and
billboards and popular actresses are used as testimonials. Lepel’s intention is to keep
its advertising expenditure constant in absolute terms.
14
cX¦H¤S|?¨HccoXª|Ho?c¦H~>j
9.2%
14
12
10.9%
9.4%
8.1%
12%
9.2%
7.4%
10
8.90%
8.1%
10%
8%
8
6%
6
4%
4
2%
2
0%
0
1994
1995
1996
1997
1998
Total advertising expenditure (lhs)
1999
2000
2001E
% on sales (rhs)
15
4. How CSP Competes in a Difficult
Market
¤ World-wide contraction in tights demand is still on-going, while supply
is overcrowded
¤ A premium-price policy
¤ From tights to underwear: its technological lead provides a competitive
edge in the diversification into complementary business areas
4.1 The tights market
Future developments in
tights demand remain
uncertain
¤
Hj#o?
Following a world-wide boom in hosiery consumption in the late 1980s and early
1990s, the hosiery market has been slowing down significantly since the mid-nineties.
In both 1998 and 1999, the European hosiery market recorded a 10% volumes drop
and the Italian one a 4.5% and 9% volume decline, respectively. In 2000,
consumption decreased further, with the Italian and European business declining by
12.3% and 15%, respectively.
In industrialised countries in general, volumes are slowing sharply but value-demand
is marginally still increasing. The main reasons for shrinking volumes are:
¤ An increasing duration of hosiery products thanks to the growing penetration of
the elastomers as widely-used raw materials;
¤ Increasing spread of more durable opaque tights, which leads to lower
replacement demand;
¤ Wearing tights is becoming a fashion phenomenon, and in recent years fashion
dictated by the main designers has made the use of tights decisively ‘out’;
¤ High diffusion of trousers;
¤ Ageing population, with strong preference towards thicker (and hence more
durable) tights;
¤ Higher quality level and technical contents of hosiery.
This general slowdown in consumption has translated into a decrease in tights
consumption per capita from 24 pairs a year in 1996 to 18 pairs in 2000 (in Italy).
cX¦H¤rf?rcH«#eHco¤®®®
Products
Global annual
production
6 billion pairs
Consumption in Italy
Tights
Annual per-capita
consumption
14-18 pairs
Pants
Bras
6-7 pairs
1-2
2.5 billion
0.5 billion
120 million
35 million
n.a.
n.a.
30 million
Others
Source: ACNielsen
16
350 million pairs
cX¦H ¤ rf? rcH« #eH;
crc6#f ro¦j|cro Ho? ~jcffcro
|#c
10000
1200
8000
1000
cX¦H ¤I rf? rcH« #eH;
HrX#|`c6H#e?r©o~¤®®®
USA
17%
800
6000
600
4000
400
2000
200
0
Western
Europe
41%
Japan
12%
0
1990
1996
1998
Rest of the
world
8%
2000
Western Europe (lhs)
Entire World (lhs)
N-America (rhs)
Asia (rhs)
Eastern
Europe
10%
Asia
12%
E-Europe (rhs)
Source: CSP International and Du Pont
Source: CSP Internationa on Du Pont data
It is worth noting that despite declining consumption at home, the industry’s exports,
which represented 71.4% of total production in 1999, rose to 77.6% in 2000, also
helped by the partial recovery of the Russian market and further penetration of
Eastern Europe. We believe that exports will continue to be a key driver in the future
business turnaround.
cX¦H¤p#fc#orcH«H6r
Millions of pairs
Production
Export
Import
Final Consumption
Export on Production
¤ Million
1597
1239
% change on
1999
3.9%
12.9%
1038.1
610.5
% change on
1999
-2.0%
7.7%
86
444
98.4%
-8.0%
42.3
940.0
33.8%
-7.0%
77.6%
58.8%
Source: Sistema Moda Italia and ACNielsen (*) Families and extra-family consumption.
cX¦H®o#f«crQª|r#eH~¤®®®¨uppp
Russia
Germany
France
UK
Value % change on 1999
Volume % change on 1999
70
61.1
-6.6
-2.4
-9.3
-10.1
-9.8
2.8
Spain
-5.7
-5
Switzerland
Poland
67.3
-8.9
47.6
-2
Austria
-6.2
-14.8
Belgium
Sweden
-3.1
-14.9
0.1
-16.2
Source: Osservatorio Calzetteria Femminile
The Russian market needs to be considered separately, as until 1998 the former USSR
was one of the most important markets for Italian tights exporters. In the case of CSP
and other Italian producers, turnover from the official export channel was only part
of the total export to the country. The so-called parallel sales, autonomously
generated by Italian wholesalers, were also feeding Russian tights consumption. The
1998 financial and economic crisis caused a sharp decrease in general consumption in
Russia. Both direct export and parallel channels have sharply decreased. The situation
has improved in the country but, notwithstanding the encouraging signs coming
from the Russian market in late 2000, it is difficult to forecast a complete recovery in
17
consumption. In order to gain recovery in the Russian business, CSP has re-organised
the distribution with ten dealers.
Medium-term perspective for hosiery consumption
As tights demand is highly sensitive to fashion whims, it is difficult to forecast a
future consumption trend. In line with recent newsflow and considering the business
seasonality, in the remaining part of the year the consumption outlook might
improve. According to Osservatorio Calzetteria Femminile, in 2001 the Italian tights
consumption will decrease by around –2% in terms of volume, but will increase 2.5%
in terms of price. In the future, we believe that concentration on export markets,
leveraging on the “Made in Italy” tag and on the fashion-related aspects, may be one
of the limited options available to re-launch the business.
Competition is
becoming fierce
¤
¦||f«
The global hosiery sector is characterised by ever growing competition, which is
making life tough for hosiery manufacturers as a result of a number of factors:
¤ Declining market growth: it is obvious that the world-wide contraction of demand
for hosiery products should prompt an intensification of the competitive
backdrop.
¤ The high number of producers, both big player and small manufacturers: apart
from the bigger players (Sara Lee, Wolford, CSP, Golden Lady), there is a huge
number of second-tier manufacturers. Among them, more than 300 smaller
producers are concentrated in the Italian “tights district” of Castel Goffredo.
About 30 other producers complement the competitive scenario in Europe. The
companies with direct access to the market are less than 100 and those with
significant brand awareness are nearly 60.
¤ The high level of marketing and advertising expenditure required to develop brand
awareness, on traditional media and directly in the selling points. As hosiery is
very sensitive to fickle fashion trends, the level of Advertising & Promotions is
traditionally high (around 10-15% of total sales). As turnover is consistently
reducing, profitability margins tend to be compressed.
¤ The level of resources to be invested in product innovation.
¤ The risk of under-utilisation of the production structure, which in recent years has
been expanded thanks to technological innovations. The economies of scale can
be best exploited with full production capacity. As the sector is declining, the only
way to gain market share and new production is to erode competitors’ market
share.
¤ Heavy price competition: in a declining market, price competition is a widespread
but risky strategy. The price decrease causes a reduction in margins that only the
bigger companies can offset with top line expansion or control of other costs.
18
cX¦Huo#|`rrQ#corcH«¦||fcHco`Hrf?
1
2
Group
Country
Brands
##HHr¦|
Sara Lee
Filodoro
US
Italy
Pretty Polly, Hanes, L’Eggs, Donna Karan
Folodoro, Philippe Mantignon, Omero
Pretty Polly
UK
Pretty Polly
Vatter
DIM
Germany
France
Nur Die, Bi, Bellinda, Elbeo, Edoo
DIM, Chesterfield, Rosy
Sans
Spain
Princess
rf?Ho#?«#cHr`
Golden Lady
Italy
1999 sales
(¤m)
1,023
102
222
179
Golden Lady, OMSA, SiSì
256
Calvin Klein, Burlington, Brittannia,
Nonsense, Olympic-Champion, Supp-Hose
Husdon, Kunert, Burlington, Silkona
Flake, Trumpf, Esprit, Christian Dior, Boss,
Kenzo, Joop
Fukusuke, Manzoku
Sabrina
205
Kaiser Roth
US
Kunert
Germany
Falke
Germany
4
5
Fukusuke
Gunze
Japan
Japan
6
Atsugi
Japan
Mira Carat
153
7
Wolford
Ergee
Austria
Austria
Wolford
Ergee
132
26
8
CSP International
Italy
Oroblù, Sanpellegrino, New Opportunities,
Star Way, Le Bourget, Bomo
109
3
179
179
256
179
The Italian market in particular is characterised by a high level of concentration, with
the five major companies covering around 60% of total turnover in 2000. As
described in Figure 32 below, the biggest Italian player is Golden Lady with a 20%
market share in 2000. Golden Lady’s strategy reflects the research of an efficient
quality/costs mix, and with an acceptable quality level its pricing is around 20% lower
than the market average. As Figure 35 and Figure 36 below illustrate, Golden Lady
has been one of the very few hosiery players to increase its market share domestically.
In the mass-market production, OMSA is the highest quality producer. Quality is
obviously highly priced, and allows the company to benefit from strong brand
awareness and customer loyalty. Filodoro, the Italian arm of the multinational Group
Sara Lee, has a lower positioning than CSP, and it enjoys roughly the same market
share. Sara Lee operates in the top market with its top quality brand Philippe
Matignon. Levante has a diversified offering both in the middle market segment
(through the brand Levante) and the lower end of the market (Elledue). Figure x
illustrates the dynamic of the different price positioning of the hosiery players in Italy.
It is interesting to notice how Golden Lady’s market leadership translates into a highly
negative premium price, while both Sanpellegrino and Oroblù enjoy a market share,
which is higher in value terms.
Omsa
8%
Levante
7%
Others
40%
Filodoro
12%
CSP Int
13%
Source: Progesa
Golden
Lady
20%
cX¦H
V
cc,¦cro
rQ
ro¦j|croroc6Ho?Hªco¤®®®
% on total consumption
cX¦H #eH `#H ro r#f
r?¦6cro
20
15
10
5
0
28
44
57
68
84 111 141 205 365
CSP
Golden
Lady
Levante
OMSA
Source: Osservatorio Calzetteria Femminile and UBM
19
cX¦HS#eH`#HrQ#fc#orcH«#o?~rf¦jH
Golden Lady
Omsa
1993
1994
1995
1996
1997
1998
1999
2000
16.0%
11.2%
15.6%
10.3%
16.9%
10.9%
17.7%
10.7%
23.6%
11.4%
24.3%
10.5%
24.7%
10.0%
24.3%
9.5%
SiSi
2.0%
2.1%
2.3%
2.3%
2.8%
2.9%
3.6%
4.1%
5.8%
13.7%
6.5%
15.1%
7.1%
12.7%
7.5%
12.2%
8.7%
11.0%
9.0%
10.5%
8.0%
8.1%
7.1%
6.6%
0.8%
1.1%
1.0%
3.5%
3.4%
3.4%
2.9%
3.5%
3.6%
0.8%
3.3%
1.3%
2.8%
2.6%
Pompea
1.4%
3.1%
4.0%
Glamour
Oroblù
1.0%
1.0%
1.1%
1.1%
1.0%
1.1%
Sanpellegrino
Filodoro
P. Mantignon
Levante
Elledue
0.7%
0.8%
1.0%
1.2%
1.2%
Source: AC Nielsen. Note: Brands represented in the table are those which together cover 60% of the market
cX¦H#eH`#HrQ#fc#orcH«#o?~#f¦H
Value
1993
1994
1995
1996
1997
1998
1999
2000
Golden Lady
Omsa
9.9%
9.1%
10.0%
8.5%
11.5%
8.9%
11.8%
9.1%
16.4%
9.6%
17.6%
9.2%
17.3%
8.8%
17.8%
7.8%
SiSi
3.0%
3.3%
3.7%
3.5%
4.8%
4.9%
6.0%
6.7%
6.6%
15.2%
7.4%
15.9%
8.2%
13.4%
8.7%
13.0%
9.9%
11.8%
9.6%
11.1%
8.6%
8.5%
7.7%
6.9%
1.8%
1.8%
2.7%
2.4%
3.4%
3.8%
3.7%
3.3%
4.2%
4.2%
0.8%
4.0%
1.3%
3.2%
2.0%
Pompea
1.1%
2.6%
3.2%
Glamour
Oroblù
0.9%
2.3%
0.8%
2.5%
0.9%
2.3%
Sanpellegrino
Filodoro
P. Mantignon
Levante
Elledue
1.4%
1.6%
1.8%
2.4%
2.5%
Source: AC Nielsen. Note: Brands represented in the table are those which together cover 60% of the market
cX¦HHo?rQHjc¦jc6coX
4.0%
2.0%
0.0%
-2.0%
1993
1994
1995
1996
1997
1998
1999
2000
-4.0%
-6.0%
-8.0%
Golden Lady
Omsa
SiSi
Sanpellegrino
Filodoro
P. Mantignon
Levante
Pompea
Glamour
Oroblù
Source: UBM on AC Nielsen.
A rationalisation of the
supply universe is
foreseeable, with Italian
producers eroding
market share worldwide
20
¤
Medium-term perspectives
Due to the highly competitive environment and the declining demand, a contraction
in the number of players in the sector is foreseeable. The selection, in our view, will
favour the sounder companies in terms of innovative production structure, financial
strength and good relationships with the distribution channels. In any case, Italian
producers should continue to play a leading role in the future thanks to their
competitive advantages (i.e. the concentration in the industrial districts, the presence
of sub-contractors and the high technological level generally reached in the area).
cX¦HI#fc#oHcX`ro¦r|H#o
cX`#eHr?¦6cro
70%
cX¦Hpo?¦c#fro6Ho#cro~
rQ#fHror#f#fc#o¦or¨H
70
60%
68
50%
66
40%
64
30%
20%
62
10%
60
58
0%
1992
1993
1994
1995
1996
1997
1998
1999
2000
56
First 5 producers
Source: Associazione di Categoria Sistma Moda Italia
First 10 producers
Source: Osservatorio Calzetteria Femminile
4.2 CSP competitive positioning
CSP still enjoys a
10.3% market share in
value
¤
Against the backdrop portrayed above, CSP’s production in 2000 was 13% of the
total Italian tights production. In the 1996-2000 period, CSP enjoyed an average
market share of 9.2% in volume and 11.4% in value. However, after the peak reached
in 1997, the company has slightly suffered both in terms of volume and of value. This
was partially due to the increase in discount production (New Opportunities) and
partly to the concentration of CSP’s advertising investments on the launch of the new
seamless technology, instead of the traditional communication strategy.
cX¦HV®#eH`#Hco#f¦H
cX¦H Vu #eH `#H co
rf¦jH
12.5%
12%
12.0%
10%
11.5%
8%
11.0%
6%
10.5%
4%
10.0%
2%
9.5%
0%
9.0%
1996
1997
1998
1999
2000
1996
1997
1998
1999
2000
The higher market share in terms of value is determined by CSP’s pricing policy. In
general, CSP has pursued a policy of premium pricing through its brand
segmentation. Thanks to innovation, the quality content of its products and targeted
marketing and advertising of the best products, CSP has been able to command a
significant premium price. These have all been strong competitive leverages, which
the company has exploited in order to first reach, and subsequently defend, its
market position.
21
cX¦H V¤ Hjc¦j c6H ~ ro
#eH¨H#XH
cX¦HV#o?#o?c6H
Index
Price
Tights
200
Index Price
Underwear
Le Bourget
160
150 (b)
20
Star Way
150
135 (c)
15
Sanpellegrino
100
100 (d)
10
Bomo
90
150
5
Lepel
na
150
30
27.6
25.5
22.9
25
23.7
19.8
0
1996
1997
1998
1999
2000
Brands
Oroblù
145 (a)
(a) Seamless Dolcevita; (b) Juste en Dessous/Skinwear;
(c) Seamless Total Comfort; (d) Seamless Comodo
4.3 A look at the underwear market
The growing underwear
sector
¤
The Italian underwear sector is estimated to be worth ¤2125 million, or ¤1420 million
considering only the ladies’ portion (Source: AC Nielsen on Itaf data). It is estimated
to guarantee an average increase of 4% yoy and a 50% average gross margin. The
low capital intensity of underwear production and the critical role of creativity, design
and cutting justify a high level of market fragmentation. The sector is generally
mature but has recently enjoyed a period of re-vitalisation as a consequence of the
diffusion of new products made with lighter and more comfortable materials.
cX¦HVVH6HoHo?rQ|Ho?coXco#?cHo?H©H#~upp®Mu®®
140
130
120
110
100
90
80
1990
1991
1992
1993
1994
1995
Spring/Summer collection (1990=E500m)
1996
1997
1998
1999
2000
Fall/Winter collection (1990=E645m)
Source: AC Nielsen on Itaf data.
In order to spread product innovation, the companies are focusing on an aggressive
advertising and marketing strategy (with A&P expenditure exceeding 8-10% of total
sales). In an environment characterised by growing competition, the key success
points in our view are:
¤ The reduction of production expenses. As underwear relies on a low capital
intensive production, the de-localisation of the production structure in the lower
labour costs countries is becoming a common strategy
¤ The close relationship with the distribution channels, through policies of trade
marketing
¤ The high importance of having a balanced price-quality mix
¤ The vertical integration on the distribution side with the opening of mono-brand
shops or corners in shopping malls.
22
Depending on the product categories considered, market fragmentation can be very
different. The first brands in bras in Italy command a market share of 40.6%
(volumes) and 44.7% (value). After these brands, fragmentation starts to be visible:
the first ten brands in the industry enjoy a 57.4% and 59.5% share of the market
respectively in volumes and value terms. In contrast, for pyjamas the first five brands
account for 20.5% of the market volumes (and 20% of the value) and for panties the
percentages become 23.8% and 32.8% for volumes and value respectively.
cX¦H VS o?H©H# #eH; #co
#o?~#eH`#H,«#f¦H<¤®®®
cX¦HV#dr#o?c6HH¨Hf
/D3HUOD
15%
13%
3OD\WH[
/HSHO
55%
9%
2%
Infiore
Lovable
Playtex
Lepel
6%
La Perla
/RYDEOH
Source: CSP
CSP is well-positioned
to become an important
sector player
¤
,QILRUH
Others
Source: UBM
Medium-term perspectives
According to CSP’s indications, the sector should grow at a rate of around 4-5% in
the next few years. In addition to organic growth, increasing concentration could
heighten competitive pressures in the industry. Despite the high importance of labour
in the production process, we believe that in the future the underwear sector will
increase its reliance on more capital-intensive technologies. Companies able to mix
cost control, effective A&P and diversification in production will probably become the
sector leaders. We consequently believe that CSP is fairly well positioned as an
important player in future.
4.4 CSP: Strength and Issues
cX¦HVo#f«c
Strengths
Opportunities
¤ Sales force efficiently segmented by brands and ¤ Market leadership in technological innovation thanks to
products
the seamless production
State-of-the-art
production
capacity
¤
¤ Development in foreign markets
¤ High perceived value-added
¤ Increasing diversification into underwear
State-of-the-art
seamless
technology
¤
¤ Exploitation of brand awareness through licensing and
mono-brand store network
Presence
in
complementary
businesses
¤
¤ Reorganisation of the distribution channel and
reduction in costs
‘Made
in
Italy’
tag
¤
¤ Recovery of the Russian economy
¤ Better exploitation of ‘Made in Italy’ label to enhance
market share
Weaknesses
Threats
¤ Secular trend of declining consumption
¤ Market characterised by an over-supply
¤ Mono-brand store network is challenging
¤ Possible overlap of the lines, despite segmentation of
the offering
¤ Unclear market positioning of certain brands and lines ¤ Sustainability of premium-pricing
¤ Increasing need for high marketing investments
¤ Low brand loyalty in hosiery sector
¤ Integration of acquired companies still in progress
Source: UBM
23
5. Strategy
¤ CSP’s strategy is directed towards the improvement of revenues and
profitability
¤ The top line will be sustained through product diversification and
geographical expansion
¤ The control of costs and exploitation of the synergies among the group
companies should enhance profitability
CSP strategy is focused
on…
¤
CSP is committed to re-gaining in two years the market share it lost over the last
three. This means a volume share of around 10% whereas in terms of value 12% by
end 2003. The strategy is based on the following pillars:
¤ Innovation: through the launch of new products CSP aims to preserve its
positioning on the market and to re-enforce the relationship with the distribution
channel.
¤ Focus on improving customer relationships, through better product display, large
assortments that meet all customer needs and customer service.
¤ Geographical expansion: the entry into new markets should offset the decline in
revenues mainly in the domestic market.
¤ Licensing: the favourable brand awareness of CSP products can be successfully
exploited in related sectors, i.e. men’s underwear and swimwear.
¤ Better management of the selling points and expansion of direct access to
consumers.
5.1 Innovation
…product
innovation…
¤
The R&D activity has always been a key point in CSP’s strategy and up to 1998 the
incidence of new production (products launched in the previous 12 months) on total
sales reached 25%. The weight of new production has recently decreased to around
17%, mostly concentrated on the high value-added seamless technology.
The innovation strategy gives strong advantages and gives an edge on the ultimate
retailers in terms of the day-to-day management of the sell-out at the shop level. New
product launches contribute to a fuller valorisation of the traditional offer and of
CSP’s entire brand assortment, as well as creating higher visibility to the products and
allowing a closer relationship with customers.
The recent developments in seamless technology, to which CSP has also contributed,
are opening a huge potential market. Being one of the innovators, CSP is in a good
position to benefit from it.
24
cX¦H VI H#jfH o6c?Ho6H ro
fr,#frcH«#eH
cX¦H Vp H#jfH
r©`¤®®urdH6cro
12%
||fc6#cro
60%
10%
50%
8%
40%
6%
30%
4%
20%
2%
10%
0%
0%
1997
1998
1999
2000
Pants/ boxers
Top/Bras
Bodies
T-shirts
cX¦HS®||fc6#crorQH#jfHH6`orfrX«;ª|H6H?¨rf¦cro
Products
Pants
Bras
Annual production in USA,
Europe, Far East in next five years
3000 million pairs
700 million
Incidence of seamless in five
years time
1350 million pairs (45%)
150 million (20%)
Total
3700 million
1500 million (40%)
Source: CSP on Sara Lee
5.2 Customer relationship
…research of customer
satisfaction…
¤
CSP’s products are largely positioned in the higher segment of the market. As a
consequence, the maximisation of customers’ satisfaction is a ‘must’ in the Group
strategy. The intrinsic quality of the products guaranteed by CSP’s skilled
manufacturing process, a close eye on the evolution of fashion trends and the
innovation strategy, all offer important opportunities in terms of products display,
renewal and turnover of the assortment. Particular attention is also paid to the
monitoring of customers’ views.
5.3 Geographical expansion
…higher international
presence..
¤
With a backdrop as difficult as that of the hosiery market in Italy, geographical
diversification has represented a key expansion driver for CSP: domestic growth over
the 1996-2000 period had a -5.5% compound, while in the same period exports grew
at a rate of 2% compound.
Hence, from a predominantly domestic base, the company has become an
international player, primarily in Western Europe, which now accounts for 25.7% of
total sales. The company also has a significant presence in Eastern Europe, which
expanded at a 20% CAGR in the 1996-1998 period. As illustrated by the figures
below, domestic contribution to total revenues decreased from 59% in 1999 to 49%
in 2000, while sales in Eastern Europe grew by +57% yoy.
25
cX¦H
Su
c¨HcQc6#croHo?
HrX#|`c6#f
140
70%
120
60%
100
50%
80
40%
60
30%
40
20%
20
10%
cX¦HS¤#fHH#e?r©oco¤®®®
Eastern
Europe
23%
0%
0
1998
Total (lhs)
1999
Italy
48%
Western
Europe
26%
2000
% Italy on total (rhs)
Extra EU
3%
% RoW on total (rhs)
Source: CSP international
The current geographical strategy is focused on the increase of Lepel’s presence in
foreign markets. Considering that CSP distribution channels and sales organisation
guarantee the coverage of the whole of Europe, Lepel’s penetration in these markets
can be organised easily without excessive costs.
The management is planning the further penetration of the Russian market with the
underwear production. The ongoing recovery of the Russian market will be
consequently fully exploited through the complementarity of tights and underwear.
5.4 Licensing
…exploitation of brand
awareness through
licensing agreements...
¤
In 1996, CSP has started a licensing strategy, which generated revenues of ¤620,000
in 2000 (from ¤97,000 in 1997). The strategy is aimed at the exploitation of the
Oroblù and Sanpellegrino brands in different product categories. CSP licensing has
been mainly directed at related businesses, such as men’s socks, swimwear and
pyjamas. Considering the close relationship between the distribution and marketing
strategy of CSP’s direct selling and those offered through a licensing agreement, we
believe that the strategy may be successfully pursued.
cX¦H S H¨Ho¦H Qrj c6HocoX
XHHjHo~>®®®
cX¦H SV c6HocoX XHHjHo co
f#6H
Brands
Collections
700
Oroblù
600
500
400
300
200
100
0
1997
1998
1999
2000
Men’s socks,
Casual and
sports socks,
Lingerie
Sanpellegrino Swimwear,
Men’s socks,
Underwear,
Pyjamas
Star Way
Men’s socks
Licensing
company
Niga Calze,
Hosiery Center
Niga Calze and
Calze Scanzi,
Irge
Calze Scanzi
5.5 The mono brand stores network
…and the future
opening of new mono
brand shops
26
The current fragmentation of the distribution of hosiery and, above all, underwear
products makes retailing a valid instrument for the consolidation of market share.
This is the route which some of the players (Calzedonia/Intimissimi, La Perla, Wolford,
Parah) are attempting with varying success.
#fH?roc#
The most successful experience has probably been that of Calzedonia, and its more
recent underwear brand Intimissimi, important players in the Italian retailing of
hosiery and underwear respectively. Created in 1987, the Calzedonia concept, which
focuses on the retailing of hosiery products and swimwear, grew to reach sales of
¤150 million in 2000, including Intimissimi.
¤ Calzedonia can count today on a network of 680 shops in Italy (with penetration
of one shop per 20,000 inhabitants) and abroad (including Spain, Portugal,
Greece, Poland, Austria, Mexico).
¤ Intimissimi was created in 1996. In 1998 it had 80 shops, which grew to 340 in
2000 and are expected to rise to 420 by the end of 2001.
The key driver of Calzedonia’s success is the appealing price/quality mix, reached
through the de-localisation of the production and the reduction in distribution costs,
thanks to the direct involvement in both production and retailing.
#Hf#
La Perla, a luxury brand in underwear and swimwear, has also recently undertaken
the direct retailing experience by opening mono-brand shops and hosiery boutiques,
both directly owned and in franchising, to sell the group of brands which fall under
the La Perla umbrella (Anna Club, Oceano, Joelle, Marvel etc). The La Perla format
addresses the luxury end of the market, with locations in major cities world-wide
(Milan, Rome, New-York, Los Angeles, London, Hong Kong, Madrid, Moscow and
Paris), and a refined, luxury environment, and extremely high prices. As a side
activity, La Perla is leveraging on its technologies and on its distribution and retail
presence for the production and distribution of a collection of sophisticated ladies
fashionwear highly based on fabrics and styles borrowed from their underwear
experience. La Perla now counts on over 50 stores.
rfQr?
Wolford also targets the luxury end of the market, with an offering of high quality,
highly priced items covering hosiery, pants and bodies, and other products leveraging
on the hosiery technology and fabrics, and a high use of seamless production.
Wolford has a network of some 265 stores and 30 shops in shops, both directly
owned and in franchising.
A brief analysis of the best known (undocumented) experiences leads us to the idea
that a retailing experience in this segment can be successful if supported by one of
the two: volumes or top positioning. The franchising formula is a must due to the
incidence of the fixed costs structure also in relation to the low average receipt in this
sector (unless the positioning is extremely high, as is the case for La Perla).
27
cX¦H SS r rQ # Hf# rH ,«
H#~r#fSV
cX¦H S r rQ rfQr? rH ,«
H#~r#f¤pS*
11
50
12
18
38
27
5
24
7
Italy
US
Europe
138
5
12
Middle East
RoW
Source: La Perla website
The project is still at
the initial test phase
¤
Austria
E. Europe
US
Middle East
Far East
RoW
W. Europe
Source: Wolford website. * Includes 30 shop-in-shops
(all in the Far East)
The retailing idea is not new to CSP, as it had already been explored (with little
success). The project is however acquiring greater substance now, as the Group’s
product range and assortment are expanded with the addition of new categories.
This initial test phase has been run so far through only one store.
CSP’s idea is of a network of mono-brand stores, which would offer the whole range
of CSP products: tights and socks, underwear and swimwear. The project would be
limited to the domestic market, with targeted market coverage of around one store
per 50,000 inhabitants. Initially, the targeted locations are the big shopping malls
outside of the cities. This type of location avoids competition with the more than
3,000 independent shops already selling CSP products.
For the moment, we view this project with a cautious stance. A manufacturer cannot
become a retailer overnight, as the two businesses require different core
competencies. Furthermore, we believe this proposition to be challenging because of
the positioning of the stores as medium-priced retailers, against the market
polarisation on the two extremes.
However, the examples described above, and the high market fragmentation, confirm
that innovative and effective propositions can indeed successfully gain market share.
cX¦HSrccrocoXrQH#cf`#co
Price
Quality
Low
Low
Calzedonia
Intimissimi
Oroblù
High
28
High
Wolford
La Perla
6. Financials
¤ In our projection, group net sales will rise to ¤198.6 million in 2003,
and the EBIT margin will return to the pre-crisis level within 2003
¤ We expect a 36% CAGR in consolidated net profit in 2000-03
¤ However, 2001 should be another year of transition
6.1 CSP International SpA
A swinging performance
¤
#fH`crc6#fHo?
CSP’s top line trend clearly reflects the dynamics of the hosiery market, which grew in
the first half of the 1990s and sharply decreased from 1998, due to intrinsic (cyclical
trends and changing fashion) and external (the Russian crisis) factors. After a strong
growth in 1997, when total sales grew from ¤104.5 million in 1996 to ¤132.4 million
the following year (+26.7%), the company recorded a negative 15% CAGR in
turnover in the 1997-1999 period. The flat 2000 results benefited from the partial
recovery of the Russian economy (which had returned to the pre-98-crisis level), and
the exploitation of production synergies with Le Bourget.
cX¦HSI|#fHHo?
cX¦HSp|#fHH#e?r©o
140
120
Starway
3%
100
Private
label
10%
80
Oroblu
25%
60
40
20
San
pellegrino
62%
0
1996
1997
1998
1999
2000
Source: CSP international
rQc#,cfc«`crc6#fHo?
In the pre-1998-crisis period, CSP boasted a gross margin of nearly 40% and an EBIT
margin of 15%. The 1998-1999 top line decrease along with the flat incidence of
COGS caused the reduction of gross margin and nearly halved the EBIT in absolute
and margin terms. The additional depreciation related to the revaluation of fixed
assets caused a further contraction in 2000 margins. Excluding the impact of the
accelerated depreciation charges in 2000, the EBIT margin would have been 9.9%
instead of 8.5%.
29
cX¦H®|rrQcHo?
cX¦Hu|rQc#,cfc«Ho?
25
60
38%
50
36%
40
18%
16%
20
14%
12%
34%
15
30
10%
32%
20
8%
10
30%
10
0
6%
28%
1996
1997
1998
1999
4%
5
2%
2000
0
0%
1996
GROSS PROFIT
1997
EBIT restated
Targeting strong
market share gains…
¤
1998
1999
2000
Gross Margin
EBIT
EBIT margin
EBIT margin restated
Source: CSP International and UBM estimates
r|fcoH;jH?c¦jHjXr©`?c¨H
In our estimates, total sales will grow by 9.6% compound in 2000-2003. The forecast
expansion will be achieved through the following:
¤ development of the seamless underwear business and diversification strategy
¤ further recovery of the Russian economy
Impact of the seamless technology
The benefits from seamless production will be divided between CSP major brands,
most of all Oroblù and Sanpellegrino to a lower extent. As illustrated in Figure 62,
following the company’s indication, we have considered 2001 additional revenues
deriving from seamless products at around ¤10 million. According to our estimates,
sales of seamless products should increase to ¤14.5 million in 2001 and ¤20 million in
2003. 2001-03 CAGR without the seamless production would be at 4.5%.
cX¦H¤H#jfHr?¦6croroc,¦croror#f#fH
2001E
2002E
c`r¦H#jfH|r?¦6cro;
Sanpellegrino
61.9
65.6
69.6
Oroblù
22.8
23.7
24.6
4.0%
Total (including Star Way and Private Labels)
H#jfHrof«;
Sanpellegrino
Oroblù
97.5
101.9
106.7
4.6%
3.0
7.0
5.8
8.8
9.0
10.7
73.0%
23.9%
Total
10.0
14.5
19.7
40.4%
30
2003E 01-03 CAGR
6.0%
cX¦H¤®®ua¤®®#fHr©`,«#o?~>j
140
120
100
80
60
40
20
0
Sanpellegrino
Oroblù
Starway
2001
2002
Private label
Total
2003
The Role of the Russian Economy
After two years of reductions, in 2000 the Russian business returned to the pre-1998
level, as total revenues rose to nearly ¤20 million. The trend remained positive during
the first half of 2001 and we believe that in the near future Russia will continue to
contribute significantly to the company’s figures. For the whole year 2001, we expect
Russian sales to total ¤23 million, or 24% of CSP SpA’s total turnover. The up-front
payments schedule should at least reduce the credit risk, although the top line
remains sensitive to the country’s economic risks.
… and profitability
improvements
¤
rQc#,cfc«;jH?c¦jHjXr©`?c¨H
In our estimates, CSP SpA’s gross margin will rise to 32.5% in 2003 (from 31.6% in
2000) accounting for ¤41.1 million, while the EBIT will reach ¤12.6 million and a 10%
margin in the same period (which were ¤8.2 million and 8.5%, respectively in 2000).
The drivers of our profitability estimates are:
¤ a decrease in industrial costs
¤ the re-organisation of distribution (i.e. the direct management of the LOD), the
shortening the distribution chain and the consequent reduction in commissions
¤ a tight control of Selling, General & Administrative (SG&A) costs which will offset
the increase in marketing expenditure related to the launch of the new seamless
products
¤ the effect of the anticipated and accelerated depreciation consequent to the
revaluation of plants and machinery that has a heavy negative impact of around
two percentage points.
2001, however, will be another year of transition: we expect the EBIT margin to fall to
around 6.3%, or well below the profitability reported in 2000, while the bottom line
should be close to breakeven. This is due to a negative performance in the first half
that will not be recovered to the extent expected. Among the negative factors is the
reorganisation of the trade relations with the Large-scale Organised Distribution, the
higher amortisation charges linked to the asset revaluation or the optimisation of
production synergies with Le Bourget.
In our estimates we have not included the possible distribution of an extraordinary
dividend to Lepel’s stakeholders, which could have a positive impact on the tax rate.
31
cX¦HV|r|rQc
cX¦HS|
50
33%
14
12%
40
33%
12
10%
32%
30
32%
20
31%
10
2
0
30%
0
2003E
Gross Profit
4%
4
31%
2002E
6%
6
10
2001E
8%
8
2%
0%
2001E
Gross Margin
2002E
EBIT
2003E
EBIT margin
cX¦H#o?&
cX¦HHrQc
12%
25
10%
20
8%
15
6%
10
4%
10
8
6
4
2
5
2%
0
0%
0
1999
2000
2001E
EBITDA
2002E
1999
2000
2001E
2002E
2003E
2003E
Net profit
D&A as % of sales
Source: CSP SpA and UBM estimates
Adjusted Net Profit
Source: CSP SpA and UBM estimates
6.2 Le Bourget: medium term outlook
cX¦HI#fHrdH6cro
cX¦HprdH6cro
3.0
6.0%
52
2.5
5.0%
50
2.0
48
1.5
46
1.0
44
0.5
54
42
0.0
40
-0.5
4.0%
3.0%
2.0%
1.0%
2000
2001E
2002E
2003E
0.0%
38
2000
2001E
Source: CSP and UBM estimates
2002E
2003E
EBIT
EBIT margin
#fH
In our projections, Le Bourget’s total revenues will grow at a 5.8% CAGR in the 200003 period. The growth drivers are:
¤ Brand strategy, in terms of exploitation of the brand awareness and the historical
tradition of creativity and fashion
¤ Introduction of new technology
¤ Diversification of the offering
32
¤ The further development of private labels, which presently account for about 20%
of Le Bourget total sales
¤ Increasing coverage of the bottom-priced market with Bomo production,
¤ Improving the foreign distribution channel
For the time being, we have excluded the diversification into the underwear sector.
rQc#,cfc«
After years of negative results, the improvement in recent performances has
confirmed the possibility of synergies with CSP International. 2001 gross margin is
estimated to rise to 37.2% in 2003, from 35.7% in 2000. The EBIT margin should
return to being positive by the end of 2001 and progressively increase to 5.3% in
2003 thanks to extensive restructuring actions. We have based our profitability
estimates on the following considerations:
¤ The optimisation of the French plants’ production capacity. Total production grew
from 8 million pairs of tights in 1999 to 11 million in 2000 and is planned to reach
15 million in 2001, excluding labour force and new machinery.
¤ The internalisation of the Le Bourget production in CSP’s Italian plants and in its
Polish subsidiary with the consequent reduction of sub-contracting to third parties
¤ Any restructuring charges (which we have excluded from our estimates) will be
accounted for below the operating line.
6.3 Lepel: medium term outlook
cX¦H®#fHrdH6cro
cX¦HurdH6cro
2.5
8%
7%
6%
5%
4%
3%
2%
1%
0%
28
2.0
27
1.5
26
1.0
25
0.5
24
0.0
23
2000
2001E
2002E
2003E
22
2000
2001E
2002E
2003E
EBIT
EBIT margin
#fH
In the past, new collections launches used to take place in the first semester and the
revenues deriving from the new products were mainly realised in the second half,
with important fall-down effects also in the first semester of the following year. In
2001 the new products presentation was made in July, leading to a delay in
additional revenues. Hence, after the 8% drop expected in 2001 due to changes in
the commercial strategy, Lepel’s total revenues should increase by 6% in the 20012003 period. The recovery in sales will be obtained thanks to:
¤ The introduction of the seamless products in Lepel’s offering
¤ The entrance into the Russian market, through CSP distribution channels
¤ The further geographical diversification with CSP and Le Bourget distribution
coverage.
33
rQc#,cfc«
Lepel’s aggressive marketing strategy on television and in magazines causes a high
level of advertising expenditure (20.3% on total sales in 2000). Considering that the
new seamless underwear will be launched in 2001, we have forecasted stable A&P
spending in absolute terms, at ¤5.4 million in 2001 and 2002. On the other hand, we
have assumed that the exploitation of synergies with the parent company in terms of
production know-how and distribution should imply a reduction in industrial and
general expenses. Thanks to the compensation of these costs, Lepel’s profitability
levels will be expanded in the future. In 2003, gross profit is forecast to be 42.6% and
EBIT margin 8.6%.
2001 will represent a year of transition also for Lepel’s profitability: as a consequence
of the reorganisation of the company’s manufacturing process, we expect the gross
margin in 2001 to fall at 40.9%, well below the 41.6% level reported in 2000.
However, an improvement in the mix and higher delocalisation of production should
take the gross margin in 2002 back to the levels achieved in 2000, and then continue
to improve.
6.4 Consolidated data
cX¦H¤r¦|#fH#o?
cX¦Hr¦|HrQc
250.0
10%
200.0
8%
150.0
6%
100.0
4%
50.0
2%
0.0
0%
8
7
6
5
4
3
2
1999
2000
2001E 2002E 2003E
1
0
1999
Net sales (lhs)
2000
2001E
2002E
2003E
EBIT margin (rhs)
rQc&r
As a consequence of the assumptions detailed above, we have forecast a 7% 00-03
CAGR in consolidated net sales, which will grow to ¤198.2 million in 2003 from
¤160.4 million in 2000. CSP expects the sector to suffer from an average –7/8% rate
of decline in Italy. This means that in three years time, CSP’s market share could reach
pre-1998 levels (in volume and value).
Thanks to the optimisation of the production resources among the companies,
including increasing efficiency at the Poland subsidiary, the Group will benefit from a
reduction of industrial costs on net sales from 64% in 2000 to 63.2% in 2003,
enjoying a 36.8% gross margin in 2003. As for the SG&A expenses, the slight increase
in advertising expenditure will be offset by the reduction of commissions and general
and administrative expenses. The launch of the seamless products mainly in the
Oroblù and Lepel brands and the full consolidation of Lepel (which recorded in 2000
20.3% of advertising costs on sales) will cause a growing impact of A&P costs on net
sales (11.1% in 2001 and a progressive reduction to 10.6% in 2003).
In terms of profitability, in line with the company’s indication, the EBIT margin should
expand from 4.6% in 2000 to 7.8% in 2003, with an EBIT of around ¤15.5 million in
2003, with a dip at 4.3% in 2001 for the reasons largely explained above.
In our 2000-2003 projections, we forecast that the company will report a 34% CAGR
in net profit, which will rise from ¤2.9 million in 2000 to ¤7.0 million in 2003. Thus,
34
the net margin will re-align close to the 1999 level within three years, at 3.5% in
2003.
#f#o6H`HH
We expect the net debt to reduce to ¤48 million in 2003 from ¤67 million in 2001 as
a result of the reduction in working capital, obtained thanks to the rationalisation of
the collections and the consequent improvement in stock management. Moreover,
the increasing business in Russia is paid upfront.
As for capital expenditure, after four years of sustained investments, investments are
forecasted to remain at a maintenance level of ¤3 million per year.
6.5 1H01 consolidated results
#fH
In spite of the sector weakness (-10.2% in tights consumption in the first four months
of the year), CSP 1H01 results are roughly in line with those from 2000. The increase
recorded in sales in the first quarter (+23% yoy) has been completely offset by the 25% in the second quarter, causing an overall slight reduction of –1.2% yoy in the
first semester.
The flat results have mainly been due to a 17.5% sales reduction at Lepel’s in 1H01,
notwithstanding the +3% in value recorded by the Italian underwear business. The
decrease in sales was caused by a shift in the commercial strategy, now focused on
the distribution of new products throughout the entire year, while previously
concentrated in the first months.
CSP International total sales grew from ¤40.5 million in 1H00 to ¤46.9 million in
1H01, with a 15.9% growth rate. The diversification strategy in the underwear
business followed by the management succeeded in re-balancing the ongoing
contraction of the tights sector. On the other hand, Le Bourget recorded an 8.8%
sales growth from ¤15.5 million in 1H00 to ¤16.8 million in 1H01.
Bearing in mind that the first semester is the weakest and that the increase of
advertising expenditure should be repaid by growth in sales in the second part of the
year, 1H results are not indicative of a negative full year trend. CSP SpA should
benefit in the second half from the diversification in the seamless production.
Moreover, the sustained marketing investments should translate into Lepel’s recovery
in turnover (+7.8% estimated in the second part of the year, which will offset the –
18% of 1H01).
rQc#,cfc«
Notwithstanding the reduction in CSP Group sales, the increase in gross margins
shows the benefits of the cost reduction strategy and the synergies between the
companies. The heavy decrease in EBIT, which was still positive in the first quarter and
became negative in the second, is to be related to the marketing and promotion
expenses sustained by CSP SpA. In order to efficiently launch Oroblù and
Sanpellegrino underwear products, CSP invested ¤4.33 million in promotion
campaign (in 1H00 the advertising expenditure was ¤3.14 million). Moreover, the
higher amortisation linked to the revaluation of CSP SpA fixed assets and Lepel
brands have further reduced profitability.
35
cX¦HVr¦|¦#Hf«o6rjH#HjHo~>j
1999
1Q2000
1H2000
3Q2000
2000
1Q2001
1H2001
Net sales
Cost of Goods Sold
110.6
-73.0
35.0
-22.2
72.1
-46.5
112.1
-70.5
160.4
-101.9
43.1
-26.0
71.2
-44.5
as % of sales
Gross profit
66.0%
37.5
63.5%
12.8
64.4%
25.7
62.9%
41.6
63.5%
58.5
60.4%
17.1
62.5%
26.7
Gross Margin
Advertising and promotions
34.0%
-9.9
36.5%
-3.1
35.6%
-8.9
37.1%
-11.4
36.5%
-17.0
39.6%
-6.5
37.5%
-9.7
as % of sales
Commissions
9.0%
-2.6
8.9%
-0.6
12.3%
-1.7
10.2%
-2.6
10.6%
-3.5
15.1%
-0.9
13.7%
-1.6
as % of sales
Gen & admin Expenses
2.3%
-15.8
1.7%
-6.5
2.4%
-13.8
2.3%
-19.7
2.2%
-28.3
2.2%
-8.8
2.2%
-16.4
as % of sales
Total SG&A
14.3%
-28.3
18.6%
-10.2
19.2%
-24.5
17.6%
-33.8
17.6%
-48.8
20.3%
-16.2
23.0%
-27.7
as % of sales
EBIT
25.7%
9.2
29.2%
2.6
33.9%
1.2
30.2%
7.8
30.4%
9.8
37.6%
0.9
38.9%
-1.0
EBIT margin
8.0%
7.3%
1.7%
7.0%
6.1%
2.0%
n.a.
23.1%
33.4%
-1.2%
4.1%
-65.8%
n.a.
% yoy change
Net sales
Gross Profit
EBIT
Sales breakdown in Quarters
36
21.8%
23.1%
24.9%
30.1%
7. Detailed Financial Data
cX¦HSoHo#cro#f|o6rjH#HjHo~>j
1998
1999
2000
2001E
2002E
2003E
Sanpellegrino
n.a.
58.8
59.0
64.9
71.4
78.6
Oroblù
Starway
n.a.
n.a.
26.8
3.7
23.8
3.3
29.8
3.5
32.4
3.8
35.4
4.1
Private label
n.a.
6.2
9.9
9.3
8.8
8.4
Net sales
Cost of Goods Sold
119.5
-81.2
95.5
-63.5
96.0
-65.6
107.5
-74.2
116.5
-79.7
126.4
-85.3
Gross Profit
Gross Margin
Advertising and Promotions
38.3
32.1%
-13.0
32.1
33.5%
-8.8
30.3
31.6%
-7.8
33.3
31.0%
-9.6
36.8
31.6%
-10.4
41.1
32.5%
-11.3
as % of sales
10.9%
9.2%
8.1%
8.9%
8.9%
8.9%
Commissions
-3.3
-2.5
-2.3
-3.0
-2.6
-2.8
2.8%
-12.2
2.6%
-12.0
2.4%
-12.1
2.8%
-14.0
2.2%
-13.40
2.2%
-14.41
as % of sales
Total SG&A
10.2%
-28.5
12.5%
-23.3
12.6%
-22.1
13.0%
-26.6
11.5%
-26.3
11.4%
-28.4
as % of sales
as % of sales
Gen & Admin Expenses
23.9%
24.4%
23.1%
24.7%
22.6%
22.5%
EBIT
EBIT margin
Net interest income (exp.)
9.8
8.2%
-2.9
8.8
9.2%
-1.5
8.2
8.5%
-2.2
6.8
6.3%
-2.8
10.5
9.0%
-2.2
12.6
10.0%
-2.0
Other income (expenses)
Extraordinary
1.0
-3.7
0.8
-2.4
0.3
-2.1
0
-2.8
0
-2.2
0
-2.2
Total
-5.6
-3.0
-4.1
-5.6
-4.4
-4.2
4.2
3.5%
-2.6
5.7
6.0%
-2.5
4.1
4.3%
-1.2
1.2
1.1%
-0.6
6.1
5.2%
-2.9
8.4
6.7%
-4.0
63.2%
43.8%
29.1%
47.0%
47.0%
47.0%
1.5
1.3%
3.2
3.4%
2.9
3.1%
0.6
0.6%
3.2
2.8%
4.5
3.5%
Pre Tax profit
Pre-tax margin %
Taxes
Apparent tax rate %
Net Profit
Net Margin %
Adjusted Net profit
7.6
6.6
5.7
4.7
6.5
7.7
17.3
14.5%
16.9
17.7%
18.1
18.8%
17.7
16.5%
21.1
18.1%
23.5
18.6%
9.1
-7.5
11.4
-8.1
12.8
-9.9
11.6
-11.0
13.8
-10.6
15.3
-10.9
Sanpellegrino
61.5%
61.5%
60.4%
61.3%
62.1%
Oroblù
Starway
28.1%
3.9%
24.8%
3.4%
27.7%
3.3%
27.8%
3.3%
28.0%
3.3%
6.5%
10.3%
8.6%
7.6%
6.6%
EBITDA
EBITDA margin
Cash flow
D&A
% breakdown of total sales
Private label
% yoy change
Sanpellegrino
0.5%
10.0%
10.0%
10.0%
Oroblù
-11.3%
25.0%
9.0%
9.0%
Starway
Private label
-12.4%
59.2%
8.0%
-6.0%
8.0%
-5.0%
8.0%
-5.0%
Net Sales
-20.1%
0.5%
12.0%
8.4%
8.5%
Gross Profit
EBIT
-16.4%
-10.4%
-6.6%
-10.9%
9.9%
-17.4%
10.5%
54.8%
11.6%
20.6%
Net Profit
108.4%
-8.7%
-78.8%
418.9%
38.7%
EBITDA
Cash flow
-2.4%
25.1%
4.1%
12.6%
-1.8%
-9.5%
19.0%
19.5%
11.4%
10.8%
Source: CSP international and UBM estimates
37
cX¦HoHo#cro#f|#f#o6H`HH~>j
Working Capital
Net Fixed assets
1998
1999
2000
2001E
2002E
2003E
54.8
37.0
38.2
34.5
49.4
43.6
50.5
35.1
53.6
27.0
55.6
18.7
Intangibles
1.6
0.7
1.0
1.0
1.0
1.0
Investments
1.2
14.3
23.2
23.2
23.2
23.2
39.8
3.1
49.6
4.1
67.8
4.5
59.3
4.5
51.2
4.5
42.9
4.5
1.0
4.1
1.1
5.1
1.2
5.7
1.2
5.7
1.2
5.7
1.2
5.7
Total capital employed
Shareholders’ equity
90.5
44.5
82.7
47.1
111.5
61.2
104.2
61.5
99.1
63.5
92.8
66.2
Net debt
Cash and cash equivalents
46.0
0.1
35.6
1.5
50.2
0.2
42.6
35.6
26.6
Short-term Debt
Long-term Debt
24.9
20.9
21.6
15.5
32.6
17.8
Net financial position
45.7
35.6
50.2
Total fixed assets
TFR
Other funds
Total M/L term funds
cX¦HoHo#cro#f|#`
fr©#HjHo~>j
Net financial position at
the beginning of the
year
Cash flow
TFR provisions
Other non cash
1999
2000
2001E
2002E
2003E
-17.4
-44.5
-34.8
-50.2
-42.6
-35.6
9.1
0.5
11.4
1.0
12.8
0.5
11.6
0.0
13.8
0.0
15.3
0.0
0.0
0.0
3.0
0.0
Change in W/Capital
-16.3
16.6
-11.1
-1.1
-3.1
-2.0
Operating cash flow
Capex, net of disposals
-6.6
-16.5
28.9
-18.6
5.1
-15.8
10.4
-2.5
10.8
-2.5
13.3
-2.5
0.0
-3.9
0.0
-0.6
0.0
-1.2
0.0
-0.3
0.0
-1.3
0.0
-1.8
Free cash flow
Change in equity
Other
-27.0
0.0
0.0
9.7
0.0
0.0
-11.9
-2.9
-0.6
7.6
0.0
0.0
7.0
0.0
0.0
9.0
0.0
0.0
Change in net financial
position
-27.0
9.7
-15.4
7.6
7.0
9.0
-45.7
-35.6
-50.2
aV¤
aS
a¤
Investments
Dividends paid
38
1998
cX¦HIHr¦XHo6rjH#HjHo~>j
1999
2000
2001E
2002E
2003E
14.6
-9.5
43.8
-28.1
47.3
-30.1
49.6
-31.4
51.9
-32.6
as % of sales
64.9%
64.3%
63.6%
63.3%
62.8%
Gross profit
Gross Margin (%)
5.1
35.1%
15.6
35.7%
3.8
17.2
36.4%
4.0
18.2
36.7%
4.2
19.3
37.2%
4.3
as % of sales
Commissions
8.7%
0.1
8.5%
0.1
8.5%
0.1
8.2%
0.1
as % of sales
0.2%
11.9
0.2%
11.5
0.2%
11.9
0.2%
12.2
Total Sales
COGS
as % of sales
SG&A
-5.1
27.1%
-15.8
24.3%
-15.6
24.0%
-16.2
23.5%
-16.5
as % of sales
34.6%
36.0%
33.0%
32.7%
31.9%
EBIT
EBIT margin
% yoy change
Total Sales
0.1
0.4%
-0.1
n.a.
1.6
3.4%
2.0
4.0%
2.7
5.3%
Gross profit
EBIT
8.0%
5.0%
4.5%
10.1%
5.9%
5.9%
n.a.
23.5%
38.5%
2001E
2002E
2003E
cX¦HpH|Hfo6rjH#HjHo~>j
1999
Total Sales
2000
27.1
26.7
24.6
26.2
27.9
-18.1
-15.6
-14.5
-15.3
-16.0
as % of sales
67.0%
58.4%
59.1%
58.5%
57.5%
Gross profit
Gross Margin (%)
8.9
33.0%
11.1
41.6%
5.4
10.0
40.9%
5.4
10.9
41.5%
5.4
11.8
42.5%
5.4
20.3%
1.0
22.0%
0.9
20.6%
1.0
19.4%
1.0
3.8%
3.6
3.8%
3.0
3.7%
3.2
3.6%
3.4
COGS
as % of sales
Commissions
as % of sales
as % of sales
SG&A
-6.9
13.4%
-10.0
12.2%
-9.3
12.3%
-9.6
12.3%
-9.8
as % of sales
25.6%
37.6%
38.0%
36.6%
35.3%
EBIT
EBIT margin
2.0
7.4%
1.1
4.1%
0.7
2.9%
1.3
4.9%
2.0
7.2%
% yoy change
Total Sales
Gross profit
EBIT
-1.3%
-8.0%
6.5%
6.5%
24.5%
-45.8%
-9.6%
-35.0%
8.1%
79.1%
9.1%
58.2%
39
cX¦HI®#o|HffHXcorrfe#o6rjH#HjHo~>j
2000
2001E
2002E
2003E
Sales
yoy change (%)
6.12
6.7
5.0%
7.1
5.0%
COGS
-5.1
6.4
5.0%
-5.3
-5.5
-5.8
1.0
16.8%
0.1
1.1
16.8%
0.1
1.2
18.0%
0.1
1.3
18.5%
0.1
as % of sales
Commissions
1.7%
0.2
1.7%
0.2
1.7%
0.2
1.7%
0.2
as % of sales
2.8%
0.7
2.8%
0.7
2.8%
0.8
2.8%
0.8
as % of sales
SG&A
11.4%
-0.97
11.4%
-1.0
11.2%
-1.1
11.0%
-1.1
as % of sales
15.9%
15.9%
15.7%
15.5%
EBIT
EBIT margin
0.1
0.9%
0.1
0.9%
0.2
2.3%
0.2
3.0%
Gross profit
Gross Margin (%)
40
cX¦HIur¦|rQc&r#HjHo~>j
Group sales gross of inter-company
Inter-company
as % of sales
1998
1999
2000
2001E
2002E
2003E
n.a.
n.a.
137.2
26.6
172.6
12.2
185.8
13.1
199.0
14.1
213.2
15.1
n.a.
0.0%
7.1%
7.1%
7.1%
7.1%
119.5
n.a.
110.6
n.a.
160.4
114.5
172.6
124.1
185.0
131.9
198.2
139.7
n.a.
n.a.
11.9
12.9
13.7
14.5
n.a.
-81.2
n.a.
-73.0
10.4%
-102.6
10.4%
-111.2
10.4%
-118.2
10.4%
-125.2
as % of sales
67.9%
66.0%
64.0%
64.4%
63.9%
63.2%
Gross Profit
Gross Margin
38.3
32.1%
37.6
34.0%
57.8
36.0%
66.7
36.1%
-20.1
72.9
36.8%
-21.0
Net Sales
Gross Cost of Goods Sold
Inter-company
as % of costs
Cost of Goods Sold
-13.0
-9.9
-17.1
61.4
35.6%
-19.1
10.9%
-3.3
9.0%
-2.6
10.7%
-3.6
11.1%
-4.2
10.9%
-3.8
10.6%
-4.1
2.8%
-12.2
2.3%
-15.9
2.2%
-29.7
2.4%
-30.7
2.1%
-30.8
2.1%
-32.3
as % of sales
Total SG&A
10.2%
-28.5
14.3%
-28.4
18.5%
-50.4
17.8%
-54.0
16.6%
-54.7
16.3%
-57.4
as % of sales
23.9%
25.7%
31.4%
31.3%
29.6%
29.0%
9.8
8.2%
-2.9
1.0
9.2
8.0%
-1.8
0.5
7.4
4.6%
-3.0
0.0
7.4
4.3%
-3.3
0.0
12.0
6.5%
-3.0
0.0
15.5
7.8%
-2.6
0.0
Advertising and promotions gross
as % of sales
Commissions gross
as % of sales
Gen & admin expenses gross
EBIT
EBIT margin
Net interest income (exp.)
Other income (expenses)
Extraordinary
-3.7
0.6
1.8
0.0
0.0
0.0
Per-tax Profit
Taxes
4.2
-2.6
8.5
-3.4
6.1
-2.8
4.1
-1.8
9.0
-4.1
12.9
-5.8
Apparent tax rate %
Minorities
63.2%
0.0
39.8%
0.0
45.5%
-0.5
45.0%
-0.1
45.0%
-0.1
45.0%
-0.1
Net Profit
Net Margin %
Adjusted Net Profit
1.5
1.3%
7.6
5.1
4.6%
4.3
2.9
1.8%
0.3
2.1
1.2%
2.1
4.8
2.6%
4.8
7.0
3.5%
7.0
17.3
14.5%
15.6
14.1%
19.3
12.0%
21.1
12.2%
27.0
14.6%
30.8
15.6%
9.1
7.5
11.5
6.4
14.7
11.9
15.9
13.8
19.8
15.0
22.2
15.3
6.3%
5.8%
7.4%
8.0%
8.1%
7.7%
-7.5%
-1.9%
45.0%
53.7%
7.6%
6.3%
7.1%
8.6%
7.1%
9.3%
EBITDA
EBITDA margin
Cash flow
Depreciation & Amortisation
as % of sales
% yoy change
Net Sales
Gross Profit
EBIT
-5.5%
-20.0%
0.0%
62.5%
29.3%
Net Profit
EBITDA
231.7%
-9.8%
-43.8%
23.4%
-26.6%
9.8%
128.0%
27.7%
44.7%
14.1%
Cash flow
26.5%
28.4%
7.6%
24.8%
12.4%
41
cX¦HI¤r¦|#f#o6H`HH~>j
1998
1999
2000
2001E
Working Capital
54.8
54.9
72.6
77.9
Net Fixed assets
37.0
45.2
53.4
47.2
1.6
15.0
19.4
18.4
2002E
2003E
82.9
88.6
33.9
40.7
Intangibles
7.3
12.9
Investments
Total fixed assets
0.9
1.4
0.8
39.5
61.6
73.5
65.6
41.3
Severance Indemnity
3.1
4.2
5.9
5.9
53.6
5.9
Other funds
1.0
5.1
4.0
4.0
4.0
4.0
Total M/L term funds
4.1
9.3
9.9
9.9
9.9
9.9
Net capital employed
Shareholder’s fund
90.2
44.5
107.2
52.0
136.3
61.4
133.6
63.2
126.6
66.8
120.0
71.9
Minorities
5.9
0.0
0.0
7.6
0.0
0.0
0.0
Total equity
44.5
45.7
52.0
55.1
69.0
67.3
63.2
66.8
71.9
70.3
59.8
48.1
Cash and cash equivalents
Short-term Debt
0.1
36.0
2.7
34.6
2.0
45.6
23.7
Long-term Debt
Net debt
Gearing Ratio
Implied cost of debt
Financial items as % of sales
Interest cover
Working capital on sales
9.8
23.2
45.7
55.1
67.3
102.7%
105.9%
97.5%
111%
90%
67%
9.2%
2.4%
3.5%
1.6%
5.0%
1.9%
4.8%
1.9%
4.6%
1.6%
4.8%
1.3%
3.4
5.3
2.4
2.2
45.9%
49.7%
45.3%
45.1%
4.0
44.8%
6.0
44.7%
cX¦HIr¦|#`
fr©~>j
Net Financial Position at Beg
of the Year
Cash flow
TFR provisions
Other non cash
1999
2000
2001E
2002E
2003E
-45.7
-55.1
-67.2
-69.7
-59.2
9.1
0.5
11.5
1.1
14.7
1.6
15.9
0.0
19.8
0.0
22.2
0.0
-2.1
-3.6
-1.1
0.0
0.0
0.0
Change in W/Capital
-16.3
-0.1
-17.7
-5.2
-5.0
-5.7
Operating Cash Flow
Capex, net of disposals
-8.7
-16.5
8.9
-4.7
-2.4
-4.9
10.6
-3.0
14.8
-3.0
16.5
-3.0
0.0
-3.9
-13.9
-0.6
-1.7
-1.2
-9.0
-0.3
0.0
-1.3
0.0
-1.8
Free Cash Flow
Change in equity
Other
-29.1
0.0
0.2
-10.4
0.0
1.0
-10.2
0.0
-1.9
-1.7
0.0
-0.8
10.5
0.0
0.0
11.7
0.0
0.0
Change in Net Financial
position
Net Financial Position at Year
end
-28.9
-9.4
-12.1
-2.5
10.5
11.7
-45.7
-55.1
-67.2
-69.7
-59.2
-47.5
Investments
Dividends paid
42
1998
-16.8
8. Valuation
¤ Our DCF valuation yields a fair value of ¤2.9-3.0
¤ Diversification into underwear creates value
8.1
Historical multiples
The table below illustrates a comparison of CSP’s historical and forecast multiples. For
future years, multiples are based on our earning projections. As for 1997-2000, we
have considered the consensus estimates for the corresponding year-ends. Due to its
short track record, the irregular market trend and the company results, it is difficult
to recognise a reasonable trend of the stock’s historical multiples.
cX¦HIVroHo¦crc6#f¦fc|fH
1997 (*) 1998 (*) 1999 (*) 2000 (*)
Unexpected
Russian
P/E
EV/Sales
crisis
and slowdown in European
EV/EBITDA
EV/EBIT
consumption
2001E
2002E
2003E
25.0
1.9
17.2
1.7
20.3
1.5
29.5
1.5
29.5
0.8
12.9
0.7
8.9
0.6
n.a.
n.a.
n.a.
n.a.
9.8
14.8
10.7
19.4
6.3
17.9
4.5
10.2
3.6
7.1
Source: JCF and UBM estimates (*) Historical multiples based on historical consensus estimates
cX¦HIScrc6#f¦fc|fH
Profitability dilution due
P/E
EV/Sales
to acquisitions
EV/EBITDA
EV/EBIT
1997
1998
1999
2000
2001E
2002E
2003E
18.7
1.8
142.9
2.2
22.8
1.6
41.2
1.2
29.5
0.8
12.9
0.7
8.9
0.6
8.6
15.4
11.0
9.6
6.3
4.5
3.6
10.9
27.2
18.6
25.1
17.9
10.2
7.1
Contrary to historical consensus multiples, the current valuations reflect the
expectations of a weak 2001, but are yet to suggest that the company’s expected
growth and profitability improvements from 2002 are a blatant buy.
8.2
No real peer company
¤
The comparable universe
We have examined a selection of Italian companies in clothing and textiles, and
Wolford, the only listed direct competitor. We have not, however, included Sara Lee
in our analysis due to the wide range of activities in which it is involved (food and
beverage, intimates and underwear, household products). As for geographical
presence, all the players considered are mainly present in Italy and Western Europe.
cX¦HIH6c|crorQ`Hrj|##,fHrj|#ocH
Company
Activity
Marzotto
Manufacturer of textiles and
finished clothing.
Stefanel
Manufacturer and retailer of
leisurewear for men, women and
children world-wide
Manufacturer and retailer of
clothing, sporting goods and
accessories for men, women and
children
Benetton
2000 Sales Geographical
Breakdown
European Union (50%), Italy (20%),
North America (12.8%), Asia (7.9%),
Rest of Europe (6.1%), RoW (3%)
Italy (58.7%), EU (29%), Rest of
Europe (4.2%), RoW (8%)
Europe (74.3%), Americas (12.3%),
RoW (13.4%)
Source: UBM
43
cX¦HIr©`#o?#XcorQrj|##,fH
Sales
Marzotto
Benetton
EBITDA margin
EBIT margin
00/01
01/02
2001
2002
01
10.7%
5.1%
7.0%
5.6%
15.3%
20.2%
16.3%
20.5%
11.6%
13.7%
02
Net Profit
00/01
01/02
12.4%
-3.1%
14.2% -35.0%
14.7%
12.4%
Stefanel
8.5%
7.7%
13.9%
15.0%
7.7%
8.4%
84.3%
23.8%
Wolford
8.6%
7.8%
9.7%
10.3%
4.6%
5.4% -70.0%
50.0%
Average
CSP
8.2%
7.6%
7.0%
7.1%
14.8%
12.2%
15.5%
14.6%
9.4%
4.3%
10.1% -5.9% 25.2%
6.5% -26.6% 128.0%
Source: JCF, Bloomberg and UBM estimates
cX¦HIIarfQr?6rj|#cro
CSP
Wolford
Sales (¤m)
160.4
148
Gross Margin (%)
EBIT margin (%)
36.0%
4.6%
77.1%
4.4%
Net Profit (%)
2.9
4.4
3-years EPS CAGR (%)
Positioning
35.9%
Medium high market, high premium
price
Italy (48%), Western Europe (25%)
Eastern Europe (23%)
Sustained diversification strategy in
underwear business
Markets
Others
Luxury end of the market
Austria (22.6%), USA (9.9%), Asia
(3.9%) RoW (63.6%)
Strong competitive advantage given by
the direct control of distribution
channel
Source: UBM, Company Reports
Figure 89 summarises the trading multiples of CSP and its peers in the 2001-2002
period. We believe that the comparison presented below is not highly significant, but
in any case the predominant indication is that the stock is expensive in the context of
the Italian textiles sector.
cX¦HIp#?coX¦fc|fHrQrj|##,fHrj|#ocH
Price
Market
Cap
EV
2001
2002
2001
2002
2001
2002
2001
2002
2001
Marzotto
8.4
606.3
937.3
9.7
8.5
3.2
2.9
0.5
0.5
3.4
3.0
4.5
4.0
Benetton
11.3
2707.4
11.8
9.8
7.5
6.4
1.3
1.2
6.0
5.3
8.6
7.3
Stefanel
Average
1.8
190.3
248.2
18.5
13.3
14.9
11.1
7.5
6.1
6.4
5.3
0.8
0.9
0.8
0.8
5.9
5.1
5.1
4.5
10.6
7.9
9.0
6.8
Wolford
10.6
53.0
95.0
35.3
21.2
8.8
6.6
0.6
0.6
6.8
5.9
23.8
19.0
CSP
P/E
Premium/(discount) v Italian peers
Premium/(discount) v Wolford
PCF
EV/Sales
EV/EBITDA
EV/EBIT
2002
nm
16.8%
-35.4%
-40.2%
-11.8%
-18.3%
22.6%
0.7%
nm
49.4%
-16.5%
-39.0%
-55.6%
-52.6%
20.7%
7.1%
-8.0%
-24.2%
-24.8%
-46.8%
Source: JCF, Bloomberg and UBM estimates
8.3
DCF value is ¤3 per
share
44
¤
DCF Valuation
We have performed a DCF valuation based on the scenario described. Furthermore, in
relation to the recent events in the international setting, we have also considered a
worst case scenario. In this simulation we assume a sharp decrease in general
consumption, and a huge contraction in fashion spending. Thus, we have reduced
our forecast for turnover, for the benefits deriving from the exploitation of the
economies of scale in production, the reduction in general expenses and the
improvement in profitability, as summarised in Figure 90 below. An analysis of the
results suggests that the market is currently discounting the occurrence of our base
case, and we believe this to be correct as it already portrays a conservative scenario.
We would however point out that, should the worst case scenario prevail, the stocks
could suffer from a significant downside of up to 20%.
cX¦Hp®
#f6¦f#croL#co¦j|cro
Base scenario
Worse scenario
7%
2%
1%
2%
from 4.3% to 7.8%
Flat at 8%
from 4.3% to 5.8%
Flat at 6%
Sales growth 2001-03 (CAGR)
Sales growth 2004-11 (CAGR)
EBIT margin 2001-03
EBIT margin 2004-11
Normalised tax rate
45%
45%
Average capex p.a. (¤m)
Perpetuity
3
1.8%
Jan-00
1.8%
WACC 2001
6.1%
2.0%
WACC 2002
WACC 2003-onwards
6.1%
6.4%
2.0%
2.0%
Base scenario
Worse scenario
139.1
58.1%
121.2
0.5
-68.8
70.3
-68.7
52.6
N. shares (m)
24.5
24.5
Fair value (¤)
2.9
2.1
Source: UBM
cX¦Hpu
H¦f
EV (¤m)
Terminal value as % of EV
NFP (avg. 2001/00) (¤m)
Equity value (¤m)
Source: UBM
8.4
The diversification in
the underwear business
yields value creation
¤
Value creation
We have analysed the ability of CSP to create value from its strategic diversification in
the underwear business. This strategy seems a correct one as thanks to production
and distribution synergies it adds value to the group.
cX¦Hp¤roc,¦crorQo?H©H#¦coHrr¦|#f¦HH#cro
4.0
10%
3.0
8%
2.0
6%
1.0
4%
0.0
-1.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2%
0%
-2.0
-3.0
-2%
-4.0
-4%
-5.0
-6%
Value Creation (Group)
Value Creation (Underwear)
Spread Roce-WACC (Group)
Spread Roce-WACC (Underwear)
Source: UBM.
45
8.5 Conclusion
In view of the above considerations, and although CSP is trading well below book
value, we believe that the low visibility in the medium-term is more than offsetting
the new triggers of the equity story. We recognise the appeal of valuation (in
particular, a P/Book ratio of 1x and a 2002 EV/EBITDA multiple of 4.5x) and the
positive implications of the diversification strategy. Also, the share’s three-and-a-half
yearlong fall in price seems to have brought it to a bottom threshold. All in all,
however, we believe that selectivity is the current theme of the market and that CSP is
still surrounded by too many uncertainties in terms of the trend of hosiery volumes
and the development of the underwear business. Furthermore, 2001 is still a year of
transition for CSP’s profitability. We believe the market will prefer to wait until the
concrete signs of the turnaround become more evident.
46
47
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Market Performer Price:¤2.5 Stretchy but not Ladder

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