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Luxury and Cosmetic Financial Factbook

Keep calm and care about your consumer The luxury and cosmetics financial factbook 2016 edition

Luxury and Cosmetic Financial Factbook - Page 2

2 Executive summary Statistics and key facts Index evolution Contents 8 DCF and valuation parameters A. Financial parameters B. Operating aggregates C. Advertising expenses D. SOTP and segment analyses E. Trading multiples F. Transaction multiples 36 Industry overview G. Global luxury goods market H Global cosmetic goods market I. Points of view from EY global sector and other industry professionals 80 Methodology Approach and SOTP analyses Sample selection Focus on YOOX Net–A–Porter 83 Glossary Contact us 84

Page 2 Executive summary Executive summary Oelcome to the sixth edition of EY annmal financial factbooc for the lmxmrq and cosmetics industries. The report combines publicly available data with input from leaders who work with the world’s leading companies in the sector. It looks at current trends, the evolution of operating aggregates and ceq financial parameters. In 2015, the luxury goods industry experienced 13% growth at current exchange rates, reaching Ò*-+b3 hooener, cmrrencq Ömctmations oere the main contribmtor of this grooth, with “real” growth reported to be 1%, lower than in 2014. The global cosmetics industry experienced a higher rate of growth (3.9%), reaching a total market value of €203b in 2015. Eanq factors contribmte to the state of the marcet. ?inen the significant impact that the Roberto Bonacina Marco Pier Mazzucchelli socioeconomic and political climate can have on a global scale, it would be remiss not to acknowledge this instability early on in our report. While this study aims to provide Partner, Lead Advisory M&A, Fashion & Luxury Partner, Head of TAS, MED a situational analysis, our conclusion is that the current climate and general instability Milan, EY S.p.A. Milan, EY S.p.A. across the global financial marcets, as oell as other intangible elements, are contribmting [email protected] [email protected] to the decline noted across the luxury sector. Recent global political disorder, terrorist threats and attacks as well as slowdown in economic growth rate in China are relevant factors that can impact any given industry. In short, uncertainty can have an impact on the mood of anq consmmer, none more so than ohen a significant spend is reimired, smch as within the luxury sector. On a brighter note, the luxury consumer has never been so sophisticated and is now seeking “the complete retail experience,“ ready for a trip to an exotic destination rather than limiting his or her purchase to the latest “it-bag.“ @oo shomld lmxmrq plaqers act to anoid losing their consmmers7 Oomld a imicc reaction smffice, or do brands need to renieo their entire bmsiness model7 In any case, companies must take time to get to know their consumers better, understand their desires in order to better engage them, and secure their attention and spend. The luxury and cosmetics financial factbook 2016

Executive summary PPage 3age 3 e summary utiv ec Ex The competitive landscape is changing. To keep pace, luxury brands must: In retail stores, which offer the opportunity to physically interact with consumers, • Increase the digital effort — Luxury companies are behind in an increasingly digital companies must aim to offer dedicated services by employing knowledgeable and world. New technology has changed the way companies do business, providing new highlq imalified shop assistants oho can pronide an exceptional consmmer experience. communication channels, with buying behaviors evolving and the emergence of a new Lhis goes beqond neo openings3 companies shomld focms on improning the imalitq segment, the “millennials.” Immediacy is key, so there is a constant need to innovate offered in their existing network across every single customer touch point. within the digital world, which seems to contrast with the exclusivity known for its The 2016 factbook, based on industry leaders’ feedback, offers both operational and poleposition at the core of the luxury market. Luxury brands have to manage dual financial aggregates on the lmxmrq and cosmetics indmstries as oell as ceq nalmation aspects; namely to (i) maintain their heritage and create long-term value while (ii) parameters and multiples. It looks at the industries’ future trends and includes input from responding to consmmers’ expectations and trqing to offer mniime prodmcts that offer omr sector leaders. Oe hope qom find this report to be insightfml and thomght%pronocing instant gratification. At is the latter ohere lmxmrq companies are riscing losing gromnd to for wider discussion within your organization. more dynamic, digitally savvy players. Do not hesitate to contact us with any comments or suggestions. • Hold the positioning — Another category of players is threatening the balance of luxury Thank you, fashion houses: the affordable luxury segment is gaining market share, continuously offering new products that are both fashionable and competitively priced. Price positioning is crucial, never more so than today when consumers appreciate and respond well to transparency given that digital channels provide them with a constant Öoo of information regarding prodmcts’ characteristics oorldoide. Lop%end lmxmrq companies shomld therefore emphasire the imalitq and raritq of their offerings to encourage their clients to spend more and reduce the risk of cannibalization by more Roberto Bonacina Marco Pier Mazzucchelli nimble competitors. [email protected] [email protected] • Defend the luxury experience — During the luxury journey, a consumer is surrounded by opportunities that may not always be characterized by material, long-term pmrchases3 instead, theq maq hane intangible or more ephemeral benefits, smch as travel, art, epicurean gastronomy. In such an environment, personal luxury goods companies must demonstrate that they can offer the same level of experience and customer satisfaction. The luxury and cosmetics financial factbook 2016

Page 4 Executive summary Statistics and key facts Global personal Chinese consumers remain Today, beauty is synonymous with personalized products luxury market the top consumers by and services that enrich consumer experience and its grew by 1% in country with one-third of relationship with the brands, in all distribution sectors. 2015 at constant the global exchange market. The global The accessories segment accounted rate. cosmetics market for about 30% of the 1/3 grew by 3.9% global personal in 2015. luxury goods 1% The online luxury market market in 2015. has grown tenfold since 3.9% ~30% The company– 2005 and accounted for owned retail about 7% of total sales Luxury cosmetics remains the most channels are in 2015. dynamic sector with 5.7% growth, growing twice due mostly to as fast as the ~7% e-commerce sales. wholesale channel at current 5.7% exchange rates ;mrrent Ömctmations, a and continue to strong US dollar and the gain market share depreciated Euro helped the New markets, such as India, South Africa and due to network market to show double-digit Turkey, generated more than expansion. positive impact on the two–thirds of the beauty overall market value. market growth in 2015. >2/3 2X Social media has made an online platform a critical part of every brand’s strategy. The luxury and cosmetics financial factbook 2016

Executive summary Page 5 Index evolution e summary utiv The analysis reported in the graph below shows that the EY luxury and cosmetics index (represented by the companies included in the EY factbook) has outperformed the ec market over the last eight years with a total return of 83%, corresponding to an anerage qearlq significant retmrn of 8%. Ex This relatine performance actmallq illmstrates the appetite of innestors for an indmstrq that is characterired bq solid financial fmndamentals in terms of sales grooth, mabor profitabilitq, resilient international client base and exposmre to grooing marcets, attribmting higher nalmations to companiesÇrelated secmrities, despite the economic instable environment. Financial markets this year have been characterized by a high level of instability generated by a series of events: geopolitical events, commodities pricing volatility and the China stock market volatility have all hampered growth. The EY index is a representation of the lmxmrq and cosmetics companies analqred oithin the factbooc. 9 specific oeight has been attribmted to each companq inclmded in the EY index based on its market capitalization and revenues (each of these two parameters weighing for a half). The relative weights have been revised for each company’s inclusion after its initial public offering (IPO). Finally, the evolution of the EY index has been compared to those of the S&P 500 and STOXX Europe 600 indexes, using 1 January 2008 as a starting date (rebased to 100). =Q lmpmjy and cgseelics indep englmlign cgepajed lg eabgj indices Zase )(( as g^ ) Banmajy *((0! As of 1 250 31 March CAGR 2016 08–16 200 183 8% 150 142 4% 100 94 -1% Zase )(( as g^ ) Banmajy *()-! 50 125 120 As of 1 January 115 2016 0 110 107 Jan 08 Apr 08 Jul 08 Oct 08Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15Jan 16Mar 16 105 102 EY Index S&P 500 Europe 600 100 99 95 90 85 5 5 5 5 5 5 5 15 5 15 15 15 6 1 1 1 1 1 1 1 n b ar r ay 1 n l g p ct v c Ja Fe Ap Ju u e O o e M M Ju A S N D Jan 1 Source: Capital IQ. EY Index S&P 500 STOXX Europe 600 1. Compound annual growth. The luxury and cosmetics financial factbook 2016

PAGE 6 OPENING DCF and valuation parameters LUXURY AND COSMETICS THE EY FINANCIAL FACTBOOK 2014

Opening Page 7 A Financial parameters B Operating aggregates C Advertising expenses s er aluationt ame ar D SOTP and segment analyses p DCF and v E Trading multiples F Transaction multiples The luxury and cosmetics financial factbook 2016

Ha_e 0 DCF and valuation parameters A Financial parameters Luxury companies reflect moderate but steady growth, with a limited risk profile • O9;;" ranges from / Kafilo! to )( ;oach!, depending on the companq’s risc profile perception oith an overall limited variance. • LTGR presents a larger range (1% to 4.3%) mainly depending on size, maturity stage of the retail network and prodmct dinersification. Lhe estimated anerage DL?J is slightlq looer onerall than last qear’s figmre, reÖecting a prenailing consernatine nieo among financial marcets operators abomt fmtmre grooth. O9;; and DL?J Zy cgepany Companies are sorted in decreasing order based on the Luxury Market capitalization WACC Gearing Beta LTGR market capitalization in euros companies (in €m) observed as of 31 March 2016 LVMH //$(0) 0&( -&1 (&1/ *&0 10.5% (one-month average). Coach Michael Kors, Tumi and Hengdeli Richemont ++$,.( 0&+ ),&+! )&** *&, 10.0% are not represented in the graphic Hermès ++$+*) 0&* ,&-! (&// +&* 9.5% Chow Tai Fook at left because LTGR data for them Luxottica *+$01( /&+ ,&+ (&1, *&. Hugo Tiffany was not available. Kering *($+,) 0&) )0&/ (&1- *&- 9.0% Boss Ralph Lauren Prada Burberry Brunello Swatch )/$)0- 0&. 1&)! )&). *&- C Swatch Tod's Cucinelli C8.5% WA Salvatore Richemont Coach 1$//, )(&( ,&+! (&0. *&- Ferragamo Moncler YOOX Net-A-Porter 8.0% Hermès Michael Kors 1$)/1 1&/ /&+! (&// n/a Jimmy Choo Kering LVMH Li^^any 0$)*0 1&( .&( )&(+ *&- 7.5% Luxottica Prada 7,675 0&0 )&1 (&.0 *&- Kafilg 7.0% :mjZejjy /$..0 0&0 0&*! )&)* *&/ 6.5% Ralph Lauren /$+)( 0&. 0&(! )&)( )&( 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% ;`go Lai >ggc 5,657 1&+ 0&0 (&/( +&( LTGR Hugo Boss +$0,* 0&. +&, (&0+ *&. Fote2 bmbble sire reÖects marcet capitaliration.

DCF and valuation parameters Ha_e 1 A Financial parameters The cosmetics sample is characterized by stable growth and low risk, with the exception of Natura • Fatmra’s :raril! DL?J continmes to be significantlq higher the the sample’s anerage, drinen bq its geographical coverage. • 9nerage O9;; is inÖmenced bq the significantlq high lenel of Fatmra. s er aluationt ame ar p DCF and v O9;; and DL?J Zy cgepany Companies are sorted in decreasing order based on the Cosmetics Market capitalization WACC Gearing Beta LTGR 16.0% market capitalization in euros companies (in €m) 15.0% Natura observed as of 31 March 2016 L'Oréal 0/$-,* /&0 (&* (&0. *&+ (one-month average). 14.0% Estée Lauder +($0,+ /&0 *&, (&1) *&* Shiseido is not represented in the 13.0% graphic at left because LTGR data :eiejsdgj^ )0$*+( /&0 .&,! (&0, *&. 12.0% was not available. Coty 0$+)0 /&( */&* (&/0 *&) Shiseido /$10, ,&1 ,&+ (&10 n/a 11.0% Natura *$1+. )-&, )0&- (&1, .&. C C10.0% L'Occitane 2,472 0&1 )*&.! (&/, )&0 WA L'Occitane Average 9.1% 4.8% 0.86 2.9% 9.0% L'Oréal LVMH Median 7.8% 2.4% 0.86 2.3% 8.0% Estée Lauder Beiersdorf Maximum 15.4% 27.2% 0.98 6.6% 7.0% Minimum 7.0% (12.6%) 0.74 1.8% Coty 6.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% LTGR Fote2 bmbble sire reÖects marcet capitaliration.

Ha_e )( DCF and valuation parameters A Financial parameters EY luxury and cosmetics sample: summary of financial parameters WACC Gearing Beta LTGR Safilo 7.0% Richemont(14.3%) Prada 0.68 Ralph Lauren 1.0% Coty 7.0% L'Occitane (12.6%) Brunello Cucinelli 0.68 L'Occitane 1.8% Luxottica 7.3% Swatch (9.1%) Chow Tai Fook 0.70 Jimmy Choo 1.8% L'Oréal 7.8% Burberry (8.2%) L'Occitane 0.74 Moncler Kafilg 2.0% Beiersdorf 7.8% Ralph Lauren (8.0%) 0.74 Michael Kors (7.3%) Hermès 0.77 Coty 2.1% Estée Lauder 7.8% Estée Lauder 2.2% Beiersdorf (6.4%) Michael Kors 0.77 LVMH 8.0% Tod's (5.8%) Coty 0.78 L'Oréal 2.3% Kering 8.1% Hugo Boss 0.83 Tumi (5.7%) Richemont 2.4% Jimmy Choo 8.1% Hermès (4.5%) Beiersdorf 0.84 Moncler 8.2% Swatch 2.5% Coach (4.3%) L'Oréal 0.86 Prada 2.5% Hermès 8.2% YOOX Net-A-Porter (0.3%) Tod's 0.86 Richemont 8.3% Coach 0.86 Coach 2.5% L'Oréal 0.2% YOOX Net-A-Porter 8.3% Salvatore Ferragamo 0.6% Average 0.91 Kering 2.5% Tod's 8.5% Moncler 1.4% Estée Lauder 0.91 Tiffany 2.5% Hugo Boss 8.6% Prada 1.9% Salvatore Ferragamo 0.93 Salvatore 2.6% Ferragamo Salvatore Ferragamo 8.6% Estée Lauder 2.4% Hengdeli 0.94 Hugo Boss 2.6% Ralph Lauren 8.6% Average 3.0% Natura 0.94 Beiersdorf 2.6% Brunello Cucinelli 8.6% Hugo Boss 3.4% Luxottica 0.94 Luxottica 2.6% Swatch 8.6% Shiseido 4.3% Kafilg 0.94 Luxottica 4.3% Kering 0.95 Moncler 2.7% Average 8.7% Average 2.7% Brunello Cucinelli 5.1% Jimmy Choo 0.96 Prada 8.8% Tod's 2.7% LVMH 5.9% LVMH 0.97 Burberry 8.8% Shiseido 0.98 Tiffany 6.0% Burberry 2.7% L'Occitane 8.9% Chow Tai Fook 8.8% YOOX Net-A-Porter 0.99 LVMH 2.8% Tiffany 9.0% Natura 18.5% Tumi 1.00 Hengdeli 9.1% Chow Tai Fook 3.0% Kafilg 18.7% Tiffany 1.03 Chow Tai Fook 9.3% Hermès 3.2% Kering 18.7% Ralph Lauren 1.10 Michael Kors 9.7% Jimmy Choo 19.5% Burberry 1.12 YOOX Net-A-Porter 3.6% Coach 10.0% Coty 27.2% Swatch 1.16 Brunello Cucinelli 4.3% Natura 15.4% Hengdeli 29.3% Richemont 1.22 Natura 6.6% WACC 8.7% Gearing 3.0% Beta 0.91 LTGR 2.7% Low High Low High Low High Low High Industry benchmark Industry benchmark Industry benchmark Industry benchmark Source: Data based on consensus of several brokers reports for each company. Note: LTGR data was not available for Tumi, Shiseido, Michael Kors and Hengdeli. The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Ha_e )) B Operating aggregates The sales outlook of luxury companies points to limited growth opportunities due to underperformance of key markets and a shift to global pricing YOOX Net–A–Porter notably outperformed the Pricing growth has become a challenge for the luxury peers that have historically achieved ~25% growth through price increases. The popularity of the digital channel has made maintaining price divergence in average growth levels. different marcets difficmlt. >mtmre grooth is expected thromgh2 s er • Introduction of new products at lower price points to drive volumes, addressing the lower end segment aluationt ame ar • Improved volumes due to robust tourist–related demand p DCF and v Sales CAGR, *Kering sales for FY14A–FY18E CAGR >Q)-9'=Ç>Q)0= È lmpmjy cgepanies exclude numbers for Redcats, Sales FY14A FY15A/E FY16E FY17E FY18E Sergio Rossi and Groupe Fnac. (in €m) (FY15A/E–FY18E) YOOX Net-A-Porter 20.4% Notes: LVMH +($.+0 35,664 +/$+)0 +1$+// ,)$.), -&+ Egnclej 11.3% • *()- figmres are estimated Kering* )($(+0 ))$-0, )*$)(+ )*$0/- )+$-// -&, Jimmy Choo 10.3% (“E“) or actual (“A“) , depending Richemont )($,)( ))$,*/ ))$1++ )*$)1- )*$1*/ ,&* :jmnellg ;mcinelli 10.1% on their availability as of the Luxottica 7,652 0$0+/ 1$.)0 )($*./ ))$).- 0&) Dmpgllica 8.1% date of this study. Swatch /$1/0 7,742 0$*-( 0$./0 0$00, ,&/ • Figures are converted into ;`go Lai >ggc 7,276 .$00* /$(,, /$.)1 0$,0* /&* Eic`ael Cgjs 8.0% euros, using exchange rates Ralph Lauren .$.1) .$.-0 .$1(( 7,276 7,654 ,&0 Hermès 7.5% as of 31 March 2016 (Source: Hermès ,$))1 ,$0,) 5,245 5,652 .$()0 /&- ;`go Lai >ggc Capital IQ). 7.2% • Figures for YOOX Net–A– Michael Kors +$0+0 ,$(01 ,$*00 ,$-)) -$)-. 0&( 9neja_e 6.6% Porter for FY14 and FY15 are Coach ,$**( +$.0( +$1(( ,$(-, 4,252 ,&1 Tumi 6.1% presented on a pro forma basis, Li^^any 3,732 +$.(, +$/-1 +$1.- ,$).1 -&( i.e., assuming the merger was Prada 3,552 +$-,0 3,553 3,664 +$0// +&( Kering 5.4% effective at the start of FY14. :mjZejjy +$)1) +$)1, +$+), +$,1( 3,722 -&* DNE@ 5.3% • Hengdeli is not represented Hugo Boss 2,572 *$0(1 *$0/( *$1/, *$10. *&) Burberry 5.2% in the graphic at left because FY18E data was not available. Hengdeli *$((1 )$0)( )$1.+ *$(.( n/a n/a Tiffany 5.0% YOOX Net–A–Porter )$*/* )$..- )$1.* 2,357 *$1(0 *(&, Coach 4.9% Salvatore Ferragamo )$+*) )$,)/ )$-(* )$-0* )$.)1 ,&- Jalp` Damjen 4.8% Kafilg )$)/1 )$*/1 )$+0- )$*1- )$,** +&. Swatch 4.7% Tod's 1.. )$(+/ )$(0. )$)+1 )$)0) ,&, Kalnalgje >ejja_aeg 4.5% Moncler .1, 00( )$((+ )$))1 )$*)+ ))&+ Tod's 4.4% Tumi 463 ,0) -)) -+) 575 .&) Brunello Cucinelli 356 ,), 454 -() 552 )(&) Richemont 4.2% Bieey ;`gg +/1 ,(* 443 ,0) -+1 )(&+ Kafilg 3.6% Average 6.6% Prada 3.0% Median 5.3% Hugo Boss 2.1% Maximum 20.4% Source: Data based on consensus of several brokers reports for each company. Minimum 2.1% Estimated data have not been derived from internal insights. The luxury and cosmetics financial factbook 2016

Ha_e )* DCF and valuation parameters Hermès 35.5% B Operating aggregates Sales growth expectations for cosmetics players are lower than Moncler 33.6% for the luxury segment but the gap is narrowing Michael Kors 29.0% Richemont 26.7% Tiffany 25.1% Prada 24.7% D’Gccitane and Fatmra significantlq L’Occitane and Natura are expected to post strong growth in the next few years, driven by e-commerce sales Coach 24.0% outperformed the cosmetics sample and emerging brand expansion for D’Gccitane, and channel dinersification and international grooth for Salvatore Ferragamo 23.5% expectations. Natura. The cosmetics market is likely to be driven by: LVMH 23.2% • Penetration by existing players with innovative products into new markets Swatch 23.1% • Increase of consumer purchasing power Luxottica 22.9% Tod's 21.3% • Rise of millennial consumers Hugo Boss 21.1% Sales CAGR, Notes: Average 21.0% Burberry Sales 20.9% CAGR >Q)-9'=Ç>Q)0= È cgseelics cgepanies • *()- figmres are estimated (in €m) FY14A FY15A/E FY16E FY17E FY18E (FY15A/E–FY18E) Tumi 20.5% (“E“) or actual (“A“), depending L'Occitane 9.7% on their availability as of the Kering L'Oréal 19.1% 22,532 25,257 *-$/0. */$(,/ *0$.(/ ,&* Natura 9.3% date of this study. Estée Lauder 1$.+) 1$,.. 1$0.- )($,.( ))$))1 -&- Brunello Cucinelli 17.3% Shiseido 6.4% • Figures are converted into :eiejsdgj^ .$*0- .$.0. .$0-+ /$).. 7,523 ,&( Ralph Lauren 17.1% euros, using exchange rates Shiseido .$(/, .$*,( .$011 /$))1 /$-*) .&, Average 5.9% as of 31 March 2016 (Source: Jimmy Choo 16.8% Estée Lauder 5.5% Capital IQ). Chow Tai Fook Coty 10.9% +$11/ +$0-1 3,762 +$0)/ ,$(1/ *&( L'Oréal 4.2% Natura )$0++ )$1-, *$)*. 2,337 *$-,1 1&+ Kafilg 9.8% L'Occitane )$)/0 )$+(0 )$,)) )$-+, )$/*/ 1&/ Beiersdorf 4.0% YOOX Net-A-Porter 9.5% Average 5.9% Coty 2.0% Hengdeli 7.5% Median 5.5% Maximum 9.7% Minimum 2.0% Source: Data based on consensus of several brokers reports for each company Estimated data have not been derived from internal insights. The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Ha_e )+ B Operating aggregates The luxury sample EBITDA margin indicates margin pressure in the near term EBITDA remains largely below 30%, with few The slightly lower EBITDA margin presented this year is mainly due to: • Earcet nolatilitq drinen bq cmrrencq soings and Ömctmating tomrist Öoos notable exceptions s • Lower growth experienced in some of the key markets, such as mainland China and Hong Kong er aluationt ame ar p DCF and v Average EBITDA margin, *Kering margin for FY14A–FY16E EBITDA Average ratio >Q).=Ç>Q)0= È lmpmjy cgepanies excludes numbers for Redcats, margin FY14A FY15A/E FY16E FY17E FY18E (FY16E–FY18E) Sergio Rossi and Groupe Fnac. Hermès 35.5% Notes: LVMH *+&( *+&( *+&( *+&+ *+&, *+&* Moncler 33.6% • Figures for YOOX Net–A– Kering* )1&0 )/&/ )0&- )1&( )1&/ )1&) Michael Kors 29.0% Porter for FY14 and FY15 Richemont +(&- *.&) *.&. *.&- */&( *.&/ Richemont 26.7% are presented on a pro–forma Luxottica *(&) *)&( **&) **&- *,&( **&1 Tiffany 25.1% basis, i.e., assuming the merger Swatch *)&. *(&/ *+&( *+&, *+&( *+&) was effective at the start of ;`go Lai >ggc ))&- 1&1 )(&- ))&( ))&) )(&1 Prada 24.7% FY14. Ralph Lauren )/&/ )-&- ).&* )/&+ )/&/ )/&) Coach 24.0% • The 2015 EBITDA margin Hermès +-&) +-&, +-&. +-&/ +-&* +-&- Salvatore Ferragamo 23.5% is computed on the basis of Michael Kors +)&1 *1&. *0&, *1&. *1&( *1&( LVMH 23.2% either actual (“A“) or estimated ÉEÉ! figmres for *()- sales, Coach */&* )1&+ **&( *+&- *.&/ *,&( Swatch 23.1% depending on their availability. Li^^any *-&- *+&- *,&/ *-&) *-&, *-&) Luxottica 22.9% As some groups are listed Prada *.&1 **&. *,&. *-&* *,&+ *,&/ Tod's 21.3% under different jurisdictions :mjZejjy **&1 *)&/ *(&1 *)&) *(&1 *(&1 around the world, they may use Hugo Boss *+&( *)&* *)&( *)&* *)&* *)&) Hugo Boss 21.1% different GAAP, and therefore Average 21.0% a direct comparison of EBITDA Hengdeli /&* -&/ /&) /&- /&1 /&- Burberry 20.9% may be less meaningful than YOOX Net–A–Porter .&/ /&. 0&+ 1&+ )(&0 1&- Tumi if their results were presented Salvatore Ferragamo **&* **&1 *+&, *+&/ *+&- *+&- 20.5% under the International Kafilg 1&1 /&0 1&1 0&- ))&( 1&0 L'Occitane9.7% Kering 19.1% Accounting Standards. Natura9.3% Brunello Cucinelli 17.3% Tod's *(&( )1&- *(&0 *)&- *)&- *)&+ Shiseido6.4% Ralph Lauren Moncler ++&- +,&) ++&0 ++&0 ++&, ++&. 17.1% Tumi *)&* *)&. *(&1 *(&) *(&. *(&- Average5.9% Jimmy Choo 16.8% Brunello Cucinelli )/&/ ).&/ )/&) )/&+ )/&, )/&+ Estée Lauder5.5% Chow Tai Fook 10.9% Bieey ;`gg ).&0 ).&( ).&1 )/&/ )-&1 ).&0 L'Oréal4.2% Kafilg 9.8% Average 21.4% 20.0% 20.7% 21.0% 21.3% 21.0% Beiersdorf4.0% YOOX Net-A-Porter 9.5% Median 21.6% 21.0% 21.0% 21.5% 21.5% 21.3% Coty2.0% Hengdeli 7.5% Maximum 35.1% 35.4% 35.6% 35.7% 35.2% 35.5% Source: Data based on consensus of several brokers reports for each company. Minimum 6.7% 5.7% 7.1% 7.5% 7.9% 7.5% Estimated data have not been derived from internal insights. The luxury and cosmetics financial factbook 2016

Ha_e ), DCF and valuation parameters Cosmetics companies maintain last year’s average EBITDA of B Operating aggregates Jimmy Choo 8.5% Prada 8.3% 18% for the FY16E–FY18E period Coach 7.2% Hugo Boss 6.7% Swatch 6.7% Cosmetics companies are expected to report expansion in operating margins in the coming years. L’Oréal and Estée Lauder are showing Tumi 6.5% The key drivers of margin growth are: omtperforming profitabilitq. YOOX Net-A-Porter 6.4% Hermès 6.3% • Increasing disposable income and improving lifestyle of individuals Burberry 6.3% • Demand for high-end products (presenting higher margins) Michael Kors 6.3% Richemont 5.8% Tiffany 5.6% Average 5.6% Salvatore Ferragamo 5.5% Average EBITDA margin, Note: the 2015 EBITDA margin is EBITDA Average ratio computed on the basis of either >Q).=Ç>Q)0= È cgseelics cgepanies Luxottica 5.5% FY14A FY15A/E FY16E FY17E FY18E actual (“A“) or estimated (“E“) margin (FY16E–FY18E) L'Oréal 21.9% Brunello Cucinelli 5.5% figmres for *()- sales, depending L'Oréal *)&) *)&) *)&- *)&0 **&* *)&1 Tod's 5.3% Estée Lauder 20.2% on their availability. As some Estée Lauder *(&) )0&/ )1&- *(&* *(&0 *(&* groups are listed under different Natura 19.4% LVMH 5.1% jurisdictions around the world, :eiejsdgj^ )-&- ).&+ )/&) )/&. )0&* )/&. Moncler 5.0% Coty 19.0% they may use different GAAP, and Shiseido ))&/ 0&0 1&, )(&* ))&* )(&+ Kering 4.9% therefore a direct comparison of Coty )+&1 ).&. )0&+ )1&) )1&- )1&( Average 18.0% EBITDA may be less meaningful Ralph Lauren 4.7% than if their results were presented Natura *(&/ )0&) )0&1 )1&+ *(&( )1&, L'Occitane 18.0% Kafilg 3.3% under International Accounting L'Occitane )1&( )/&) )/&, )0&( )0&. )0&( Beiersdorf 17.6% Chow Tai Fook 2.0% Average 17.4% 16.7% 17.5% 18.0% 18.6% 18.0% Standards. Shiseido 10.3% Hengdeli 0.8% Median 19.0% 17.1% 18.3% 19.1% 19.5% 19.0% Maximum 21.1% 21.1% 21.5% 21.8% 22.2% 21.9% Minimum 11.7% 8.8% 9.4% 10.2% 11.2% 10.3% Source: Data based on consensus of several brokers reports for each company. Estimated data have not been derived from internal insights. The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Ha_e )- B Operating aggregates Stable CAPEX sales ratio reflects that high investments are required to support long–term growth Jimmy Choo outperforms on the CAPEX ratio. The stable anerage lenel of a - to . ;9HEP sales ratio is mainlq explained bq the reimirements of the retail network (openings, renovations, etc.) for continued growth. Its CAPEX has been characterized by higher s logistics costs and store renovations, and is er aluationt expected to increase heavily as the company ame makes additional investments in its retail ar p network. DCF and v Average CAPEX ratio, Note: the 2015 CAPEX ratio is CAPEX Average ratio >Q).=Ç>Q)0= È lmpmjy cgepanies computed on the basis of either ratio FY14A FY15A/E FY16E FY17E FY18E (FY16E–FY18E) actual (“A“) or estimated (“E“) Jimmy Choo 8.5% figmres for *()- sales, depending LVMH -&( ,&1 -&) -&) -&) -&) Prada 8.3% on their availability. Kering )&0 -&- -&( ,&0 ,&1 ,&1 Coach 7.2% Richemont .&. .&, -&0 -&/ -&0 -&0 Hugo Boss 6.7% Luxottica +&/ +&. -&0 -&, -&+ -&- Swatch 6.7% Swatch )*&, /&- /&) /&( .&( .&/ Tumi 6.5% ;`go Lai >ggc +&* *&* *&) )&1 *&( *&( YOOX Net-A-Porter 6.4% Ralph Lauren -&) -&1 -&) ,&0 ,&, ,&/ Hermès 6.3% Hermès .&0 .&* .&* .&( .&. .&+ Burberry 6.3% Michael Kors 0&) 0&+ /&+ .&( -&- .&+ Michael Kors Coach ,&. ,&0 1&+ .&1 -&- /&* 6.3% Li^^any -&0 .&) .&( -&0 -&) -&. Richemont 5.8% Prada )(&* 0&. 1&* 0&/ /&( 0&+ Tiffany 5.6% :mjZejjy .&) /&) .&+ .&* .&+ .&+ Average 5.6% Hugo Boss -&( .&1 .&1 .&/ .&- .&/ Salvatore Ferragamo 5.5% Hengdeli )&.! )&) (&0 (&0 (&1 (&0 Luxottica 5.5% YOOX Net–A–Porter ,&+ -&( /&/ /&) ,&- .&, L'Oréal21.9% Brunello Cucinelli 5.5% Salvatore Ferragamo .&+ -&. -&- ,&1 .&) -&- Tod's 5.3% Kafilg +&* +&. +&* +&- +&+ +&+ Estée Lauder20.2% Tod's .&- ,&- -&+ -&- -&( -&+ Natura19.4% LVMH 5.1% Moncler /&) /&- -&+ ,&0 -&( -&( Moncler 5.0% Tumi .&1 -&. /&) .&+ .&) .&- Coty19.0% Kering 4.9% Average18.0% Brunello Cucinelli 0&0 1&. /&* -&) ,&* -&- Ralph Lauren 4.7% Bieey ;`gg 1&) 0&) 0&- 0&- n/a 0&- L'Occitane18.0% Kafilg 3.3% Average 5.9% 5.9% 6.0% 5.5% 5.1% 5.6% Beiersdorf17.6% Chow Tai Fook 2.0% Median 6.1% 5.9% 6.0% 5.7% 5.2% 5.6% Shiseido10.3% Hengdeli 0.8% Maximum 12.4% 9.6% 9.3% 8.7% 7.0% 8.5% Minimum (1.6%) 1.1% 0.8% 0.8% 0.9% 0.8% Source: Data based on consensus of several brokers reports for each company. Estimated data have not been derived from internal insights. The luxury and cosmetics financial factbook 2016

Ha_e ). DCF and valuation parameters B Operating aggregates Capital requirements for cosmetics companies are lower than in the luxury sector L’Occitane’s ratio omtperforms the sample dme to its retail profile. Average CAPEX ratio, Note: the 2015 CAPEX ratio is >Q).=Ç>Q)0= È cgseelics cgepanies computed on the basis of either CAPEX FY14A FY15A/E FY16E FY17E FY18E Average ratio actual (“A“) or estimated (“E“) ratio (FY16E–FY18E) L'Occitane 5.5% figmres for *()- sales, depending on their availability. L'Oréal ,&, ,&. ,&, ,&, ,&, ,&, Natura 4.5% Estée Lauder ,&/ ,&, ,&/ ,&, ,&* ,&, L'Oréal 4.4% :eiejsdgj^ ,&, *&. +&( *&0 +&) +&( Estée Lauder 4.4% Shiseido *&( *&0 *&1 *&0 n/a *&1 Coty 4.1% Coty ,&, +&. ,&) ,&+ ,&( ,&) Natura .&0 +&1 ,&. ,&/ ,&+ ,&- Average 4.1% L'Occitane -&( -&- -&- -&, -&/ -&- Beiersdorf 3.0% Average 4.5% 3.9% 4.2% 4.1% 4.3% 4.1% Shiseido 2.9% Median 4.4% 3.9% 4.4% 4.4% 4.3% 4.4% Maximum 6.8% 5.5% 5.5% 5.4% 5.7% 5.5% Minimum 2.0% 2.6% 2.9% 2.8% 3.1% 2.9% Source: Data based on consensus of several brokers reports for each company. Estimated data have not been derived from internal insights. The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Ha_e )/ B Operating aggregates EY luxury and cosmetics sample: summary of operating aggregates The charts below show the evolution of selected operating aggregates (sales CAGR, EBITDA margin, CAPEX ratio) over the past editions of The luxury and cosmetics financial factbook. Data reported represents estimates available for future years at the date of each factbook release. s er aluationt ame 1. Luxury ar p DCF and v Average sales CAGR Average EBITDA margin Average CAPEX ratio 12% 10.5% 10.4% 27% 6.0% 9.3% 24.6% 25.1% 24.3% 5.7% 5.6% 10% 8.6% 25% 5.4% 22.6% 5.5% 5.3% 8% 6.6% 23% 6% 21% 21.0% 5.0% 4.9% 4% 19% 2% 17% 4.5% 0% 15% 4.0% FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 • An an increasinglq challenging marcet, fmtmre expected grooth is slooing doon bmt still shoos significant grooth lenels. • This slowdown in sales growth directly impacts the EBITDA margin aggregates, which also show a gradual contraction over the considered period. • Lhe ;9HEP ratio is stable at - to ., illmstrating a high reimirement of innestments, dme to a progressine shift to the retail business. Source: Data based on consensus of several brokers reports for each company. The luxury and cosmetics financial factbook 2016

Ha_e )0 DCF and valuation parameters B Operating aggregates EY luxury and cosmetics sample: summary of operating aggregates The charts below show the evolution of the operating aggregates estimates (sales CAGR, EBITDA margin, CAPEX ratio) over the past editions of The luxury and cosmetics financial factbook. for cosmetics companies. Data reported represents only estimates available for the next few years at the date of the factbook release. 2. Cosmetics Average sales CAGR Average EBITDA margin Average CAPEX ratio 12% 20% 5.0% 10% 8.3% 19% 18.9% 4.5% 4.4% 8.2% 18.2% 4.5% 8% 6.1% 6.5% 18% 18.0% 17.8% 18.0% 4.2% 4.1% 6% 5.8% 4.0% 4.0% 4% 17% 16% 3.5% 2% 0% 15% 3.0% FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 • The cosmetics sector, on average, has lower sales CAGR and EBITDA margins than the luxury sector, but the difference has been narrowing over the years. While the EBITDA margin expected for the cosmetics sector remains 3% lower than the luxury sample, the average sales CAGR of cosmetics is almost the same of luxury companies (6.5% versus 6.6%, respectively). • Expected sales ;9?J obserned in *(). is higher than *()- figmres, bmt considerablq looer than the peac of *()*%)+. • The EBITDA margin has remained globally stable over the considered period, at a solid level around 18%. • The CAPEX ratio is lower for luxury companies and mostly stable at 4.2%. Source: Data based on consensus of several brokers reports for each company. The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Ha_e )1 C Advertising expenses Advertising remains a key driver in the industry, with digital expenses’ share growing fast • Earceting and adnertising represent a significant cost component for both global lmxmrq and cosmetics industries. • Q)-9'= 40% Average 26.8% 35% 33.6% 30% 29.1% 25.7% 26.4% 25% 22.9% 22.9% 20% Average 6.7% 15% 11.3% 11.3% 10% 6.6% 6.7% 6.8% 7.4% 3.4% 3.8% 5.1% 5.4% 5.6% 5% 0% Tumi Coach Prada Tiffany LVMH Kafilg Coty Natura Salvatore BrunelloCucinelliMonclerLuxottica Shiseido L'Oréal Ferragamo Hugo Boss Beiersdorf Estée Lauder Luxury companies Cosmetics companies Source: Data based on actual or estimated numbers based on availability as of the date of this report. Fote2 Lhe resmlts of *()- are actmal É9Ê! if the financial resmlts are closed and expected ÉEÊ! if the financial qear is not closed qet. The luxury and cosmetics financial factbook 2016

Ha_e *( DCF and valuation parameters D SOTP and segment analyses LVMH SOTP • DNE@ KGLH analqsis implies a total enterprise nalmation of Ò)(..1b in >Y).E. • The fashion and leather goods segment is the largest contributor both in terms of sales (35%) and EBIT (52%). Kales Zjeacdgon >Q).= in ÒZ! =:AL Zjeacdgon >Q).= in ÒZ! =N Zjeacdgon >Q).= in ÒZ! 1.0 7.0 17.2 0.0 106.9 11.7 36.1 1.4 15% 21.9 16% 0% 31% 3.6 0.5 20% 7.6 20% 3.5 13% 0.5 7% 13% 9.9 7% 13% 10% 3.7 4.8 10% 8% 51.5 9% 9% 13% 12.7 13% 52% 48% 35% (0.3) (0.1) (1.3) -2% -1% Fashion Perfumes Watches Wines Selective Eliminations Total Fashion Perfumes Watches Wines Selective Eliminations Total Fashion Perfumes Watches Wines Selective Eliminations Investments Total and and and and retailing and and and and retailing and and and and retailing leather cosmetics jewelry spirits leather cosmetics jewelry spirits leather cosmetics jewelry spirits goods goods goods Luxury products Luxury products Luxury products (excluding wines and spirits (excluding wines and spirits (excluding wines and spirits and selective retailing) and selective retailing) and selective retailing) Komrces2 KGLH based on EY analqsis and on the follooing brocers reports2 M:K )0 Banmarq *().!, Eacimarie Jesearch 0

DCF and valuation parameters Ha_e *) SOTP and segment analyses Kering SOTP D • Cering KGLH analqsis implies a total EN of Ò*/.0b in >Y).E. • ;ontribmting almost the ohole of the total E:AL for .0 of sales, ?mcci ?romp is the most profitable segment in terms of operating margin. s er aluationt ame ar p DCF and v Kales Zjeacdgon >Q).= in ÒZ! =:AL Zjeacdgon >Q).= in ÒZ! =N Zjeacdgon >Q).= in ÒZ! 3.5 0.3 0.0 12.0 0.1 0.0 1.8 0.1 27.8 0% 1.9 6% 2.1 3% 1% 27.3 8% 1% 29% 8.2 103% 98% 68% (0.2) (1.7) -9% -6% Gucci Group Puma Other brands Eliminations Total Gucci Group Puma Other brands Eliminations Total Gucci Group Puma Other brands Eliminations Total Luxury Sport and lifestyle Luxury Sport and lifestyle Luxury Sport and lifestyle Komrces2 KGLH based on EY analqsis and on the follooing brocers reports2 :arclaqs 1 >ebrmarq *().!, M:K )0 Banmarq *().! and Eacimarie Jesearch 0

Page 22 DCF and valuation parameters D SOTP and segment analyses Kering: further analysis of Gucci Group through SOTP approach • ?mcci ?romp KGLH analqsis implies an EN of Ò*/.+b in >Y).E. • Within the Gucci Group segment, the Gucci brand alone represents 49% of the top line and 60% of EBIT in FY16E, meaning that the Gucci brand is expected to constitute the largest segment within the Gucci Group and the most profitable in terms of operating margin. Kales Zjeacdgon >Q).= in ÒZ! =:AL Zjeacdgon >Q).= in ÒZ! =N Zjeacdgon >Q).= in ÒZ! 1.7 8.2 0.2 1.9 3.6 27.3 0.2 8% 21% 0.4 3.7 13% 1.1 10% 5.9 14% 1.4 13% 1.1 22% 17% 14.1 22% 4.0 60% 52% 49% Gucci brand Bottega Veneta YSL Other brands Gucci Group Gucci brand Bottega Veneta YSL Other brands Gucci Group Gucci brand Bottega Veneta YSL Other brands Gucci Group Komrces2 KGLH based on EY analqsis and on the follooing brocers reports2 :arclaqs 1 >ebrmarq *().!, M:K )0 Banmarq *().! and Eacimarie Jesearch 0

DCF and valuation parameters Page 23 D SOTP and segment analyses L’Oréal segment analysis • The L’Oréal Luxe division accounted for 29% of the total sales in FY15A. • This division is expected to register a sales growth at a CAGR of 4.4% over the 2015A–18E period, when its operating income is anticipated to grow from €1.5m to €1.8m (or at a CAGR of 4.2%) over the same period. s er aluationt • The L’Oréal Luxe division will remain one of the biggest divisions within L’Oréal, together with consumer ame ar products. p DCF and v Kales Zjeacdgon >Q),9Ç>Q)0= in ÒZ! =:AL Zjeacdgon >Q),9Ç>Q)0= in ÒZ! =:AL eaj_in >Q),9Ç>Q)0= in ! 30 27.0 27.2 5 4.9 4.9 22% 25.8 4.6 1% 21% 21% 21% 25.3 4% 4% 4.4 2% 20% 25 4% 2% 10% 11% 22.5 4% 8% 1% 19% 19% 7% 8% CAGR 3.9 10% CAGR 18% 18% 18% 4% 7% 4 2% 9% 20 4.4% 4.2% 7% 29% 30% 10% 35% 36% 29% 29% 34% 35% 3 33% 15 28% CAGR CAGR 0.9% 2.2% 2 10 46% 45% 53% 53% 48% 47% 46% 54% 54% 56% 5 1 13% 13% 13% 13% 13% 16% 15% 15% 15% 15% 0 0 (16%) (15%) (15%) (15%) (15%) 2014A 2015A 2016E 2017E 2018E 2014A 2015A 2016E 2017E 2018E 2014A 2015A 2016E 2017E 2018E L'Oreal Luxe Total cosmetics Professional products Consumer products Professional products Consumer products L'Oreal Luxe Active cosmetics L'Oreal Luxe Active cosmetics Body shop Eliminations Body shop Sources: Liberum (15 February 2016) and Kepler Cheuvreux (12 February 2016). Fote2 Lhe resmlts of *()- are actmal É9Ê! if the financial resmlts are closed and expected ÉEÊ! if the financial qear is not closed qet. The luxury and cosmetics financial factbook 2016

Page 24 DCF and valuation parameters E Trading multiples Level of multiples is affected by high volatility of financial markets • The charts below show the evolution of the trading multiples over the past editions of the factbook. • After reaching a peak in 2014, trading multiples for luxury companies are decreasing on all major valuation parameters, consistently with the lower growth expectations and margins showed by the listed company in this sector. EV/sales EV/EBITDA Price to earnings 4.0x 18.0x 35.0x 3.6x 3.7x 3.5x 3.3x 16.0x 15.0x 15.3x 30.0x 29.4x 3.1x 28.2x 3.0x 3.0x 3.0x 14.0x 13.3x 13.3x 25.0x 25.2x 2.7x 2.8x 12.7x 25.0x 24.1x 24.5x 12.0x 11.9x 11.6x 12.0x 10.7x 22.0x 21.4x 2.5x 2.3x 2.2x 10.3x 20.4x 10.0x 20.0x 19.1x 2.0x 8.0x 15.0x 1.5x 6.0x 1.0x 10.0x 4.0x 0.5x 2.0x 5.0x 0.0x 0.0x 0.0x 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Multiple on last FY Actual Multiple on current FY Forecast Multiple on last FY Actual Multiple on current FY Forecast Multiple on last FY Actual Multiple on current FY Forecast Source: Data based on consensus of several brokers reports for each company. Note: Year is referred to the Factbook edition. As an example 2016 is Factbook 2016 edition. Therefore “Multiple on last FY Actual” is calculated on 2015 results, while “Multiple on current FY forecast” is calculated on 2016 expected results. The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Page 25 Trading multiples Cosmetics multiples level illustrates the strong dynamism of the E industry • The charts below show the evolution of the trading multiples over the past editions of the factbook. • Trading multiples for cosmetics companies showed more resilience over time, as the sector’s listed companies are experimenting a stable grooth oner the last feo qears and a constant profitabilitq. s er aluationt ame ar p DCF and v EV/sales EV/EBITDA Price to earnings 3.0x 2.8x 18.0x 35.0x 33.1x 32.2x 2.5x 2.6x 2.5x 16.0x 15.6x 2.4x 2.4x 15.0x 14.4x 14.6x 30.0x 28.2x 28.9x 2.5x 2.3x 14.1x 13.8x 26.9x 27.7x 2.2x 2.2x 14.0x 13.1x 13.4x 25.8x 25.2x 2.1x 12.3x 25.0x 24.4x 2.0x 12.0x 11.3x 22.2x 10.0x 20.0x 1.5x 8.0x 15.0x 1.0x 6.0x 10.0x 4.0x 0.5x 5.0x 2.0x 0.0x 0.0x 0.0x 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Multiple on last FY Actual Multiple on current FY Forecast Multiple on last FY Actual Multiple on current FY Forecast Multiple on last FY Actual Multiple on current FY Forecast Source: Data based on consensus of several brokers reports for each company. Note: Year is referred to the Factbook edition. As an example 2016 is Factbook 2016 edition. Therefore “Multiple on last FY Actual” is calculated on 2015 results, while “Multiple on current FY forecast” is calculated on 2016 expected results. The luxury and cosmetics financial factbook 2016

Page 26 DCF and valuation parameters E Trading multiples EY luxury and cosmetics sample: summary of EV/sales multiples =N'sales >Q)-9'=! =N'sales >Q).=! =N'sales >Q)/=! =N'sales >Q)0=! Heje†s .&.p Heje†s .&)p Heje†s -&.p Heje†s -&+p Mgnclej ,&+p Mgnclej +&0p Mgnclej +&,p Mgnclej +&)p DGj†al +&-p DGj†al +&,p DGj†al +&*p DGj†al +&)p =sl†e Damdej +&+p =sl†e Damdej +&)p =sl†e Damdej +&(p =sl†e Damdej *&0p Lmei +&(p ;gly +&(p ;gly *&1p ;gly *&/p ;gly *&1p Lmei *&1p Lmei *&0p Lmei *&-p Dmpgllica *&0p Jic`eegnl *&/p Jic`eegnl *&.p Jic`eegnl *&-p Jic`eegnl *&0p Dmpgllica *&.p Dmpgllica *&,p Dmpgllica *&+p :jmnellg ;mcinelli *&0p :jmnellg ;mcinelli *&-p Kalnalgje >ejja_aeg *&,p Kalnalgje >ejja_aeg *&+p Kalnalgje >ejja_aeg *&/p Kalnalgje >ejja_aeg *&-p :eiejsdgj^ *&,p :eiejsdgj^ *&*p :eiejsdgj^ *&.p :eiejsdgj^ *&-p :jmnellg ;mcinelli *&+p :jmnellg ;mcinelli *&*p ;gac` *&-p ;gac` *&+p ;gac` *&+p ;gac` *&)p Li^^any *&+p Li^^any *&+p Hjada *&*p Hjada *&(p 9neja_e 2.+p DNE@ *&*p Li^^any *&)p Li^^any *&(p DNE@ 2.+p 9neja_e *&*p DNE@ *&)p DNE@ *&(p Cejin_ 2.*p Hjada 2.*p 9neja_e *&)p 9neja_e )&1p Hjada 2.*p Cejin_ *&)p :mjZejjy *&(p :mjZejjy )&1p :mjZejjy *&*p :mjZejjy *&)p Cejin_ *&(p Cejin_ )&1p Lgds 2.)p Lgds *&(p Lgds )&1p Lgds )&0p QGGP Fel%9%Hgjlej 2.)p Eic`ael Cgjs *&(p Eic`ael Cgjs )&1p Eic`ael Cgjs )&0p Eic`ael Cgjs *&(p Koalc` )&1p Koalc` )&0p Koalc` )&.p Koalc` *&(p Bieey ;`gg )&0p Bieey ;`gg )&.p Bieey ;`gg )&-p Bieey ;`gg *&(p QGGP Fel%9%Hgjlej )&/p Falmja )&.p Falmja )&,p Falmja )&1p Falmja )&/p QGGP Fel%9%Hgjlej )&-p QGGP Fel%9%Hgjlej )&+p DGccilane )&/p DGccilane )&.p DGccilane )&,p DGccilane )&+p @m_g :gss 1.,p @m_g :gss 1.,p @m_g :gss )&+p @m_g :gss )&*p K`iseidg 1.3p K`iseidg )&*p K`iseidg )&*p K`iseidg )&)p Jalp` Damjen )&(p Jalp` Damjen )&(p Jalp` Damjen (&1p Jalp` Damjen (&1p ;`go Lai >ggc 0.9p ;`go Lai >ggc 0.9p ;`go Lai >ggc (&0p ;`go Lai >ggc (&/p Kafilg (&-p Kafilg (&-p Kafilg (&-p Kafilg (&-p @en_deli (&,p @en_deli (&,p @en_deli (&,p @en_deli (&,p =N'sales >Q)-9'=! =N'sales >Q).=! =N'sales >Q)/=! =N'sales >Q)0=! *&+p *&*p *&)p )&1p Dgo Hi_h Dgo Hi_h Dgo Hi_h Dgo Hi_h Indmsljy Zencheajc Indmsljy Zencheajc Indmsljy Zencheajc Indmsljy Zencheajc Source: Data based on consensus of several brokers reports for each company. Notes: • Lhe resmlts of *()- are actmal É9Ê! if the financial resmlts are closed and expected ÉEÊ! if the financial qear is not closed qet. • Market capitalization is based on a one-month average as of 31 March 2016. The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Page 27 E Trading multiples EY luxury and cosmetics sample: summary of EV/EBITDA multiples =N'=:AL<9 >Q)-9'=! =N'=:AL<9 >Q).=! =N'=:AL<9 >Q)/=! =N'=:AL<9 >Q)0=! YOOX Net-A-Porter 27.0x YOOX Net-A-Porter 21.0x Hermès 15.8x Hermès 15.1x s er Hermès 18.6x Hermès 17.1x YOOX Net-A-Porter 15.6x YOOX Net-A-Porter 14.0x aluationt Coty 17.5x Coty 16.2x Coty 15.4x Coty 13.8x ame Estée Lauder 17.5x Estée Lauder 16.0x DGj†al 14.9x DGj†al 13.4x ar p :jmnellg ;mcinelli 16.7x DGj†al 15.8x Estée Lauder 14.7x Estée Lauder 12.5x DCF and v DGj†al 16.5x :jmnellg ;mcinelli 14.9x Tumi 13.7x Tumi 12.4x Beiersdorf 15.7x Beiersdorf 14.7x Beiersdorf 13.6x Beiersdorf 12.1x Shiseido 15.0x Tumi 14.1x :jmnellg ;mcinelli 13.4x :jmnellg ;mcinelli 10.9x Tumi 14.1x Shiseido 12.9x Shiseido 11.4x Shiseido 10.0x Luxottica 13.5x Luxottica 11.7x Luxottica 10.8x Luxottica 9.9x Coach 12.9x Cejin_ 11.6x Cejin_ 10.6x Cejin_ 9.7x Egnclej 12.6x Egnclej 11.2x Kalnalgje >ejja_aeg 10.2x Kalnalgje >ejja_aeg 9.3x Cejin_ 12.6x 9neja_e 11.1x 9neja_e 10.1x 9neja_e 9.3x 9neja_e 12.3x Kalnalgje >ejja_aeg 10.8x Egnclej 10.0x Egnclej 9.2x Jimmy Choo 12.2x Coach 10.7x Richemont 9.9x Richemont 9.2x Kalnalgje >ejja_aeg 11.7x Jimmy Choo 10.5x Coach 9.7x Coach 9.2x Richemont 10.8x Burberry 10.2x Burberry 9.6x Burberry 9.1x Tod's 10.6x Richemont 10.1x Jimmy Choo 9.3x Jimmy Choo 8.6x Natura 10.4x LVMH 9.7x LVMH 9.1x LVMH 8.5x LVMH 10.2x Tod's 9.5x Tod's 8.8x Tod's 8.4x Burberry 10.2x Natura 9.2x Prada 8.6x Prada 8.1x Tiffany 10.0x Tiffany 9.1x Tiffany 8.5x Tiffany 8.0x Swatch 9.9x Prada 9.0x Natura 8.2x Natura 7.8x L'Occitane 9.8x L'Occitane 8.9x L'Occitane 8.0x L'Occitane 7.3x Prada 9.8x Swatch 8.4x Swatch 7.9x Swatch 6.8x Chow Tai Fook 9.1x Chow Tai Fook 8.4x Chow Tai Fook 7.4x Chow Tai Fook 6.5x @en_deli 7.3x Eic`ael Cgjs 6.9x Hugo Boss 6.3x Hugo Boss 6.3x Eic`ael Cgjs 6.9x Hugo Boss 6.6x Eic`ael Cgjs 6.3x Eic`ael Cgjs 5.6x Hugo Boss 6.7x Jalp` Damjen 5.9x Kafilg 6.1x Kafilg 5.6x Kafilg 6.5x @en_deli 5.7x Jalp` Damjen 5.3x Jalp` Damjen 4.9x Jalp` Damjen 6.4x Kafilg 4.7x @en_deli 5.0x @en_deli 4.2x EV/EBITDA (FY15A/E) EV/EBITDA (FY16E) EV/EBITDA (FY17E) EV/EBITDA (FY18E) 12.3x 11.1x 10.1x 9.3x Low High Low High Low High Low High Industry benchmark Industry benchmark Industry benchmark Industry benchmark Source: Data based on consensus of several brokers reports for each company. Notes: • Market capitalization is based on a one-month average as of 31 March 2016. • Lhe resmlts of *()- are actmal É9Ê! if the financial resmlts are closed and expected ÉEÊ! if the financial qear is not closed qet. The luxury and cosmetics financial factbook 2016

Ha_e *0 DCF and valuation parameters E Trading multiples Regression analysis: EV/sales multiple vs. EBITDA margin • Jegression analqses shoo strong correlation betoeen EN'sales lenels and profitabilitq, illmstrating the premimm paid for good profitabilitq performance. • 9nalqses shoo a robmst correlation betoeen EN'E:AL<9 and sales grooth. Kales denelopment is another driver for creating value, especially for the luxury segment. Je_jessign analysis2 =N'sales emlliple ns& =:AL<9 eaj_in *(). Je_jessign analysis2 =N'=:AL<9 emlliple ns& sales ;9?J *().= È *()0= 7.0x 25.0x Hermès YOOX Net-A-Porter 6.0x R² = 0.5575 R² = 0.505 20.0x 5.0x Hermès E Brunello Cucinelli 6 15.0x Tumi 4.0x 1 0 2 /sales Coach V L'Oréal Moncler A Luxottica Salvatore D Kering T Salvatore Ferragamo Estée Lauder I Moncler Ferragamo B Tumi E 2016 E 3.0x Coty / Jimmy Choo V Richemont Burberry Brunello Cucinelli Luxottica E 10.0x Richemont Tod's LVMH Beiersdorf Kering Coach Tiffany Tiffany Chow Tai Fook YOOX Net- Burberry LVMH Swatch 2.0x A-Porter Prada Michael Kors Prada Michael Kors Jimmy Choo Tod's Hengdeli Hugo Boss Natura Swatch Ralph Lauren Shiseido L'Occitane 5.0x Hugo Boss Safilo 1.0x Chow Tai Fook Ralph Lauren Hengdeli Safilo - 0% 5% 10% 15% 20% 25% 30% 35% 40% -10% -5% 0% 5% 10% 15% 20% 25% 2016 EBITDA margin (%) Sales CAGR 2016E–2018E Source: Data based on consensus of several brokers reports for each company. Notes: market capitalization is based on a one–month average as of 31 March 2016. The luxury and cosmetics financial factbook 2016

s er aluationt ame ar p DCF and v The luxury and cosmetics financial factbook 2016

Ha_e +( DCF and valuation parameters F Transaction multiples Transaction multiples in the luxury industry remain at a significant premium to many other sectors • Transaction multiples illustrate the high attractiveness of the industry over the past few years. • Lheq also reÖect a premimm to raritq, indeed the brands repmted to be Éon the marcetÊ are nerq feo. • The average sales multiple in recent years ranged between 1.2x and 1.6x, when the average EBITDA multiple ranged between 10.4x and 15.0x. • Ceq transaction annomnced in *(). oere the acimisition of ;ornelianq bq Annestcorp and the acimisition of Joger Ninier bq Lods. =N'sales >Q)*Ç)@).! =N'=:AL<9 >Q)*Ç)@).! 1.8x 16.0x 14.6x 15.0x 1.6x 1.6x 1.6x 14.2x 14.1x 1.6x 1.5x 1.5x 1.5x 14.0x 12.8x 13.1x 13.4x 1.4x 12.0x 1.2x 1.2x 10.7x 10.4x 1.2x 1.1x 10.2x 10.0x 1.0x 0.9x 8.0x 0.8x 0.6x 6.0x 0.4x 4.0x 0.2x 2.0x 0.0x 0.0x 2012 2013 2014 2015 1H16 2012 2013 2014 2015 1H16 Average Median Average Median Source: Capital IQ. The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Ha_e +) F Transaction multiples The M&A deals in the cosmetics industry show a similar trend as the luxury industry • Lhe anerage sales mmltiple oner the last fine qears ranged betoeen ).*x and *.)x, ohen the E:AL<9 mmltiple ranged between 10.1x and 16.6x. • EN'E:AL<9 mmltiples in )@). are slightlq looer than *()- and inclmde the acimisition of the H? :eamtq s er Q)*Ç)@).! =N'=:AL<9 >Q)*Ç)@).! 2.5x 18.0x 16.6x 2.1x 16.0x 14.9x 2.0x 1.9x 1.9x 14.0x 12.6x 1.6x 1.6x 12.0x 11.7x 11.1x 11.0x 1.5x 10.1x 10.2x 10.9x 1.5x 1.4x 1.2x 10.0x 8.8x 1.0x 1.1x 8.0x 1.0x 6.0x 0.5x 4.0x 2.0x 0.0x 0.0x 2012 2013 2014 2015 1H16 2012 2013 2014 2015 1H16 Average Median Average Median Source: Capital IQ. The luxury and cosmetics financial factbook 2016

Page 32 DCF and valuation parameters F Transaction multiples Analysis of worldwide M&A transactions in the luxury industry (2012–1H16) • As shown in the number of completed deals sorted by geography and accounts for almost one-third of total deals, Italy is the top target country of the luxury industry. Italy and US together represent more than an half of total deals (59% of total transactions). • Hrinate eimitq fmnds hane a grooing interest in the lmxmrq sector, recentlq approx. ,/ of total transactions. • 9fter a *()- characterired bq a large nmmber of transactions, the deal actinitq in the first semester of 2016 has slowed down. FmeZej g^ cgepleled deals FmeZej g^ cgepleled deals Zy lype g^ Zmyej FmeZej g^ cgepleled deals sgjled Zy _eg_jap`y g^ l`e laj_el gnej >Q)*Ç)@). aegn_ l`e lgp )( cgmnljies! S. Korea 80 50 50% China 2% Canada Spain 2% 2% 68 45 43 47% 45% 3% 70 41 41 Germany 62 40 40% 4% Italy 60 40% 30% 52 35 34% 35% UK 50 31 9% s 30 30% 44 l 27 a 30% e d 40 f 25 25% o . 21 o Switzerland N 20 20% 30 17% 9% 19 15 13 15% 20 10 10 9 9 10% 10 France 5 5% 10% 0 0 0% United States 2012 2013 2014 2015 1H16 2012 2013 2014 2015 1H16 29% Corporate PE PE/total Sources: Capital IQ, Mergermarket, Factiva. The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Page 33 F Transaction multiples Analysis of worldwide M&A transactions in the cosmetics industry (2012–1H16) • As shown in the number of completed deals sorted by geography, and account for almost half of total deals, US remains the top target country for the cosmetics industry. • Lhe first three comntries bq target geography (US, France and Italy) are the same of those of the luxury s er industry, and they represent 68% of total transactions. aluationt ame ar • PE funds are increasingly attracted by the cosmetic market and the personal care sector in general. p DCF and v FmeZej g^ cgepleled deals FmeZej g^ cgepleled deals Zy lype g^ Zmyej FmeZej g^ cgepleled deals sgjled Zy _eg_jap`y g^ l`e laj_el gnej >Q)*Ç)@). aegn_ l`e lgp )( cgmnljies! 45 35 70% Australia Spain China 31 4% 4% 4% Canada 40 39 62% Germany 4% 30 28 60% 5% United 35 35 UK States 25 50% 5% 41% 30 S. Korea 26 6% 25 20 40% s 21 l 16 33% a e 20 d 14 14 15 30% 17 f Italy o . 20% 15 o 21% 8% N 10 10 8 18% 20% 10 7 7 5 5 3 10% France 0 0 0% 19% 2012 2013 2014 2015 1H16 2012 2013 2014 2015 1H16 Corporate PE PE/total Sources: Capital IQ, Mergermarket, Factiva. The luxury and cosmetics financial factbook 2016

Industry overview

Global luxury goods market G H Global cosmetic goods market I Points of view from EY global sector and other industry professionals w ervie v try o Indus The luxury and cosmetics financial factbook 2016

Page 36 Industry overview Global luxury goods market Retail Directly Operated Stores (DOS) Personal luxury goods Chinese consumers represent the accounted for about 29% of the overall have the second largest share of buyers in the world, market, while monobrand distribution across largest market share of accounting for about 31% of global formats approximately 24.2% in luxury goods purchases. accounts ~29% the luxury goods market. for about Retail DOS 53% of overall ~53% ~31% distribution. Monobrand distribution Retail sales account for The Hong Kong Japan is the top performing area 34% in 2015 and have and Macau for the luxury goods market grown by 2% since 2014, markets posted (+9% growth at a constant while wholesale represent a significant ~24.2% rate!, and in *()-, it oas the first 66% of the total personal contraction foreign destination for Chinese luxury due to consumers. goods 66% currency As accessible status market. Wholesale Ömctmations, sqmbols, shoes benefit government from strong tailwinds reforms and and have been growing +9% 34% decreasing faster than Retail popularity. the overall growth leather goods category in the recent past. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters PPage 37age 37 Ex ec Global personal luxury goods continue to buoy the market, but utiv Global luxury goods Title for section G Global luxury goods market e summary H growth is leveling off • Personal luxury goods have the second largest market share (approximately 24.2%) in the luxury goods market after luxury cars, which account for about a 38.8% X Welcome to the third edition of EY’s annual Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for share in the industry. L’Occitane and Natura from FY11A to FY14E. DCF and v Financial Factbook for the luxury and cosmetics p • Global luxury market value stood at €1 trillion in 2015, with the personal luxury goods market growing at 13% at current exchange rates; however, at constant ar X Increased demand through innovative products will cater to underserved emerging markets. sector. Lhe >actbooc combines financial ame exchange rates, the growth has slowed to 1%, slower than the 3% recorded in 2014. data, insight from EY’s global team of sector X aluation Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate t er • Currency Ömctmations, and in particmlar a strong MK dollar and depreciating emro, helped the market to show double-digit positive impact on overall market value. s specialists and opinions of external experts. demand in established geographies. • While wholesale remains the dominant distribution channel for personal luxury goods (accounting for about two–thirds of market sales), the company–owned retail channels are growing twice as fast as the wholesale channel at current exchange rates and continue to gain market share due to network expansion (with 600 new Titles for charts stores opened in 2015) and growth in same store sales (13% at the current exchange rate). Indusw try oervie ) 2 v Ogjldoide pejsgnal lmpmjy _ggds eajcel ljend *((/Ç)-=! Lgp cgmnljies *()-=! v ervietry o 280–295 CAGR w Indus 300 253 2%–3% 20% 250 212 218 224 US 78.6 192 15% 200 170 167 173 150 153 13% 13% Japan 20.1 and disMe 11% 10% thodology 100 10% claimer +1% at 7% 50 constant 5% Mainland China 17.9 b rate owth € gr Titles for charts 0 % 3% 3% 0% -50 Italy 17.3 -2% and specific analyS -100 -5% ample s -150 France 17.1 election -200 -8% -10% s e 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2020E 0 20 40 60 80 100 s Market size Growth €b Source: Data based on consensus of several brokers’ reports for each C Glo company. on Notes: t s act uss N)! 9otelst:aMgaarkmet cmaap':itaaliin ÉzatiDomn ixs bmrq ?ased ooon a ods Onoer-mldoonitdh ae Eveararcege at Kts omf Ddq >eceamllbÇOer 2in0te12r *. ()-,Ê Altagamma/Bain. ary The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. *! 9ltagamma':ain, ÉOorldoide Dmxmrq Earcets Eonitor, *()- Mpdate,Ê Altagamma/Bain, October 2015. The luxury and cosmetics financial factbook 2016

HPa_e +0age +0 DCF and valuation pIndustry oaramevervieterws Luxury goods market by geography and channel Global luxury goods Title for section G Global luxury goods market H X Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for ) 2 DmWpmejly _comge tgdo ts dhee tehanird _d edjgitoioln o` Zf Ey nYa’s alignnnaulialy al nd Zy je_ign *()-=! ?lgZal pejsgnal lmpmjy _ggds eajcel$ Zy c`annel and ^gjeal *()-=! Financial Factbook for the luxury and cosmetics L’Occitane and Natura from FY11A to FY14E. Europe Americas Mainland China Rest of world Japan X sector. Lhe >actbooc combines financial Increased demand through innovative products will cater to underserved emerging markets. 15% X data, insight from EY’s global team of sector Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate specialists and opinions of external experts. demand in established geographies. 10% 9% 9% 5% 5% 5% 3% Retail Wholesale th Titles for charts 34% 66% w 0% o E gr 0% Online 5 7% 1 Monobrand 0 -2% Off-price Airport 2 -5% Concession stores Off-price 11% stores -5% business 27% stores 18% 18% Online 1% -10% -9% 4% Department stores -12% Specialty 28% -15% Retail DOS stores 51% 35% Region Nationality ) cemalblÇeOr 2in0t1e2r *. ()-,’’ Altagamma/Bain. The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. *! 9ltagamma':ain, ËËOorldoide Dmxmrq Earcets Eonitor, *()- Mpdate,’’ Altagamma/Bain, October 2015. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters HPa_e +1age +1 Ex ec Chinese consumers are the dominant luxury goods buyers, utiv Global luxury goods Title for section G Global luxury goods market e summary H accounting for about one–third of global purchases, with the majority of purchases being carried out outside China X Welcome to the third edition of EY’s annual Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for Financial Factbook for the luxury and cosmetics L’Occitane and Natura from FY11A to FY14E. DCF and v p X ar Increased demand through innovative products will cater to underserved emerging markets. sector. Lhe >actbooc combines financial ame data, insight from EY’s global team of sector X aluation Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate t er specialists and opinions of external experts. s demand in established geographies. 2 9sian pejsgnal lmpmjy _ggds eajcel ;`inese nisilgjs Zy je_ign *()-=Ç*(=! ) Najied pej^gjeance in l`e 9sian pejsgnal lmpmjy _ggds eajcel _jgol` *(), ns& *()-=! ) 17% 16% Titles for charts 25% 20% 13% 14% 35 29.1 • Japan was the top performing region at a constant rate (+9%), and in 2015, it oas the first 10% 9% 30 27.2 21% 22% 20% Indusw 4% 3% 25 foreign destination for Chinese tourists (whom represent almost 40% of total sales in Japan). n 20.9 0% o 20 15% try o i 15.5 • Mainland China’s luxury market in 2015 witnessed an annual growth of about 17% (and a ervie l 12.6 l b -2% i 15 13.5 v € -10% M 11% 10% negative growth of about 2% at constant exchange rates) to reach €18b. While the demand v -20% -11% 10 6.0 5.0 5% for watches and menswear witnessed a decline, the demand for jewelry, womens wear and ervietry o 5 -30% -25% 0 1% 0% shoes experienced an upward trend. w Indus Japan Mainland Hong Kong South Southeast Hong Kong and South Japan Southeast Asia • The @ong Cong and Eacam marcets posted a significant contraction due to currency China and Korea Asia Macau Korea Ömctmations, gonernment reforms and decreasing popmlaritq. Lhe @ong Cong marcet Macau Real terms Constant rate 2015E 2020E CAGR15E–20E witnessed a contraction of 11% in 2015 (–25% at constant rates). • Hong Kong and Macau remain the top destinations in terms of number of visitors, but Japan and Korea are the geographic areas where the foreseen growth in tourists is the highest. and disMe thodology claimer ) 9sian pejsgnal lmpmjy _ggds eajcel *(),È*()-=! 2 ;`inese Zmyejs cgnlinme lg dgeinale as l`e lgp _lgZal cmslgeejs Titles for charts 25 • Chinese consumers represent the largest share of buyers in the world, accounting for about 20.0 20 18.0 15.018.0 31% of global luxury goods purchases, followed by American buyers (24%) and European and specific analyS b 15 11.0 buyers (18%). ample s € 10 9.0 9.0 8.0 • However, onlq oneÇfifth of the pmrchases made bq ;hinese tomrists are done in Eainland 6.0 7.0 5 China, the majority being made in the European markets. The dominance is further increased election 0 with the development of new outlet sites in China and the fact that Chinese travelers have Japan Mainland South Hong Kong Southeast Asia been enthusiastic visitors of the many outlet malls in Europe. s e China Korea and Macau s 2014 2015E • Chinese consumers are also focused on purchasing more from South Korea and Japan, which are emerging as new prominent shopping destinations for Chinese tourists. Notes: Source: Data based on consensus of several brokers’ reports for each )! 9ltagamma':ain, É9ltagamma *()- Oorldoide Dmxmrq Earcet monitor, *()- Mpdate,Ê Altagamma/Bain, C Glo company. on October 2015. t s act uss Notes:Market capitalization is based on a one-month average as of December 2012. ary 2) Nomura, “Global tourism: shifting destinations for Chinese travellers,” Nomura global market research, 7 April The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. 2016. The luxury and cosmetics financial factbook 2016

HPa_e ,(age ,( DCF and valuation pIndustry oaramevervieterws Accessories segment continues to be the largest, and fastest, Global luxury goods Title for section G Global luxury goods market H growing market segment X Welcome to the third edition of EY’s annual Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for Financial Factbook for the luxury and cosmetics L’Occitane and Natura from FY11A to FY14E. X sector. Lhe >actbooc combines financial Increased demand through innovative products will cater to underserved emerging markets. data, insight from EY’s global team of sector X Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate specialists and opinions of external experts. demand in established geographies. ?lgZal pejsgnal lmpmjy _ggds eajcel Zy ?jgol` jales g^ _lgZal pejsgnal lmpmjy ) ) 9ccessgjies2 gmlpej^gjeej pjgdmcl lype *()-=! _ggds eajcel Zy pjgdmcl lype ) Others Titles for charts 4% • Since 2012, accessories has been the largest category within the personal luxury goods Accessories 12% market and have grown the fastest since 2009, with a CAGR of 12% through 2015E. Hard Accessories luxury 30% • The accessories segment accounted for about 30% of the global personal luxury goods 22% Hard luxury 11% market, with a 3% growth rate (at constant exchange rates) in 2015. Apparel 7% • The accessories segment also commands a dominant 40% share of the overall online personal luxury goods market sales. Beauty 5% • As accessible statms sqmbols, shoes benefit from strong tailoinds and hane been grooing Beauty faster than the overall leather goods category in the recent past. Shoe sales growth 20% Apparel Others 4% continues to outpace leather goods, with both men’s and women’s segments showing 24% positive growth trends. 0% 5% 10% 15% CAGR 09-15E Hjice _ap nejsms =mjgpe Zy _eg_jap`ic Hjice _ap nejsms =mjgpe Zy pjgdmcl lype ajea gnej l`e lasl )* egnl`s2 gnej l`e lasl )* egnl`s2 2 Hjice di^^ejenlial ^gj _eg_jap`ic ajeas and pjgdmcl lype 50% Titles for charts 60% 52% 39% 50% 46% • Pricing analysis indicates continued convergence towards European prices. Harmonization is 40% being performed through new product launches; meanwhile, prices on current products are 29% 31% 30% 40% freimentlq mnchanged. 30% 27% 29% 31% 31% 22% 20% 20% 19% 30% 23% • In the past, brands have been “price setters.” Today, pricing is not driving growth, and this 20% will generate pressure on the top line and margins in the near future. 20% 10% 11% • As Japan has become one of the most popular destinations among Chinese travelers, 10% 5% 5% companies are trying to take advantage by charging higher prices in Japanese retail stores. 0% 0% US Japan Hong Kong US Japan Hong Kong • Apparel is characterired bq regional content, a higher freimencq of neo prodmcts and less Apr 15 Nov 15 Mar 16 Apparel Leather Watches and jewelry exposmre to gifting and thms reÖects a higher price gap than other prodmct categories. • Price changes all at once could be risky, as they might confuse the customer base and Source: Data based on consensus of several brokers’ reports for each suddenly change a brand’s relative positioning nersms peers, pmtting brand eimitq at risc. company. Notes: N)o! 9telst:aMgaarkmet cmaap':itaaliinza, ÉtioDn imxs bmraq gsed ooon a ods onoer-mldoonitdh ae mvearargcee at ss otmf Ddqe,cÊ emAlbtaer 2ga0m1m2. a/Bain, 21 Dicember 2015. The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. 2) Morgan Stanley, “Mind the price gap,” Morgan stanley research, 21 March 2016. The luxury and cosmetics financial factbook 2016

w ervie v try o Indus The luxury and cosmetics financial factbook 2016

PPage 42age 42 Industry overview Global cosmetics goods market The global 9sia%Hacific continmed Consumers continue to explore cosmetics goods €203b its lead as the world’s new looks, and companies are market continued biggest cosmetics offering new formulas and textures to grow, reaching market and posted to cater to the rising demand. €203b. 3.4% growth thanks to an acceleration The success of Online beauty sales in Southeast Asian Millennial consumers’ purchasing lip makeup was registered 20% markets, which has power is expected to reach one of the 2015 growth in 2015 on a helped to offset the US$3.4 trillion by 2018 in the US highlights, with worldwide basis and slight slowdown in alone. growth at 10% in accounted for 6% of economic growth rate the mass-market the beauty market. in China. US$3.4 channel, and 16% in the selective 20% channel. 3.4% trillion 10% growth growth Consumer engagement, in-store excellence and innovation are the key drivers of success for beauty cosmetics companies. 16% 6%market The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters PPage 43age 43 Ex ec The global cosmetics market is expanding steadily … utiv Global luxury goods Title for section H Global cosmetic goods market e summary H X Welcome to the third edition of EY’s annual • TShae mles oaf irknedt cuostnrty pinulaeyd tero gs arroe ew, rxpeeacctheid tng €o g2r0o3w ab. Tt a hhe meaaltrhky ret wataes s, lelid bghty dly soturbolneg-deir igin 2t an0n1u5 wal gitrh gowrth rowath ote ffo r Financial Factbook for the luxury and cosmetics 3L’.O9% accits canoe ampnad Nred tatuo 3ra f.6ro% im Fn 2Y01114 (A tbo Foth aY1t c4Eo. nstant rates) and in line with the average of 4% observed over DCF and v p the past decade. ar X Increased demand through innovative products will cater to underserved emerging markets. sector. Lhe >actbooc combines financial • Consumer engagement, in-store excellence and innovation are the key drivers of success for cosmetics ame data, insight from EY’s global team of sector X aluation Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate t er specialists and opinions of external experts. companies. s demand in established geographies. • Lhe marcet remains smpplq drinen, and consmmers are aloaqs on the loocomt for imalitq, performance and Titles for charts perceived results. Indusw ) 2 ?lgZal cgseelics indmsljy eajcel _jgol`$ QGQ *()(Ç*()-! , at current rates ?lgZal cgseelics eajcel se_eenlalign Zy pjgdmcls and _eg_jap`ies *()-! try oervie v v ervietry o w Indus 250 12% Hygiene Other Eastern Africa, Middle East products 1% Europe 3% 203 11% 6% 200 185 10% 171 178 Latin 158 165 10% America 8% Fragrances 11% 150 12% Skin care Asia-Pacific and disMe 36% b +4% at 6% owth 36% thodology € constant gr claimer 100 rate % 4% Western 4% Europe 4% 4% 4% Makeup 20% 50 17% Titles for charts 2% 0 0% Hair care North America 2010 2011 2012 2013 2014 2015E 23% 24% and specific analyS Cosmetics market Growth % ample s election s e s Source: Data based on consensus of several brokers’ reports for each C Glo company. on Notes: t s act uss N)! Eotesa:rMceartkDeit cne iapnitdamlizsattriq pon irs bofialsee, gd olon a obal fner-amgornatnh acevse, hragae air cs oarf De, meceamcebeÈr 2mp0, s12c.i n care, personal hqgiene. ary The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. 2) L’Oréal annual report 2015. The luxury and cosmetics financial factbook 2016

PPage 44age 44 DCF and valuation pIndustry oaramevervieterws … and proving resilient in times of economic uncertainty Global luxury goods Title for section H Global cosmetic goods market H X Welcome to the third edition of EY’s annual Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for Financial Factbook for the luxury and cosmetics L’Occitane and Natura from FY11A to FY14E. X sector. Lhe >actbooc combines financial Increased demand through innovative products will cater to underserved emerging markets. data, insight from EY’s global team of sector X Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate specialists and opinions of external experts. demand in established geographies. ) Feo eajcels 3 Gnline plal^gjes _ainin_ pgpmlajily Titles for charts • New markets, such as India, South Africa and Turkey, generated more than two–thirds of the • Beauty, today, is synonymous with personalized products and services that enrich the beauty market growth in 2015. consumer experience and its relationship with brands in all distribution sectors. • 9sia%Hacific continued its lead as the world’s biggest cosmetics market and posted 4.3% • Online beauty sales registered 20% growth in 2015 on a worldwide basis and accounted for growth due to an acceleration in Southeast Asian markets, which has helped to offset the 6% of the beauty market. slight slowdown in economic growth rate in China. • Social media has made the online platform a critical part of every brand’s strategy. • The industry players are investing more resources in currently underrepresented countries • Luxury cosmetics remains the most dynamic sector with 5.7% growth in 2015, thanks in to spread their global reach and tap growth opportunities. particular to e–commerce sales. • The operators are increasinglq inclmding prodmcts in their portfolios to specificallq target consumers with lower disposable incomes. 2 ?jgoin_ eacemp cale_gjy 4 Targeting millennial consumers Titles for charts • Makeup is the most vibrant category for the third consecutive year and acted as a growth • There lies a strong opportunity for growth from millennial consumers, as their purchasing engine driven by the ËËselfie generation.’’ power is expected to reach US$3.4t by 2018 in the US alone. • The success of lip makeup is one of the 2015 highlights, with growth at 10% in the mass • Further, it is estimated that 75% of the US workforce will comprise millennials by 2020, market channel, and 16% in the selective channel. making it an attractive group for industry players. • It is a Öomrishing marcet as consmmers continme to explore neo loocs, and companies are • Eighty-six percent of millennials share their brand preferences online, which can help 1 offering new formulas and textures to cater to the rising demand. companies to reach wider consumer groups. • In addition, the push for natural cosmetics has opened new growth opportunities for smaller • A new shopping revolution is underway in how consumers shop at retail stores and online players in an otherwise highly competitive market. The trend has forced large companies to platforms, as new channels of communication, commerce and service converge due to the either acimire or denelop their oon ËËgreen’’ products. impact of millennial consumers. Source: Data based on consensus of several brokers’ reports for each company. SNooutersc:eMsa: Lrke’Ot créapail Atalinznatuioan il Rs bepaoserd ot 2n a o015n, Ee-smtoéne Lth aavuedreagr Ae ans onuf Dal Receempobert 2r 2001125 a. nd other selected research. NThoe 2tes0: 112 g) Eroswtéte Lh coaruredsepr Aondns tnuo tahl Re seapleos grt 2ro0w1th r5.ate between FY11A and FY12A/E. The luxury and cosmetics financial factbook 2016

w ervie v try o Indus The luxury and cosmetics financial factbook 2016

PPage 46age 46 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Digital tango with China and other industry professionals Many luxury “maisons” focused in 2015 on digital 2 Dior challenges and Asian markets expansion. After the 1 booming era where one store per week was the store opening rate, now it may be time for brands to 3 Bally rethink their business model entirely. Many recognize 0 the high potential of the e-commerce and mobile 3 Coach Paolo Lobetti Bodoni commerce (m-commerce) markets, but few are able 19 to compete in them profitablq, and enen feoer are MED RCP Advisory Leader, Advisory able to successfully combine their e-commerce and 4 Louis Vuitton Turin, Ernst & Young Financial Business Advisors S.p.A. retail strategies. 1 Nowadays, brands are more cautious about opening 4 Zegna new stores, having experienced challenging 0 relationships with local partners and distributors and 4 waiting a long time for returns on their investments. 7 Armani Looking at the number of store opening and closings by some relevant brands (see graphic at right), we 5 Gucci can see that it may be time for them to consider full 1 Ivan Chan expansions only and to contemplate how to balance 5 Dunhill and link stores with the digital space, known as the 1 Partner, Tax online to ofÖine, or G*G, integration. Hong Kong, Ernst & Young Tax Services Limited Full physical store expansion by brands is based on 6 Bottega Veneta the brand awareness paradigm that they need to 2 have stores to intensify their contact with customers 11 Hugo Boss and increase brand awareness. Brands are beginning 6 to realize that, in Asia, they face rural regions with high population growth but where opening stores to Number of stores Closed 2015 Opened 2015 get in touch with customers is simply too capital Source: EY intense and less effective. Luckily, these consumers Lilly L Cheung are highly connected digitally, with a higher Senior Manager, Tax penetration rate of chat and m-commerce platforms Shanghai, Ernst & Young Certified Tax Agency Co. Ltd. than in the European Union (EU). The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters PPage 47age 47 I Points of view from EY global sector Digital tango with China and other industry professionals In particular, in China, customers are used to paying (>$US26,000 in yearly disposable income) and one potential way for luxury brands to secure China with modern mobile payment methods that only need afÖment homseholds 6MK,.,((( in qearlq sales. a fingerprint and three seconds per transaction. disposable income) of lower tier cities, will be driving The imestion is ohether lmxmrq homses shomld innest Lhese cmstomers first encomnter brands on digital the growth potential for luxury brands in the coming in their online presence instead of their ofÖine channels, so brands must manage their digital years. presence, or invest in a combination of both to channels for the brand ambassadors that they are, In the past, luxury brands in China were reluctant to attract future consumer growth and the millennial focmsing on specific digital marceting dedicated to try the online channel. However, with the generation in China as well as to pioneer an unrivaled cmstomers on first contact. Lo reach this enormoms development of cross-border online platforms and customer experience worldwide. w market, marketing and branding strategy need to be the popularity of traveling to buy foreign goods, localized. The “digital conversation” with Chinese ervie especially luxury goods, the online marketplace is v consumers is a totally different game than dialogue try o with Western consumers. Chinese consumers like Indus more storytelling and have higher expectations in terms of delivery lead times and customer care What gZslacles dg lmpmjy Zjands ^ace in l`e di_ilal eajcelplace7 imalitq, as theq are accmstomed to msing highlq Image - The most important concern for luxury brands is their brand image and exclusivity. Online shopping is, in general, associated with responsive and sophisticated platforms. shopping in a marketplace for cheap buys, which should be fast and convenient, whereas luxury goods are relatively expensive and not necessarilq imicc or connenient to pmrchase. Hrodmcts being anailable online might impact their lmxmrq image. Digital luxury strategy capturing the Chinese Grey market/fake/Daigou - Luxury brands do not wish to be associated with fake goods being sold via e-commerce through unauthorized channels. Degal action has been an important tool in fighting this tqpe of comnterfeiting. É

HHa_e ,0a_e ,0 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Digital tango with China and other industry professionals The Chinese Government has been an important China increases individual parcel tax rates The Chinese authorities also introduced the new driver of stimulating and regulating online business In order to ËËlenel the plaqing field,’’ the ;hinese cross-border e-commerce (CBEC) tax policy, which growth, so it is worthwhile for luxury brands to gain a government increased the individual parcel tax rates took effect on 8 April, 2016. This new CBEC tax deeper understanding of the recent changes in on nearly all luxury goods, effective 8 April, 2016, as regime only applies to imported goods that are guidelines that impact consumer behavior, including summarized in the table below: traded through e-commerce platforms properly the recently launched Circular 18 on cross-border registered with Chinese Customs. e-commerce duties. Further, the government is A Chinese consumer is liable to pay the normal setting up cross-border e-commerce platforms, China individual parcel tax change import duties when buying imported goods through where certain governmental support is provided. This Product categories New rate Old rate Increase CBEC, unless each transaction is less than RMB2,000 can be in the form of easing and hastening customs Gold and silver 15% 10% 5% and the total amount spent is less than RMB20,000 a clearing. Finally, Chinese customers’ allowed online Sporting goods (excluding 30% 10% 20% year. Reduced import taxes apply if transactions are transaction amount has been increased. golfing prodmcts!, below the thresholds previously mentioned, as footwear, bags follows: China tax changes relating to e-commerce Apparel and textiles, 30% 20% 10% • No customs duty Until recently, most cross-border business- electronics, bicycles, watches (excluding • 30% discount to CT to-consumer retail goods in China were administered high-end pieces) • 30% discomnt to import%lenel N9L under the individual parcel tax regime, which imposes Jewelry and precious 60% 10% 50% an “individual parcel tax” on inbound hand-carried jewelry accessories Additionally, imported CBEC goods, except for personal articles. These articles (e.g., passengers’ @igh%end oatches, golfing 60% 30% 30% certain items, are not subject to China’s import accompanying baggage and gifts for family and products licensing reimirements. ;osmetic prodmcts are one of friends! are mostlq imported in reasonable imantities Cosmetics, tobacco, 60% 50% 10% the exceptions, and imported cosmetics and skin care for personal use, not for trading purposes. The tax is alcohol products sold through CBEC will need to be also called the “personal postage tax” because it registered with the China Food and Drug applies to personal articles brought into China by The new tax regime, if strictly enforced, will put Administration, following the same procedures as post or by courier. It is a combined tax, consisting of pressure on the practice of Daigou and potentially those applicable to normal commercial goods the customs duty (CD), consumption tax (CT) and discourage Chinese consumers from buying luxury imported under the general trade mode. import%lenel nalme%added tax N9L!. Lhe personal goods overseas. The volume of parallel imports of postage tax is generally lower than the accumulated luxury goods into China would likely reduce as well. A ;<, N9L and ;L rates for similar goods imported for parallel import is a non-counterfeit product imported trading purposes (i.e., commercial goods). This from another country without the permission of the favorable tax regime encouraged the popularity of traveling to buy foreign luxury goods and encouraged brand owner. the practice of Daigou. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters HPa_e ,1age ,1 I Points of view from EY global sector Digital tango with China and other industry professionals EY digital operating model research findings Fast-paced e-commerce development and the How do you build your e-reputation? ensuing governmental response triggered the need Appearance on respected websites to increase your credibility 13% 75% for a better understanding of e-commerce for luxury brands in China. EY- Operating Model Effectiveness Association with other brands of choice 11% 22% group interviewed 20 luxury brands in Mainland China between April and August 2015, investigating Review websites entries 11% 22% 11% 44% their digital market strategy, operating model and w operational transformation needs. Some highlights of Linking your brand with only certain e-commerce channels 13% 50% ervie the study are discussed below. v How do you control your e-reputation? try o How luxury brands maintain their brand image Indus Luxury brands use a number of approaches to Joint ventures with online KOLs 11.1% 11.1% 66.7% protect and maintain their image or “e-reputation.” According to our survey, best practices include: Promoting positive online conversations 22.2% 33.3% appearing only on respected websites, limiting the number of e-commerce channels through which their Initiating online forum discussion 22.2% 22.2% products are offered, working with key opinion leaders (KOL) and ensuring positive reviews on Censoring online conversations 11.1% 11,1% 44.4% products (see the graphic at right). Not important Less important Average Somewhat important Very important The luxury and cosmetics financial factbook 2016

HHa_e -(a_e -( DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Digital tango with China and other industry professionals Luxury brands invest for omni‑channel integration In addition, more and more luxury houses that have Though proven success is yet to come, digitalization When luxury brands were asked how much and in an outlet business are collaborating with multi-brand is in progress. which activities they were planning to invest for the e-commerce sites to have a presence online. next three years, there was a clear distinction between market entry brands with a limited online O`ic` g^ ygmj Zmsiness egdel se_eenls is egslly inÖmenced Zy ygmj di_ilal sljale_y7 presence versus mature brands that are well-presented online. The luxury brands with a Customer segments relatively low online presence are planning on Revenue streams spending an average of up to US$4m to US$5m on Cost structure building presence on third-party e-commerce sites Now and social media, collaborating with KOLs, and Channels Future marketing their brand history in order to create Now and future Customer relationships online awareness with (new) Chinese customers (see graphic below). These strategies aim to introduce Value proposition new customers, via e-commerce, to foreign luxury 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% brands, as Öagship stores are less present in smaller cities and more rural areas. Luxury brands that are well-presented online often Annesleenl in sales and eajcelin_ and cmslgeej Investment in a holistic operations approach have an online presence on third-party e-commerce jelaligns`ip eana_eeenl ;JE! aclinilies mp lg MK,(e sites. Some brands plan to invest up to US$40m in up to US$4m to US$5m the next three years to build their own online • ?eneration of traffic to channels • Fetoorc secmritq, data storage and mobile'tablet platform; integrate mobile, tablet and PC; and compatibility integrate their online and ofÖine innentorq • Online marketing • Digitization of sales processes management and supply chain (see graphic at right). Luxury brands building their own platform seems to • Content production • Own integrated platform, i.e., e-commerce and be the future trend, since they do not need m-commerce third-party e-commerce sites to build their brand. • KOLs and social media presence • Omni-channel infrastructure Moreover, if they grow in China, a part of their sales will go to these third-party e-commerce platforms if • Platforms: e-marketplaces and mobile platforms they do not have their own. • Customer relationship management (CRM) to manage cmstomer profiles and relationships The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters HPa_e -)age -) I Points of view from EY global sector Digital tango with China and other industry professionals Organizational changes and impact of brands’ When will you adopt these omni-channel practices? China digital strategy Luxury brands see their organization and service 67% levels changing in the next three years, including Up-to-date marceting, smpplq chain'logistics, cmstomer sernice 0–12 months and IT capabilities. Marketing efforts, especially on 56% social media, will need to increase in order to attract 12–24 months 24–36 months customers, improve the stickiness in the physical w store and attract more traffic to the oebsite. Kmpplq ervie chain'logistics shomld be restrmctmred2 preniomslq a v batch of products was sent to the store, and from the 33% 33% 33% 33% try o store, it was divided. Now, companies send one item Indus across China to get it delivered. A customer service 22% 22% 22% 22% 22% 22% 22% team is needed to deal with returns and engage customers, who are more diverse, which will likely mean longer oorcing homrs for online imestions. 11% 11% 11% 11% 11% Sometimes, customer service teams have to answer imestions beqond their control, i.e., on the delinerq imalitq. >inallq, AL capabilities oill need to change so Return online Check inventory at Order inventory at Ship from stores Pickup online Holistic planning that there is transparency and communication purchases other stores other stores purchases in store across channels between in-store and online inventory. Integration will be needed between online and mobile portals, the order management system, the warehouse Currently, luxury brands want to have transparency In the coming two to three years, brands desire management system and the logistics provider between their physical stores in their stock holistic planning across all channels, meaning that system. availability. In the next year, they would like to ship online prodmcts can be bomght and picced mp ofÖine, The graph at right shows the omni-channel integrated inventory between stores and their distribution but also the other way around. development plan of the average luxury brand. centers, where demand planning, inventory management and warehousing will be impacted. The luxury and cosmetics financial factbook 2016

PPage 52age 52 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Digital tango with China and other industry professionals What are the key drivers for integrating the supply chain and logistics of your physical and online stores? GfÖine retail entities in China are exploring new approaches to expedite customs clearance and 25% reduce supply chain lead time to meet the new e-commerce opportunities. The China General Not important Administration of Customs (GAC) introduced the Average ;mstoms Enterprise ;ertification Kqstem. Lhis rating 20% Very important system may provide a possible solution to simplify customs for brands entering China. 15% Effective 1 December 2014, importers are graded into the following four ratings: Prior grades per GAC Current grades per GAC 10% decree no. 197 decree no. 225 AA Advanced authorized enterprise 5% A Normal authorized enterprise 0% B General credit enterprise Cost efficiency Inventory reduction Company structure Tax and legal reasons and design C and D Dishonest enterprise In our study, one of the main reasons luxury brands Currently, most of the e-commerce luxury goods in provided as to why they should integrate their online ;hina are smpplied bq ofÖine retail entities located in and ofÖine smpplq chains is innentorq redmction, ;hina! ooned bq lmxmrq brands. ?oods are first where the transactions made are delivered from the imported into China as normal “commercial goods” same pool of inventory either in the physical stores under the general trade mode. Such imports face or warehouses, based on availability to deliver on obstacles, such as slow clearance, the return of promised customer service levels (see graphic imported goods that need to be exported again, and above). The other main reason is the tax and legal the large amount of administrative work that needs regulations in China. to be prepared along with the importation. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters PPage 53age 53 I Points of view from EY global sector Digital tango with China and other industry professionals Generally, entities with a higher rating from customs New trends in customers’ and companies’ The best plaqers oe’re obserning are defining a are entitled to more beneficial treatments dmring the behavior in China blended strategy for each market, with different clearance process. approaches for mega cities than for rural areas, Kpecificallq, an advanced authorized enterprise may Luxury customers’ buying strategies diverge leneraging Öagships on the mmst%be%seen streets and enboq the follooing cmstoms benefits2 Customers that have access to global pricing save A-list locations, delivering sophisticated digital 1. Lower inspection rate of imported and exported money by buying online, mainly through marketing on Asian platforms (also third-party goods e-marketplaces. These additional savings can in turn platforms) and providing story and content to 2. Kimplified review of documents for imported and be used to buy luxury goods. Customers are able to generate social conversations. w exported goods buy more for less. The mindset for 2016 is to move the focus from ervie increasing walk-ins in the shops to engaging v 3. Prioritized customs clearance formalities for consmmers in a more Öexible, digital omni%channel try o imported and exported goods Company sales’ strategies converge platform that is anailable *,'/ for continmed 4. Customs inspection and release of imported and Companies that pursued the mass market previously profitabilitq. Indus exported goods before commoditq classification, are now trying to upsell their brand, since new digital customs valuation and country of origin are customers from lower tier cities are likely new to their determined or other customs formalities are brands. In addition, luxury brands are introducing completed new lines, which are capturing these new online 5. Customs assignment of coordinators for customers, in order to prevent down selling of their enterprises original brand. In this context, luxury is no longer In addition, an advanced authorized enterprise is now defined as scarce, bmt characterired as haning a long, treated as an authorized economic operator (AEO) in mniime and amthentic brand storq of craftsmanship. China. The government has agreed with several comntries'regions Kingapore, @ong Cong, Komth Korea) to mutually recognize an AEO. Under such agreements, Chinese customs and participating comntries'regions oill provide conveniences for the goods imported by one AEO enterprise from another AEO enterprise. The luxury and cosmetics financial factbook 2016

PPage 54age 54 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Recent transactions in the perfume industry: the price of and other industry professionals scarcity For decades, the perfume market has proven As depicted in the next page, the fragrances market extremely attractive for luxury brands and fashion has so far mainly been led by two types of industry designers, oho identified it as a imicc oaq to earn plaqers2 ). dinersified lmxmrq gromps and *. incremental revenues while improving brand specialized cosmetics and fragrance manufacturers awareness. Perfume and cosmetics specialists also that partner with luxury, fashion or other premium benefited from this incremental Öoo of demand and brands (“haute couture,” fashion, accessories, etc.) Arnaud Cohen tooc adnantage of the significant price differential through fragrance deals. between very high selling prices and their own Brands, such as Guerlain and Lancôme, which have Partner, TAS (limited) costs. been exclusively involved in the cosmetics sector, and Paris, Ernst & Young Advisory These golden years appear to have ended. In order to smaller brands engaged in the haute parfumerie continue being successful in an increasingly niche market are the few exceptions that prove the competitive market, the main industry players have rules, as illustrated on the chart on page 55. In all explored alternative or complementary strategies other instances, the sale of fragrances mainly relies that are currently driving the industry, including: 1) on a brand created outside of the perfume industry, the lamnch of neo fragrances or Öancers for brands which plays a considerable role in increasing product that are already successful on the market, 2) the attractiveness and is a key differentiator in the entry into new market segments, such as the “haute market. Benjamin Msika parfmmerieÊ niche, primarilq thromgh acimisitions, and 3) the purchase of rights over existing brands. Senior Manager, TAS Following a brief overview of the current state of the Paris, Ernst & Young Advisory market, we will explore in more depth the last two options and ansoer the imestion marcet participants are asking themselves: is the price for continued growth still worth it? *** The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters PPage 55age 55 I Points of view from EY global sector Recent transactions in the perfume industry: the price of and other industry professionals scarcity Chanel: Chanel Avon: Christian Lacroix, Haiku LVMH: Guerlain*, Christian Dior, Kenzo, Givenchy Puig: Bean Haml ?amltier, Hrada, Nalentino, ;omme des ?ar…ons, Fina Ricci, Paco Rabanne L’Oréal: Lancôme*, Yves Saint Laurent, Giorgio Armani, Estée Lauder: Estée Lauder, Ermenegildo Zegna, DKNY, Ralph Lauren, Cacharel, Diesel, Maison Margiela, Proenza E9;, Lom >ord, Lommq @ilfiger, Eichael Cors, >r†d†ric Kchomler, Nictor  Jolf Ealle"", :q Cilian"", ;liniime" w ervie v Coty: ?mcci, Joberto ;analli, :ottega Neneta, :alenciaga, ;gsa pgljeZZejg ^aje _li Inter Parfums Inc.: Abercrombie & Fitch, Boucheron, Coach, try o Top Guess, Stella McCartney, Cerruti, Miu Miu, Alexander operatori economici?

PPage 56age 56 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Recent transactions in the perfume industry: the price of and other industry professionals scarcity The following table provides a non-exhaustive list of the license agreements in force in the fragrance sector today. Licensor Licensor business Licensee Licensee business Date of effect Royalty rate Status Abercrombie & Fitch Premium apparel Inter Parfums Inc. Perfume house 2016 n'a Active Alexander McQueen* Luxury fashion Coty Cosmetics 2016 n'a Active Boucheron Fine jewelry Inter Parfums Inc. Perfume house 2011 n'a Active Burberry Luxury fashion Inter Parfums Inc. Perfume house n'a 14% Expired Christian Lacroix Luxury fashion Inter Parfums Inc. Perfume house n'a 5.5% Expired Coach Luxury fashion Inter Parfums Inc. Perfume house 2016 n'a Active Dolce & Gabanna Luxury fashion Procter & Gamble Co.

DCF and vIndustry oaluation pverview arameters PPage 57age 57 I Points of view from EY global sector Recent transactions in the perfume industry: the price of and other industry professionals scarcity More often than not, the exact terms and conditions of the licensing agreements are not publicly available, but royalty rates paid by the licensee are typically expected to range between 2% and 10% in this industry. Less protection Discount While licensing deals are still very much being Royalty rate costs and tax rate Value of the developed, some of the main perfume manufacturers trademark 1 Revenues generated Royalties on the trademark Cash Öows attributable have experienced the limits of this business model { { w and are now exploring more, and more often, under the trademark to the trademark ervie opportunities to directly buy either the rights over a v trademark category or an entire trademark, brand or try o business. Another strategy used by industry players Indus is to look for haute parfumerie brand targets. While As depicted in the previous chart, under this To mnderstand the practical conseimences of this the benefits of smch strategies are imite enident from approach, the nalme of the brand is eimal to the approach, let’s tace a simplified example oith the a bmsiness and grooth perspectine, the right imestion stream of after-tax royalty savings associated with following parameters: to ask is whether these transactions are also sound the ownership of the intellectual property (IP) rights • S1 = 100 from a financial perspectine. discounted at a rate commensurate with the risks of • g = 2% To help ansoer this imestion, it is msefml to go bacc to the asset. Eathematicallq, the brand nalme N:rand! • RR = 6% some of the basics of valuation theory and to review is dependent on the following parameters: the valuation approach commonly known as the • S1 = sales generated under the brand name in year • DR = 10% 2 one • TR = 33.33% relief-from-royalty method . In fact, the relief-from-royalty method seems particularly suited • g = annual growth rate of sales associated with the Numerically, this leads to N:rand 5 )((".! " to estimating the value associated with the ownership brand )Ç++.++!' )(Ç*! 5 -( of the rights to a brand intangible asset in the • RR = royalty rate In other words, a perfume brand generating sales of perfume sector. • DR = discount rate 100, growing at 2% per year (into the long term) and for which the licensee pays a royalty rate of 6% has a 1 • TR = tax rate One of the most famous examples of the limits to this business model theoretical, intrinsic value of 50 or 0.5x sales. is arguably the termination of the licensing arrangement between In formmlaic terms, the nalme of an indefinite%lined Burberry and Inter Parfums at the end of 2012. While Inter Parfums receined significant compensation from :mrberrq mpon termination of brand is computed as: the licensing agreement, the former lost approximately 50% of its total sales almost overnight. 2 The basic tenet of the relief-from-royalty method is that without VBrand = ((S1*RR) * (1–TR))/(DR–g) ownership of the subject intangible asset, the user of that intangible asset would have to make a stream of payments to the owner of the asset in retmrn for the rights to mse that asset. :q acimiring the intangible asset, the user avoids these payments. The luxury and cosmetics financial factbook 2016

HHa_e -0a_e -0 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Recent transactions in the perfume industry: the price of and other industry professionals scarcity Now that we know how the math works, we can also What could cause such a disconnect? 4. Finally, the scarcity of such assets and the will to mnderstand hoo the brand nalme Ömctmates oith the In our view, this discrepancy can be linked in large seize growth opportunities in a highly competitive main parameters. part to the following factors: market For a royalty rate between 4% and 8% and a discount 1. The secmring of fmtmre cash Öoos for an indefinite While the first three factors could validly impact the rate between 8% and 12%, the resulting brand value period of time. Indeed, in our previous numerical parameters considered to value a brand under the is between 0.3x and 0.9x sales. example under the relief-from-royalty method, we relief-from-royalty method or translate into That is the theory. Let’s now take a look at two recent had assumed that owning the brand was measmrable additional cash Öoos, the fourth factor real-world industry transactions: eiminalent to anoiding the paqment of a fmtmre has no direct financial translation and therefore leads • On 9 July 2015, Coty announced its merger with stream of royalties. In doing so, we omitted to say to the imestion each decision%macer in the indmstrq the P&G beauty business (and its large perfume that this acimisition is also a oaq to ÉsecmreÊ the shomld asc2 ohat price'premimm am A readq to paq for and cosmetics portfolio! for a combined eimitq ability to continue using the brand and avoid any such scarce assets? value of US$9.6b. While this portfolio is made of uncertainties that may arise at one moment or This race for scarce brands has also resulted in scores of owned brands and license agreements another (e.g., increased royalty rate upon renewal another strategq that clearlq has some benefits bmt ohich maces it difficmlt to analqre!, this translates of the license!. >mrther, in general, bq acimiring a will not be the ultimate answer to the industry’s into a 2.1x sales multiple. brand, the perfume manufacturer also secures challenges. This alternate or complementary strategy • On 19 March 2015, Inter Parfums announced the the cash Öoos associated oith preniomslq has consisted of perfume manufacturers looking for acimisition of the Jochas brand for MK)(0m. developed IP (existing fragrances) growth opportunities at the high end of the market, According to the company’s press release, the 2. The capabilitq to define the strategq on enerq i.e., the haute parfumerie niche market. brand achieved sales of US$46m at the time of the aspect of the mse and denelopment of the brand  The haute parfumerie is indeed an interesting way to acimisition, ohich translates into a *.+x sales ohich is mnlicelq mnder a license agreement  and address the market, as it allows manufacturers to: multiple. more specificallq on the follooing strategic • Avoid being dependent on third-party distributors In other oords, for these too transactions, the EN' decisions: (large, specialized retailers, such as Sephora) and sales multiple was more than four times what we • International development of the brand capture the margin associated with the distribution computed for a “typical perfume brand.” While the • Feo lamnches'innonations, ohich no longer of the perfumes utmost care should be taken when analyzing these need to be approved by the brand owner • Differentiate themselves from the “pack” of the transactions’ figmres as an example, the Jochas • Price positioning, which does not need to be fashion'lmxmrq brands oith a distinct image fine sales included some royalty revenues that should be approved by the brand owner fragrances specialist) and value proposition segregated and analyzed separately), we clearly see 3. Potential costs synergies [distribution, media ÉpersonaliredÊ'ÉmniimeÊ fragrances! that there is a great disconnect between the intrinsic buying purchasing power, Selling, General & • Increase the price scale with offers ranging from brand nalme indicated bq omr simplified theoretical Administrative expenses (SG&A), etc.] €100 to €700, as described in the following table, computation and the reality of recent transaction which summarizes some recent transactions in the prices paid in the industry. high-end segment of the market The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters HPa_e -1age -1 I Points of view from EY global sector Recent transactions in the perfume industry: the price of and other industry professionals scarcity Date Target Buyer Seller Consideration Comments While not enough information is available to compute the valuation multiples, it should also be noted that 25 Feb 2016 By Kilian Estée Kilian Undisclosed By Kilian is a luxury perfume brand from Paris, created by these transactions generally also “come at a price,” Lauder Hennessy Kilian Hennessy. Sold in more than 40 countries through as: freestanding stores (e.g., Paris, London, New York, Moscow, Doha and Lugano) and perfumeries, By Kilian • The market addressed by haute parfumerie offers perfumes with a price range between €100 and corresponds to a marginal portion of it. €300. • There are an increasing number of players in this 24 Jan 2016 L’Artisan Puig Fox Undisclosed Penhaligon’s London is one of the most prestigious British niche, which makes it increasingly competitive as Parfumeur Paine & fragrance houses and holds two Royal Warrants. The brand w and Company has its own stores (London, Paris, Hong Kong, Singapore, well. ervie Penhaligon’s Milan, New York, Beverly Hills, Taipei, etc.) and a global • In certain cases, these brands are too closely v London presence. Penhaligon’s offers perfumes with a price range associated with their creator and may not last in try o between £65 and £150. L’Artisan Parfumeur Paris is a luxury artisanal brand from the long run. Indus Paris, working with its own craftspeople to create authentic • They may not allow aggressive expansion or and innovative perfumes. L’Artisan Parfumeur operates dinersification plans. retail bomtiimes in >rance Haris, Dille, Earseille! and has a global presence. L’Artisan Parfumeur offers perfumes with *** a price range between €100 and €150. The competition between the perfume industry’s 22 Dec 2015 Serge Shiseido Serge Undisclosed Serge Lutens is a luxury perfume brand from Paris. Serge main plaqers has certainlq intensified as the indmstrq Lutens Lutens Lutens fragrances retail in approximately 2,000 stores, has become more mature and players realize that spanning 35 countries with a total net sales of c. €40m. Serge Lutens offers perfumes with a price range between there might not be room for everyone. Besides, the €100 and €600. race to the “Holy Grail” is not over, and some 12 Jan 2014 Editions de Estée n'a Undisclosed Editions de Parfums Frédéric Malle offers a collection of transactions might still occur in the near future. As Parfums Lauder luxury perfumes created by 12 master perfumers from an example, after the exit of the Dolce & Gabanna Frédéric aromnd the oorld. Kold thromgh fine stores in Haris and Feo brand from the ;otq portfolio follooing the ;otq'H? Malle York as well as through Barneys New York in the United transaction, some companies active in the sector States and Liberty in London, Editions de Parfums Frédéric seemed to look at it closely. For this transaction, as Malle offers perfumes with a price range between €100 and €260. for anq other, the imestions that oill need to be 11 Jan 2014 Le Labo Estée n'a Undisclosed Le Labo provides highly selective luxury fragrances. The answered include: how much of a premium are Lauder brand distributes its perfumes in minimalistic freestanding investors willing to pay for scarce assets? More stores in New York, London, Paris, Los Angeles, San importantly, in the luxury world where things change Francisco, Tokyo and Hong Kong, as well as selected nerq imicclq, are oe betting on the right brand7 As the prestige department stores worldwide. Le Labo offers price offered commensurate with the risks taken? perfumes with a price range between €140 and €730. The luxury and cosmetics financial factbook 2016

HHa_e .(a_e .( DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Millennials and the luxury landscape and other industry professionals Millennials and the luxury landscape Creating a dialogue through social media Millennials are taking the reins of luxury, and for Condé Nast magazine calls it “the Yelp effect.” Every them, it’s all about the experience. Born in an era experience with a brand, good or bad, can be easily bookended by the introduction of the personal catalogued, documented and shared online via social computer and the smartphone, millennials have media in todaq’s oorld. 9lmost a imarter of searches always had information — and choices — right at their for millennials’ top 20 brands are links to John Nguyen fingertips. Oith *- of all homseholds in the MK user-generated content. Additionally, millennials lean making more than US$500,000 annually belonging heavily on recommendations from friends and peers. Senior Manager, Audit to millennials, the generation represents a lucrative Because millenials are accustomed to seeking out Dallas, Ernst & Young LLP United States market for luxury brands. The U.S. Chamber of recommendations, lmxmrq brands are finding it critical Commerce cites that although they’re decades away to maintain positive relationships with them. One way from peak earning power, millennials currently they’re doing this is through social media. command approximately US$700b in purchasing More than 2.1 billion people worldwide are on social power: US$200b of their own and US$500b of media in one form or another. And one-third of 1 indirect spending thromgh inÖmencing their parents. millennials cite social media as their preferred Jecrmiting firm :erglass # 9ssociates estimates that method of communication with businesses.2 Because by 2017, the millennial generation is expected to millennials tend to be very active on various forms of outspend baby boomers. Tapping into millennials’ social media, there are numerous channels and Kelsea E West desire for engagement is forcing brands to innovate opportunities for luxury brands to deliver their and create ever more immersive, interactive 3 messages to a willing audience. According to Chris Senior, TAS experiences for consumers. Paradysz, co-CEO of marketing agency PMX Agency, Dallas, Ernst & Young LLP United States Here is what some luxury brands are doing to capture Gucci, Chanel and Burberry have seen success with millennials’ hearts — and wallets. an innovative digital presence attracting millennial consumers. Chanel’s YouTube channel currently has more than 550,000 subscribers and features high-production content, including promotional videos, fashion shows and beauty tutorials. 2 Tom Pick, “47 Superb Social Media Marketing Stats and Facts,” 1 Crqstina ?mstafson, ÉEillennials redefine lmxmrqÈand the staces are InfusionSoft, 21 January 2016. 3 high,” CNBC News, 18 February 2015, CNBC LL 2016, accessed via Erin Shea, “Future of fashion brands depends on millennial brand http2''ooo.cnbc.com'*()-'(*')0'. affinitq,Ê Luxury Daily, 18 January 2013 , Napean LLC, 2016. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters HPa_e .)age .) I Points of view from EY global sector Millennials and the luxury landscape and other industry professionals Chanel aims to produce video content as luxurious as Olivier Rousteing, Balmain’s creative director, has Reinforcing the brand through social responsibility its products in order to build its digital brand and lure helped rejuvenate the popularity of the label through Millennials are commonly characterized as caring 4 consumers. It seems to be working. The latest video his Instagram account, which documents his partying more about social justice and the environment than from Chanel’s show in Cuba caused YouTube user oith models as oell as his high%profile relationship generations before them. Due to these 5 lilEiss>(>( to comment, É?ood฀ A’ll go broce again in with the Kardashians. Named Balmain’s creative characteristics, lmxmrq brands that shoo an affinitq November–December shopping this collection lol as director at the age of 24, Rousteing’s social media for social responsibility could attract more millennial usual.” User Christopher James had a more presence — and the attention it attracts — has consumers. The Harvard Business Review says that emotional take: “Oh my god! Thrilling! Inspirational, transformed the companq from a Öashq, inaccessible 88% of US and UK millennials and Generation Xers w emotional, denine SsicU. At’s the first time a fashion brand to the brand that omtfits millennials’ fanorite 7 believe brands need to do more good. Not typically ervie show makes me cry ... Devine [sic]!” celebrities. Rousteing learned from his friend Kim associated with social responsibility, luxury brands v There’s further evidence that connecting with Kardashian how to tap into the potential of using are beginning to adapt this preference of their try o consumers via social media can lead to a better Instagram as a social media marketing tool long millennial customers by implementing green Indus bottom line. Luxury conglomerate Kering reported an before many other designers. He prides himself on initiatives, focusing on transparency and 11.5% YOY revenue increase for Gucci, which became being a celebrity-loving millennial, and has now sustainability, and showcasing local manufacturing increasingly active in the digital space during the deneloped an mnofficial É:almain 9rmqÊ of his closest 8 efforts. :oth DNE@ and Cering hane implemented latter half of 2015. The Instagram page for Gucci has celebrity friends, including model Rosie smstainabilitq programs to focms on specific more than 0.- million follooers and freimentlq posts Huntington-Whiteley, Kanye West, Kylie Jenner and environmental and social issues and challenges in photographs of the latest product offerings and Rihanna, for whom he personally selected concert their indmstrq, specificallq aromnd manmfactmring. An celebrities wearing Gucci. Luxury conglomerate tomr omtfits. Rousteing credits the success in part to 2012, Kering implemented a series of ambitious 6 DNE@ also reported increased momentmm and his focus and ability to build a brand via social media. target goals, which were integrated into the company success for label Bulgari, which has a strong digital manufacturing plans around responsible gold presence. And then there’s the story of Balmain. sourcing, water pollution, leather traceability, chemical mse and carbon emissions. DNE@ implemented the “LIFE” program, also in 2012, to embed environmental factors into the company’s managerial processes. 7 Andrew Winston, “Luxury Brands Can No Longer Ignore Sustainability,” hbr.org, 8 Feb 2016, 2016 Harvard Business School Publishing, 2016, accessed nia https2''hbr.org'*().'(*'lmxmrq%brands%can%no%longer% ignore-sustainability. 5 8 Jessica Pressler, “Meet Balmain’s Oliver Rousteing, Fashion’s BFF,” GQ, 3 Crqstina ?mstafson, ÉEillennials redefine lmxmrqÈand the staces are 4 Hilary Milnes, “How Chanel trounces other industry brands on YouTube,” November 2015, Condé Nast, 2015. high,” CNBC News, 18 February 2015, CNBC LLC, 2016, accessed via 6 Digiday, 25 August 2015, 2010–2016 Digiday. Ibid. http2''ooo.cnbc.com'*()-'(*')0'. The luxury and cosmetics financial factbook 2016

PPage 62age 62 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Millennials and the luxury landscape and other industry professionals The program is centered on key elements of Luxury brands believe that a millennial who loves These store features were incorporated into the environmental performance and developing new buying a brand’s mini-me bags, makeup, perfume brand’s omni-channel sales strategy, creating an environmental management tools. When millennials and accessories now will love buying the same experience in which the consumer could order from can see that their interests are aligned with that of a brand’s full-sized handbags and shoes in the future. the website or tell a sales associate he or she would brand, they are more inclined to make a purchase As such, these lower-priced offerings provide brands like another size of an item or experience with knowing that it originated from causes that matter to an opportunity to form a relationship between the different potential lightings, all from the comfort of 9 them. brand and the millennial consumer, as opposed to a the dressing room. This forward-looking initiative certain product and the consumer. Brands that have contributed toward a 10% increase in sales of Introducing the brand through accessible price had success with this strategy have found the balance Minkoff’s Capsule collection to wholesalers this 13 points between offering items for younger shoppers that season. Despite the fact that millennials have not yet reached are expensive enough to maintain the brand’s allure Celebrity endorsements, social media, technology their full earning capabilities, they are willing to without diluting the luxury perception of the brand, and social responsibility initiatives are all important spend freely what they can now, with a hopeful future yet are still attainable given millennial consumers’ mediums through which luxury brands can reach and 11 of even higher spending. A proven successful method current price sensitivity. appeal to millennial consumers. In order to capture for labels to cater to this spending is to offer a wide millennial market share, successful brands will have range of products at varying price points. Iconic Providing a personalized experience through to innovate, grow and adapt with the technological fashion homses Domis Nmitton and :mrberrq hane both technology and social media revolutions that are shaping our 14 seen success in marketing a wide range of products Technology is another key method of reaching economic future. ranging in price from US$100 up to thousands of consumers. Creating an interactive, and digital 10 dollars. This pricing strategy can also be seen in experience helps to align millennials desires for lines of “mini-me” bags by labels, such as Céline, experiences with luxury brand shopping. Fashion Mulberry, Chanel, Philip Lim, Chloé, Stella McCartney, designer Rebecca Minkoff has succeeded in building Kate Spade and more. This fall, Hermès will feature a technology into the brand’s identity to attract 12 mini-me version of its iconic “Kelly” bag. consumers and encourage spending. The brand recently opened a new high-tech store in Manhattan that includes interactive mirrors and smart dressing rooms. 9 “Most Millennials Don’t Trust Big Luxury Brands and Brands are Taking 11 Notice,” The Fashion Law: The Leading Source for Fashion Law and the Lianna Brinded, “Luxury fashion houses are starting to crack the secret 13 Business of Fashion, 20 January 2016, The Fashion Law, 2016. to attracting millennials,” Business Insider, 26 December 2016, CNBC Ibid. 10 Gabrielle Rein, “Think Tank: Why Millennials Are the Future of Luxury,” LLC 2016. 14 Gabrielle Rein, “Think Tank: Why Millennials Are the Future of Luxury,” 12 Women’s Wear Daily, 25 April 2016 , Fairchild Publishing, LLC, a Kristina Gustafson, “Rebecca Minkoff rewriting the rules of fashion,” Women’s Wear Daily, 25 April 2016 , Fairchild Publishing, LLC, a subsidiary of Penske Business Media, LLC, 2016. CNBC News, 12 February 2016, CNBC LLC 2016. subsidiary of Penske Business Media, LLC, 2016. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters PPage 63age 63 I Points of view from EY global sector Chinese appetite for luxury goods and brands reshapes the luxury and other industry professionals landscape The Middle Kingdom Interestingly enough, China is far from being the Accounting for roughly one-third of the total tax-free preferred country for domestic luxury purchases. pmrchases in *()-, ;hina oas the first ÉLax >ree Three main factors may explain this paradox: Shopper Nation” according to Global Blue, a global strengthened anti-corruption laws in Mainland China 1 and Hong Kong, Chinese consumers’ willingness to leader in tax-free sales. Lhis figmre is enen more impressive when considering that Hong Kong scores live an authentic brand experience by buying luxury Amaury Bonnaire 10th in the same ranking. However, Chinese products locally, and last but not least, better prices consumers did not complete the most tax-free elseohere dme to inÖation in ;hina, foreign exchange w Executive Director, TAS transactions (Russian consumers completed the rates and high taxes and custom duties in China Geneva, Ernst & Young SA (about 30% for imported watchmaking and 50% for ervie most!, ohich means that ;hina is first in this rancing v not because it is the most populous country, but cosmetics). try o because Chinese consumers bought expensive As a result, Chinese consumers prefer to make luxury Indus items È first and foremost, oatches and beoelrq hard goods purchases while traveling abroad. When luxury goods), also according to Global Blue. As a traveling in Europe, more than 81% of Chinese matter of fact, the Fung Business Intelligence Centre travelers will shop with a budget as high as €3,544. values the yearly Chinese tax-free spending at Chinese travelers represent a crucial opportunity for US$200b in 2015 — a value that is expected to more luxury retailers — especially since they typically only than domble in the next fine qears.2 have a few holidays during which to travel. One of Fabian Denneborg them is the “National Day” holiday week in early October. In 2015, with a weak yen and during this Executive Director, TAS so-called “Golden Week,” around 400,000 Chinese Zurich, Ernst & Young AG tourists spent some US$830m in Japan.3 Being able to capitalize on those Chinese travelers represents a crucial issue for the European luxury industry. 1 “Global Blue releases the Globe Shopper Report: China Edition,” ?lobal :lme oebsite, accessed nia http2''corporate.globalblme.com' pressÈcentre'globalÈblmeÈreleasesÈtheÈglobeÈshopperÈreportÈchinaÈ edition', *( 9pril *()., ?lobal :lme, *().. 2 3 “Report: Outbound Chinese Traveler Spending to Hit $422 Billion,” Jing “Tax Free Shopping in 2015: a year in review,” Global Blue website, Daily, *, Keptember *()-, Bing

PPage 64age 64 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Chinese appetite for luxury goods and brands reshapes the luxury and other industry professionals landscape Persistent uncertainty in Greater China The deceleration in consumption of luxury goods has As for most luxury groups, watch companies are Greater China4 been fmrther amplified since *(), amid protests currently prioritizing reducing their stock levels in used to be seen as the only safe haven for European luxury brands following the 2007–08 against Mainland China. Anti-Mainland sentiment has order to improve inventory rotation. They are also global economic crisis — but it is no longer true. In negatively impacted tourism from China Mainland, taking advantage of lower pressure on real estate 2012, the Chinese Government implemented a new while a strong Hong Kong dollar has faded out the prices to renegotiate rents. Meanwhile, they pursue anti-gift policy. This measure was a major challenge demand for luxury goods in that city-state.8 online sales implementation as well as store for luxury companies: since then, the market rationalization throughout Greater China, with a 12 conditions in Greater China have remained very New normal, new strategies special focus on Hong Kong. Moreover, luxury challenging, and the current situation is not getting Unsurprisingly, luxury brands remain highly exposed groups’ marketing strategies are changing as well: any better. to uncertainty in Greater China: for instance, Swatch some of them, smch as DNE@, Cering and Jichemont, Over the last few months, the demand for high-end and Richemont generated 34% and 24% of their 2015 are focusing their efforts on promoting the most products has been shrinking. In the watch industry, 9 promising recent brands in their portfolios. This revenue in this area, respectively. However, due to enables them to drastically decrease marketing the mid-price point declined by almost 20% in the weaker sales than expected, most watch retailers are expenses by avoiding onerous traditional second half of 2015.5 Luxury companies are suffering currently facing overstocks. Meanwhile, they 13 from cutthroat competition, even more exacerbated continue to struggle with high rental costs. communication campaigns. by the availability of midrange brands. Meanwhile, In response to the change in the Chinese economic China’s middle class is allocating more and more environment, luxury companies are currently Made in China savings to house properties as a result of the Chinese adapting their strategies to catch new opportunities. But what if intensifying ad campaigns or reducing 6 Government’s credit easing policy. For example, Swatch decided not to increase its costs is not the solution to invigorate the Chinese Amid continming concerns abomt ;hinese financial prices to keep the focus on market share and luxury market? More and more investors are betting marcet efficiencq and gross domestic prodmct ?

DCF and vIndustry oaluation pverview arameters PPage 65age 65 I Points of view from EY global sector Chinese appetite for luxury goods and brands reshapes the luxury and other industry professionals landscape These young entrepreneurs are convinced that they European luxury groups have shown a strong interest *& French luxury groups strategically increase their can get past the loo%imalitq repmtation of Émade in in Chinese companies. This relation also works the Swiss watch activities China” products and appeal to the other way around and has not left the Swiss luxury In the second consolidation wave starting in the proud-to-be-Chinese sentiment of its customers — sector — more precisely the Swiss watchmaking early 2000s, two large French luxury groups qes, made in ;hina can be mniime, original and of industry — unchanged. entered the stage. With a diverse luxury product high imalitq. And it seems to be working: many portfolio ranging from clothes to perfume and Chinese consumers now want products made for the Asian groups, new driver of the consolidation accessories, DNE@ and Cering expanded their Chinese by the Chinese, and the success story of waves in the ownership of the Swiss watch brands prodmct offerings bq acimiring Koiss oatch w local brands, such as the cosmetic producer The Swiss watchmaking industry — with 30 million manufacturers in the premium segment, including Herborist, the designer Mary Ching and the number Lag @emer and @mblot bq DNE@ and ervie watches shipped abroad in 2014 — was not left v one jeweler in market share in Greater China Chow mntomched in this fight for smpremacq in the lmxmrq Girard-Perregaux and Ulysse Nardin by Kering. try o Tai Fook, is convincing proof. sector. 9lthomgh it seems at first glance fairlq +& Asian _jgmps _jgo in l`e a^^gjdaZle lmpmjy Indus However, European brands also want a slice of the fragmented with more than 200 watch brands, the space gigantic cake that represents Chinese-made luxury Swiss watchmaking industry has undergone a After these two consolidation waves, the four products, and a number of companies have been multifaceted consolidation process with few sizable luxury players mentioned above (Swatch, successful in combining European branding with independent players left in the market. Looking a Jichemont, DNE@ and Cering! hane reached a Chinese design and production. Hermès, for instance, little bit closer at the past two decades (see the certain level of saturation. The remaining founded Shang Xia, a craft designer that focuses on graphic below), three different types of consolidation independent players in the Swiss watchmaking Chinese savoir faire, in 2007. Hermès owns 90% of oanes'rationales can be identified2 market include sizable heritage brands in the the brand, which has even opened a shop in Paris in )& Consolidation g^ Zjand pgjl^gligs g^ leadin_ premium luxury segment, such as Rolex, Patek 2013. Swiss watch groups Philippe, Audemars Piguet, Chopard, and Also in 2013, Kering bought Qeelin to penetrate the Starting in the mid%)11(s, the first consolidation Breitling, as well as smaller brands; many of which Chinese luxury market. Qeelin asserts its Chinese wave hit the Swiss watchmaking industry when are active in the affordable luxury segment. While identity, not only by using Chinese materials and the two large watch groups Swatch and the sizeable heritage brands are strongly craftspeople, but also through its iconic collection Jichemont began acimiring lmxmrq oatch positioned with high brand value and critical mass, “Wulu,” which celebrates China’s cultural heritage. manufacturers to complement their product the smaller brands face challenges due to Shanghai Tang, another example of a successful offerings in different price segments and to international competition and scale. Demand for association of European brand management with benefit from scale effects. Lhese acimisition affordable luxury products has increased in Chinese design and production, aims at rejuvenating targets included manufacturers with strong brand emerging countries in the Middle East and Asia Chinese fashion of the 1920s and 1930s; it is now value and brand heritage, such as Breguet and mainlq drinen bq the high affinitq for part of the prestigious brand collection of Richemont, Glashütte (Swatch) and A. Lange & Söhne, IWC “Swiss-made” watches in the growing middle alongside ;artier, Eontblanc and Nan ;leef  9rpels. and Jaeger-LeCoultre (Richemont). class. The luxury and cosmetics financial factbook 2016

PPage 66age 66 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Chinese appetite for luxury goods and brands reshapes the luxury and other industry professionals landscape Strategic investors from these regions, therefore, Wave 1 increasingly look at Swiss watch brands in the Breguet (CHF120m) affordable lmxmrq segment as potential acimisition Swatch Glashütte Original targets. The most prominent representative of this Union Glashütte development is Citychamp Watch & Jewellery Group A. Lange & Söhne Jaeger-LeCoultre (formerly known as China Haidian), which started to IWC Richemont (CHF3.1b)* build up a portfolio of Swiss watch brands by acimiring Eterna, r†d†riime ;onstant, Kering Girard-Perregaux Ulysse Nardin complementing its existing portfolio of the Swiss JEANRICHARD** component manufacturers La Joux-Perret and Prototec as well as the Swiss watch brand Arnold & Wave 3 Dreyfuss & Co. Son. Eterna Corum Rotary Looking ahead, acimisitions of one of the fomr Citychamp (CHF26m) (CHF81m) (CHF45m)*** European luxury groups seems unlikely due to the Arnold & Son Frédérique fact that each has already built up a comprehensive (CHF64m)**** Constant portfolio of brands and the sheer size and indicative Citizen valuation of the remaining independent heritage 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 brands. The continuation of the third wave of consolidation is more likely, where we will see the " Lg_el`ej Des Eanm^aclmjes @gjlg_‡jes K9 ^jge Eanneseann 9? plms jeeainin_ ,( slace g^ Bae_ejDe;gmllje ** Together Sowind Group entry of additional Asian buyers that aim to leverage *** Together Dreyfuss Group their distribution power in Asia with the ownership **** Purchase price for Prothor Holding, which includes the watch brand Arnold & Son as well as component manufacturers La Joux-Perret and Prototec and sale of affordable luxury watches made in Switzerland. Sources: EY research, Mergermarket. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters PPage 67age 67 I Points of view from EY global sector Store costs management: how to improve internal rate of return and other industry professionals and enhance performance The internet and social media have created a new Store cost breakdown: example generation of constantly connected consumers, who are updated on global trends, sensitive to innovation General construction and willing to share with the world their own shopping 31% experience. Even the way we think about stores and what they should be (and generally retail business Wooden Items Riccardo Pastore management) has changed. Eye-catching signs, 20% furnishings that enhance products’ value perception w Director, Cost and Cash and stunning showcases remain key success factors, Optimization, TAS but modern shops should also be able to interact with ervie v Milan, EY S.p.A. social media and with customers’ smartphones, Other try o proposing offers and personalized content, 1% presenting innovative experiences and responding to Carpets Indus 1% the needs of both teenagers and older consumers Painting — all this while remaining a friendly and enjoyable 3% place to go. Lift and stairs Shelves 4% and furniture As a conseimence, the onerall cost of a store’s life 12% cycle has greatly increased. New high-tech systems Demolition and strip out generate neo expenditmres, reimire periodic 5% maintenance and are subject to rapid obsolescence Electrical works Markup risks. At the same time, costs for furniture and 5% 7% renovations (which in the opening of a new store can Stones account for more than 60% of the budget) have not External windows and doors 6% 5% decreased, putting companies on the spot to make a decision: increase the budget or just say no to certain changes? Each cost can be addressed, preserving quality and concept During the store concept definition phase, companies are so focused on the impact of communication and on the return on investment that the store may postpone ansoering this imestion, identifqing onlq in a later stage solutions that adhere to the budget while still realizing the spirit of the store. The luxury and cosmetics financial factbook 2016

HHa_e .0a_e .0 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Store costs management: how to improve internal rate of return and other industry professionals and enhance performance In this phase, store redesign is a key factor, especially In line with this view, cost reduction strategies may All of these choices, though each of possibly minor for those retailers that manage a large number of include the following: importance, can sometimes make the difference shops, as a redesign offers the opportunity to not • Electricity and lighting costs are reduced by between a successful investment plan and a project only reduce the cost of the investment (CAPEX focusing light beams where the most interesting with low returns. reduction), but also to improve overall process products are going to be placed. The imestion is2 ohq shomld companies pmrsme this efficiencq. Enen in those areas ohere it is tqpicallq • Furniture, display cabinets and counters are no approach? Any savings generated will free up hard to challenge the stylistic choices, such as the longer purchased as a bundle, but their structure is resources that can be used for new advertising selection of materials and finishes, it is possible to analyzed, broken down and optimized component campaigns as oell as to finance neo commmnications adopt a process that allows the company to focus by component mntil achiening a fmnctional, Öexible on social media and, potentially, to support the exclusively on what really provides value to its and inexpensive solution. opening of additional stores. customers, avoiding wasting resources on non-core • Large plastic furnishings are broken down into Financial resomrces to smpport a imicc store elements. smaller pieces to reduce the costs of the molds. modernization and renovation plan can be found by What does it mean to reconceive the store? It • Suppliers of Öooring, tiles, stones and coatings are looking at each single store cost component, taking certainly does not mean dramatically changing the sought on a global scale. into account the store life cycle phase and identifying store’s aesthetics and the guidelines that drove its minimally invasive solutions. design, but rather to help make sure that any money • Catalogs and window stickers disappear in favor of spent has an impact on the customer and, tablets, large screens and online solutions. conseimentlq, increases store profitabilitq, bq reducing all costs that do not elicit a positive emotional response from the customer. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters HPa_e .1age .1 I Points of view from EY global sector Store costs management: how to improve internal rate of return and other industry professionals and enhance performance Store concept definition, concept indmstrialiration, initial investment and operational “or running” Maintenance maintenance, as a whole, depend on how well the Store investments store concept has been thought out. But how is it s ie possible to stay true to the concept and initial it n u creative ideas while adhering to the budget? Though t Concept r o it’s not possible to cnoo the price per simare meter p industrialization p for each store, it’s certainly possible to make a series o g in w of technical and marcet analqses to figmre omt ohich v a steps the companq is going to tace and ohat benefits S ervie v and issues will result. Concept definition try o Once the store concept is defined, it’s time for Indus indmstrialiration, ohich raises the imestion2 ohat are Store life cycle the small changes and choices that allow the retailer to switch from a “beautiful” (and potentially costly) prodmct to an Éefficientlq doableÊ prodmct7 Definition of a new Challenging of Cost management Maintenance concept at cgncepl specificaligns without design running Creativity often clashes with the corporate targets, target cost to achieve target cost egdificaligns costs management and during the redesign-to-cost process, the budget shomld firstlq be allocated to preserne the creatine and distinctive elements of the concept, while for Technical levers Commercial and process levers standard and less marketing sensitive items (which can account for more than 50% of the investment), simple and linear solutions should be sought, mainly based on functionality and in line with the overall look. The luxury and cosmetics financial factbook 2016

HHa_e /(a_e /( DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector Store costs management: how to improve internal rate of return and other industry professionals and enhance performance Store cost management does not end with concept Exhibitors, promotional materials, shopping bags, marceting, pmrchasing and technical offices. An fact, it indmstrialiration3 efficiencq opportmnities can be manneimins and hangers can be redesigned thromgh is only if each actor involved is available to ”get achieved through the so-called ”learning economies”: a process easier than the one undertaken for the involved in the game’’ that real business needs and those processes that allow retailers, while developing stores, but their redesign will likewise be able to market opportunities will be highlighted, boosting a a project, to learn from previous mistakes, eliminate decrease costs by up to 20%, without renouncing the virtuous circle that encourages co-design with oaste and increase realiration efficiencq. An omr concept of the store and while satisfying marketing trusted partners and a 360-degree analysis of experience, an efficiencq reconerq of mp to *( is needs and goals. investments (considering both initial costs as well as deemed feasible. Rethinking the store concept before In conclusion, a fundamental aspect of making the incidental or recurring ones), respecting marketing a neo oane of openings'renonations is still possible, redesign-to-cost process happen and be effective is guidelines and taking advantage of all communication but it’s better to remember that other elements, such the active collaboration between designers, and technical market solutions. as planning, consolidation of purchasing volumes, choice of the best partner and cost-controlling actinities, can hane eimallq significant effects. DeaÖels Displays and Window Shopping Structured contractual agreements, adoptable on a and brochures Catalogs point of purchase (POP) stickers bags Packaging large scale (e.g., builders, dry wall experts, electricians and main contractors) can help Levers Examples of actions companies anoid onerrmns.

DCF and vIndustry oaluation pverview arameters HPa_e /)age /) I Points of view from EY global sector A new challenge for luxury: retail through online marketplaces and other industry professionals Most luxury goods are sold online but sometimes An online marketplace is a website that sells products under conditions that are not approved by their that it has bought but also broadcasts offers for brands. Under European Union (EU) competition other retailers or merchants, i.e., they do not buy laws, manufacturers and luxury brands are prohibited products for resale but instead sell products on from banning a distribution channel — in this case the behalf of other merchants. These online marketplace internet — since the European and national websites often go as far as collecting the payment on Marie-Pierre Bonnet-Desplan competition authorities consider that it plays a key the retailer’s or merchant’s behalf, and so consumers role in terms of fair competition and delivering goods cannot clearly identify from whom they are buying w Executive director, Tax at a lower price to consumers. Therefore, driven both the product. Paris, Ernst & Young Société d’Avocats by distribution practices and competition rules, ervie How is the development and growth of these v luxury brands are essentially hoping to regulate the marketplaces likely to impact distribution in the try o practices of retailers that sell their products online. luxury segment? Indus But these online practices are subject to continuous Until recently, brands were barely concerned with the changes as well as the legal rules issued by websites developed by their retailers initially competition authorities. The rules recently put in authorized to sell their products in their physical place already appear to be outdated. stores. The websites of the major authorized Today, there are four different types of online sites retailers, which have a strong reputation and that offer lmxmrq goods for sale3 the first three are2 therefore a strong potential audience (especially the (i) brands’ own websites, which were initially used as oebsites of leading stores!, are generallq high imalitq. showcases, but are now more often sales oriented; Their internet policy is similar to their in-store policy (ii) sites of “pure players” retailers, wherein the sale and typically in compliance with a brand’s image and activity is fully digitalized, without involving any policies. This compliance, however, is not always the physical point of sale; and (iii) authorized retailers case for the websites of smaller authorized retailers. oho hane a phqsical point of sale ofÖine! and oho But until to now, the websites of these smaller have also developed their own online sites (i.e., retailers had a limited distribution; hence, even if the click-and-mortar companies). For the “pure players” smaller retailer’s distribution policy was not really of and “click-and-mortar” types of distribution websites, good imalitq or consistent oith the policq of the lmxmrq brands are bmst beginning to establish specific brand, there was no real danger for the brand since imalitatine criteria for online sales. The fourth online the site was not widely published. site type — new entrants in the online business that is developing today and may become its most powerful participant — are online marketplaces. The luxury and cosmetics financial factbook 2016

PPage 72age 72 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector A new challenge for luxury: retail through online marketplaces and other industry professionals But these rules are changing with the growth of Even if these brands do not exactly belong to the If the court decides that distribution via marketplaces online marketplaces. By hosting offers among this luxury segment, they fall under this same legal cannot be banned on principle, brands will need to multitude of small websites, marketplaces provide regime — selective distribution. Cosmetic brand strike a balance: not by prohibiting sales but by luxury goods with a much wider distribution range. If Caudalie has not been able to obtain an injunction regulating them. Hosting on a platform should be brands wish to have more control over the sale of from the Court of Appeal of Paris to ban the sales of prohibited only if the platform does not comply with a their goods, assuring compliance with their image its products through authorized drugstores selling its brand’s imalitatine criteria. Lhat is to saq that onlq a 4 and policies, what should they do? Some brands have products on a marketplace specializing in this area. platform that is not suitable given its activity, tried to ban their authorized dealers from hosting Conversely, the backpack brand Deuter has won its operation, and product environment, will be their goods on a marketplace. Indeed, EU competition case before a German court.5 prohibited from distributing luxury goods. These The French Authority gmidelines inclmde a clamse, imite obscmre, that might has launched an analysis on this subject and imalitatine criteria shomld be defined bq lmxmrq validate such a restriction. conclusions are expected soon. Thus, the situation is brands, and a strategy should be built around them. But is this position sustainable? Recent legal imite nagme, and lmxmrq brands are dealing oith a Luxury brands may choose to wait or prepare, but developments suggest not. In Germany and France, legal uncertainty, which is not business as usual. another development looms on the horizon: the the competition laws explain that opening up the ;larification could be expected soon at least in geo-restriction of websites*... an even more complex internet to smaller retailers is an unrealistic way to Europe for a cosmetic brand considered to belong to subject. foster competition if they cannot reach a wider the luxury sector. The Frankfurt court has put audience by hosting their offers on a marketplace. foroard a series of fomr imestions to the ;omrt of 1 Adidas has recently been instructed, in Germany, to Justice of the EU, as this subject is governed by allow its authorized retailers to offer its products on European law.6 Put simply: is it legitimate, vis-à-vis marketplaces. Following this instruction, Adidas’ European competition rules, to prohibit the members French subsidiary has also committed to doing the of a selective distribution network from involving a 2 same. Brand competitor Asics has similarly been third party (i.e., marketplace) in the product sales instructed.3 process? 1 Press release of the Bundeskartellamt, “Adidas abandons ban on sales via online market places,” 2 July 2014. 2 4 Press release of the French Competition Authority, 18 November 2015. Haris ;omrt of 9ppeal, K9K eFona Kant† c' K9K ;amdalie, * >ebrmarq *().. 3 5 Press release of the Bundeskartellamt, “Bundeskartellamt takes a critical Supreme Regional Court of Frankfurt, Deuter Sport Backpack, 22 December view of restriction online distribution by Asics,” 28 April 2014; decision of 2015. 6 the Bundeskartellamt, 26 August 2015. Frankfurt Court of Appeal, 19 April 2016. * Websites are prevented from delinering the goods omt of a specified territorq. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters PPage 73age 73 I Points of view from EY global sector The beauty market: where to invest? and other industry professionals The beauty market is proving to be very attractive for most of its players — beauty companies, retailers, start-ups and investment funds — with its track record Digital beauty brands of high single-digit growth (from +6% to +8%) in the early 2000s and low single-digit growth (around +4%) after the *((/Ç(0 global financial crisis, despite Digital beauty service Blasco De Felice widespread economic tensions. The anerage profitabilitq of the top plaqers in this rich Retail beauty brands w Beauty top executive and profitable marcet is aromnd )0 E:AL<9, and the ervie best performers top *(, despite macing significant v investments in distribution, business drivers and Retail beauty services try o onerhead. Lhis profitabilitq enables most plaqers to Indus deploy investments to develop their business in ts research and innovation, advertising and marketing, e Open innovation distribution and retail operations. The beauty market is also incredibly dynamic, with y mark Ethnic beauty brands innovation representing up to one-third of yearly eaut revenues. For the players in this market, this is a B double-edged sword: the most innovative companies Bio beauty brands thrive, while the laggards are destined to decline. In addition to the more mature and competitive mainstream segments of the beauty market, many E-commerce beauty platform niche segments are growing at a double-digit pace and face less fierce competition. Lhese niches Kpecific laj_el Zjands represent a strong investment opportunity for beauty companies, retailers, start-ups and investment funds alike. +4% 18% Some of the hot opportunities of the beauty market Growth EBITDA (see graphic) are discussed further below. The luxury and cosmetics financial factbook 2016

PPage 74age 74 DCF and valuation pIndustry oaramevervieterws I Points of view from EY global sector The beauty market: where to invest? and other industry professionals Digital native beauty brands with a big idea But there are many segments that escape even the Many of these smaller companies are located in Digital native brands have all the trends in their favor: lices of 9maron and Kephora, leaning the field open Forthern Atalq, ohere a specific sanoir faire exists. the consumer shift toward the internet, the to innovative e-commerce retailers, particularly in Others are located in Latin America, where local expansion of social networks, the development of the the luxury, pharmacy and professional segments. specificities, economic instabilitq and import dmties vloggers’ community, the explosion of e-commerce, Some e-commerce retailers are specializing in certain make such innovation and subcontracting strategies and the resistance of traditional brands to changing product categories, such as cosmetics (e.g., indispensable. Other such small companies are in their business models. For example, NYX Cosmetics, Beautylish) and perfume (e.g., The Perfume Shop), Asia, where the cost of production is generally lower. ohich oas recentlq acimired bq D’Gr†al, became a big plus new e-commerce models are appearing, not brand in the US by simply leveraging a community of unlike what is happening in the fashion industry with Digital beauty services YouTube creators. Sigma Beauty, another digital e-commerce sites Farfetch and Lyst. The future is here for digital beauty services. native, sells its makeup brushes and accessories Consumers access these services via laptops and thromgh an affiliation program ohere beamtq Innovation labs and subcontractors desktops, at home and in the street, on e-commerce vloggers receive a commission on every product that Innovation in beauty is absolutely critical, yet not all sites and in brick-and-mortar stores. Users may is sold after viewing one of their videos. companies can afford to pay an army of researchers discover new products, try a hair color, locate a or for sophisticated laboratories and all the product beauty professional (e.g., Uala in Italy and Style Seat Digital platforms, innovative business models development costs. The same is true for in the US — both online platforms to locate and Of comrse, there are big fish in the digital beamtq manufacturing, which is both capital and people reserve a stylist), receive recommendations or simply market too, namely Amazon and Sephora. Amazon is intensive. make a purchase — all online. Consumers may also try on track to becoming the online beauty generalist Even the large beamtq companies sometimes find it virtual makeup application, which enables them to retailer, with its amazing offers, competitive prices more convenient to outsource part of their innovation virtually try a brand’s products and colors on their and outstanding logistics. Meanwhile, Sephora is seeking and manufacturing to achieve speed to face, with a very realistic and dynamic result. establishing itself as the digital genius among beauty marcet and Öexibilitq. Lhis trend tooard Éopen retailers, by mastering social networks, in-store innovation” and subcontracting is stimulating the digital services and e-commerce. development of smaller, more focused and more Öexible companies that complement traditional beauty companies as well as start-ups. The luxury and cosmetics financial factbook 2016

DCF and vIndustry oaluation pverview arameters PPage 75age 75 I Points of view from EY global sector The beauty market: where to invest? and other industry professionals Another factor they can leverage is to sell products in Here is a short list of the small beauty pearls that the As the large beauty companies are mostly focused on shops that are “men friendly,” rather than just in large beamtq companies hane acimired oner the last acimiring and deneloping brands, theq are staqing traditional perfumeries, supermarkets and few years: away from other parts of the industry, i.e., services, department stores. And of course, using the internet • Est†e Damder recentlq acimired senen beamtq retail and smbcontractors, ohich leanes significant as a marketing and commercial vehicle to reach men pearls: Le Labo, Rodin Olio Lusso, Editions de space for other players, such as investment funds, consumers will also make a major difference. Parfum Frédéric Malle, Glamglow, Dr. Jart, Do The retailers and start-ups, to get in the game. Right Thing, and Have & Be Co. The beauty market is attractive, growing and Investment opportunities • D’Gr†al acimired eight beamtq pearls2 Essie, multifaceted, and any player with a precise business w The large beauty companies are aggressively Clarisonic, Urban Decay, Décleor, Carita, NYX idea and outstanding execution can succeed and ervie pursuing investment opportunities through a massive Cosmetics, Niely, and Carol’s Daughter. achieve considerable returns. v acimisition campaign. Eost of them are focmsed on • Mnilener acimired fine beamtq pearls in the scin care try o the “small beauty pearls,” which are brands that have category: Ioma, Ren Skincare, Kate Somerville, Indus something special in their DNA, their business model Dermologica and Murad. and'or their marceting model. Darge beamtq • Hmig acimired too pearls in the fragrances companies acimire these pearls at a significant category: Penhaligon’s and L’Artisan Parfumeur. multiple of their EBITDA, yet they have a business • ;otq acimired a paccage of ,+ brands from H? plan that leverages their large R&D, marketing and and the portfolio of the Brazilian company commercial organizations to achieve spectacular Hypermarcas, among which several beauty pearls growth. are included. The luxury and cosmetics financial factbook 2016

Page 76 DCF and valuation parameters The luxury and cosmetics financial factbook 2016

DCF and valuation parameters Page 77 w ervie v try o Indus The luxury and cosmetics financial factbook 2016

Methodology

ApAppprrooaacch ah annd Sd SOOTTP aP annaalylysseess SSampampllee s seelleeccttiioonn FFoocucus os on Jn YiOmOmX Ny Chet–oAo–Porter thodology Me The luxury and cosmetics financial factbook 2016

Ha_e 0( Methodology Approach and SOTP analyses Approach Lhere are manq criteria bq ohich to analqre the operating and financial performances of listed companies. Lhe aim of this smrneq is not to condmct a detailed analysis of the selected companies. The approach implemented in this sixth edition of The luxury and cosmetics financial factbook essentially relies on three types of information: • Several standard valuation parameters and operating aggregates • Industry characteristics (in terms of growth forecasts and drivers) • An overview of 30 major players of the industry Even though this data is important and essential to the analysis, it must be stressed that other criteria or parameters could also have been analyzed. The entirety of the data utilized in this factbook is publicly disclosed information. The Transaction Advisory Services (TAS) teams of EY who participated in developing this SOTP analyses docmment hane not had access to anq confidential information. If the information used is found out to be incomplete or incorrect, EY will not be held >or the companies that hane dinersified actinities DNE@, Cering, D’Gr†al!, oe performed a responsible for any impact this may have on the results or the analyses presented in this SOTP analysis to isolate the pure luxury segment and to better understand its document. characteristics as well as its contribution to the companies’ performance. It must be noted that the information provided in this study is based on the latest available This analysis was not possible for Swatch, Beiersdorf and Shiseido as no accurate data financial statements of each companq as at +) Earch *().. Earcet data has been was available. considered as of +) Earch *()., mnless stated otheroise or apart from smbseiment pieces of information inclmded in this smrneq. 9nq modification of the analqred gromp’s financial performances or anq enolmtion of the financial marcets that occmrred since +) Earch 2016 could lead to partially or completely different conclusions. Hlease note that oe hane presented the actmal *()- figmres for the companies, ohich have already released their 2015 annual results as of 31 March 2016. The luxury and cosmetics financial factbook 2016

Methodology Ha_e 0) Sample selection Sample selection The sample analyzed is composed of 30 listed companies from the luxury and cosmetics Please note that the sample has been adjusted in this sixth edition. Actually, one industry, of which 23 are mostly in the luxury business and 7 are in the cosmetics segment. company was added: YOOX Net–A–Porter Group S.p.A., as the two companies YOOX To select these companies we proceeded as follows: Group and Net–A–Porter have recently merged, creating the leading online luxury fashion • We firstlq identified Épmre plaqersÊ of the lmxmrq sector2 :rmnello ;mcinelli K.p.9. retailer. YNAP was listed on the Milan Stock Exchange in October 2015. (Cucinelli), Burberry Group (Burberry), Coach Inc. (Coach), Chow Tai Fook Jewellery Group Ltd (Chow Tai Fook), Hengdeli Holdings Limited (Hengdeli), Hermès International S.C.A. (Hermès), Hugo Boss AG (Hugo Boss), Jimmy Choo PLC (Jimmy Choo), Kering K9 Cering!, DNE@ Eoet @ennessq Domis Nitton K.9. DNE@!, Eichael Cors @oldings Dtd (Michael Kors), Moncler S.p.A. (Moncler), Prada S.p.A. (Prada), Polo Ralph Lauren Corp. (Ralph Lauren), Compagnie Financière Richemont S.A. (Richemont), Salvatore Ferragamo S.p.A. (Salvatore Ferragamo), Swatch Group AG (Swatch), Tiffany & Co. (Tiffany), Tod’s S.p.A. (Tod’s), and Tumi Holdings Inc. (Tumi). • We completed this first list oith other plaqers in cosmetics2 :eiersdorf 9? :eiersdorf!, Coty Inc. (Coty), Estée Lauder Companies Inc. (Estée Lauder), L’Occitane International S.A. (L’Occitane), L’Oréal S.A. (L’Oréal), and Shiseido Co. Ltd (Shiseido). • We also added companies that are in direct relation with luxury companies, such as Dmxottica ?romp K.p.9. Dmxottica! and Kafilo ?romp K.p.9. Kafilo!. thodology • Finally, we decided to include a company that is not part of the luxury environment, but Me acts as the largest cosmetics company from the emerging markets, Natura Cosméticos S.A. (Natura), to enlarge the geographical coverage. The luxury and cosmetics financial factbook 2016

Ha_e 0* Methodology Focus on YOOX Net–A–Porter YOOX Net–A–Porter: overview We included YNAP in the sample as shares of the merged entity started trading on the Milan Stock Exchange on 5 October 2015. Cey ^acls2 K`aje ljadin_ pallejn since GclgZej *()-! • Founded in 1999 by Federico Marchetti, YOOX is an e–commerce company and an 130 internet retailing partner for fashion and luxury brands. The company opened its first online door È qoox.com È in *(((, follooed bq thecorner.com, shoescribe.com 120 and numerous monobrand online stores. The group delivers to more than 100 110 countries worldwide and as of 3 December 2009, YOOX was listed in the Milan Stock Exchange. 100 • Net–A–Porter was established in 2000 in the UK by Natalie Massenet. The 90 company is an online luxury retailer, and it operates through three main brands: net–a–porter.com, theoutnet.com and mrporter.com. In 2015, Net–A–Porter 80 delivered in 170 countries, offering more than 650 of the world’s leading luxury products. 70 • In 2015, the merger between YOOX Group and Net–A–Porter created the world’s 60 leading online fashion retailer (YNAP Group). The newly formed group has 2.2m October–15 November–15 December–15 January–16 February–16 March–16 active consumers and 6m orders (FY14 data). YOOX Net-A-Porter Group FTSE MIB • The YF9H ?romp operates in three bmsinesses2 i! online Öagship stores, ii! Source: Capital IQ. Note: 5 October 2015 = 100. multi–brand in–season and (iii) multi–brand off–season. Key financials CAGR • Total offered shares: 24.3m (out of which 6.2m are newly issued shares), plus (in €m) FY14A FY15A FY16E FY17E FY18E FY16E–FY18E 3.6m of shares for the greenshoe option. Post IPO shares (excluding greenshoe) Sales )$*/*&+ )$..-&( )$1.*&* *$+-.&. *$1(0&+ *)&/ oere ,0..m. Lhe final offer price oas Ò,.+( per share for a marcet capitaliration EBITDA 0-&/ )*.&, ).*&0 *)1&+ +)+&( +0&/ of €209m. EBITDA margin .&/ /&. 0&+ 1&+ )(&0 EBIT *,&1 +0&0 .1&- 0)&, )*)&/ +*&+ YNAP Group EBIT margin *&( *&+ +&- +&- ,&* Fel pjgfil *+&, -+&, -,&+ 0*&1 )+.&/ -0&/ • The new entity YNAP started trading on 5 October 2015 at €29.95, representing a CAPEX ratio 0&( ,&+ -&( /&/ /&) market capitalization of €3.6b. Source: Capital IQ. Fote2 financial figmres are at +)

OPENINGGlossary Ha_e 0+ EXE Ex C ec UTIVE SUMMAR YOOX Net–A–Porter: overview utiv A Global luxury goods market e summary B Global cosmetic goods market Y DCF AND V TGITlossLEary C Global luxury goods market DCF and v R p ar AMETERS • Sustainable luxury ameAL U t aluation Sub title or First paragraph erATION P s • China — can Western luxury tame the Red Dragon’s desire? A CAGR: compound annual growth rate We have seen many luxury houses respond to the • Focus on the American market - CAPEX: capital expenditure INDUS challenges of the new kind of customer by slowly • Focus on the Italian market Indus developing a digital strategy. This is not just a DCF: discomnted cash Öoo TR try o web presence to manage brand content and deal • Counterfeit issues facing the industry Y O v VER with online sales. It is an integrated approach that EBIT: earnings before interest and taxes ervie • Focus on marketing and advertising VIE harnesses social media, and connects mobile w in the luxury industry W and tablet applications oith bacc%office logistics EBITDA: earnings before interest, taxes, to deliver a viable e-channel. The channel can depreciation and amortization • Focus on licensing in the luxury provide an alternative to retail and wholesale, or industry AND DISMETHODOLOG complement the more traditional routes to market. EV: enterprise value and disMe • Focus on digital in the luxury industry thodology CLAIMER 1. Sustaining development: maintaining the FY: financial qear claimer quality and supply of crucial raw materials, such Focus on Brunello Cucinelli and Y Generally accepted accounting principles GAAP: as increasingly rare skins and ethically traceable D Michael Kors gems, is a big challenge for some houses. It has GDP: gross domestic product led to an increase in vertical acquisitions in the AND SPE and specific analyS AMPLE SELE supply chain. For example, crocodile farms in S LTGR: long-term growth rate ample s Australia and African ostrich ranches have been CIFIC ANAL on the acquisition menu of larger luxury groups. M&A: mergers and acimisitions election But the challenge is not just to secure supply. C s TION SOTP: sum of the parts Y e The focus is on sustainable development in all SE s S its forms. It is important to consider the ethics WACC: weighted average cost of capital behind the products and images of luxury; the act us perceived and actual wastage in production E GLOt YOY: year-on-year C Y EXPERGlo processes and packaging; and the carbon onSon t s act usS s ary footprint and water impact of the end product. ARary – C T Y s S s Glo LUXURY AND COThe luxSMETICury and cS THE EosmeY FINANCIAL Ftics financial fACactbook 2016TBOOK 2014

HHa_e 0,a_e 0, ConOpeningtact us Contact us =Q K&p&9& >as`ign  Dmpmjy leae Executive summary Roberto Bonacina Rossana Pezone Francesco Gradone Welcome to the third edition of EY’s annual Financial Factbook for the luxury and cosmetics sector. The Factbook combines Partner, Lead Advisory M&A, Fashion & Luxury Manager, Transaction Support, Senior, TAS, Fashion & Luxury Milan, EY S.p.A. Fashion & Luxury Milan, EY S.p.A. Milan, EY S.p.A. financial data, insight from EY’s global team of sector specialists and opinions of external experts. [email protected] [email protected] [email protected] +39 335 138 1950 +39 366 578 7631 +39 366 402 1242 ;gnljiZmlgjs lg l`e *(). ^aclZggc Amaury Bonnaire Arnaud Cohen John Nguyen Executive Director, TAS Partner, TAS Senior Manager, Audit Geneva, Ernst & Young SA Paris, Ernst & Young Advisory Dallas, Ernst & Young LLP United States Laurent Bludzien [email protected] [email protected] [email protected] +41 58 286 5517 +33 1 55 61 07 10 +1 214 7543499 Marie-Pierre Bonnet-Desplan Fabian Denneborg Riccardo Pastore Executive director, Tax Executive Director, TAS Director, Cost and Cash Optimization, TAS Paris, Ernst & Young Société d’Avocats Zurich, Ernst & Young AG Milan, EY S.p.A. [email protected] [email protected] [email protected] +33 1 55 61 13 11 +41 58 286 3335 +39 02 8066 93794 Ivan Chan Paolo Lobetti Bodoni Kelsea E West Full Name Partner, Tax MED RCP Advisory Leader, Advisory Senior, TAS Hong Kong, Ernst & Young Tax Services Limited Turin, Ernst & Young Financial Business Dallas, Ernst & Young LLP United States [email protected] Advisors S.p.A. [email protected] +852 26293828 paolo.lobetti–[email protected] +1 214 9698487 +39 335 760 0436 Lilly L Cheung Benjamin Msika Blasco De Felice Senior Manager, Tax Senior Manager, TAS Beauty top executive Shanghai, Ernst & Young Certified Tax Agency Co. Ltd. Paris, Ernst & Young Advisory [email protected] [email protected] [email protected] +39 344 136245 +86 21 22285506 +33 1 55 61 02 25 The luxury and cosmetics financial factbook 2016

The luxury and cosmetics financial factbook 2016

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY Global Consumer Products Sector can help your business Consumer products companies are operating in a brand–new order, a challenging environment of spiraling complexity and unprecedented change. Demand is shifting to rapid–growth markets, costs are rising, consumer behavior and expectations are evolving, and stakeholders are becoming more demanding. To succeed, companies now need to be leaner and more agile, with a relentless focus on execution. Our Global Consumer Products Sector enables our worldwide network of more than 17,500 sector–focused assurance, tax, transaction and advisory professionals to share powerful insights and deep sector knowledge with businesses like yours. This intelligence, combined with our technical experience, can assist you in making more informed, strategic choices and help you execute better and faster. © 2016 EYGM Limited. All Rights Reserved. EYG no: 02904‑164GBL ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.