Content thumbnail Seeking sustainable growth - The luxury and cosmetics financial factbook

Seeking sustainable growth - The luxury and cosmetics financial factbook

Seeking sustainable growth The luxury and cosmetics financial factbook 2015 edition

Seeking sustainable growth - The luxury and cosmetics 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 cosmetics market I. Points of view from EY’s global sector specialists and outside experts 64 Methodology Approach and SOTP analyses Sample selection Focus on Jimmy Choo 67 Glossary Contact us 68

Page 2 Executive summary Executive summary Welcome to the fifth edition of EY’s annual financial factbook for the luxury and cosmetics sector. The factbook combines publicly available data with input from our sector leaders based on their work with the world’s leading luxury and cosmetics companies. It looks at current industry trends, the evolution of operating aggregates and key financial parameters. For the second year in a row, the industry experienced an overall contraction in growth: the value of the global market for personal luxury goods grew by 3.0%, reaching €224b. After a decade of double-digit growth, fueled by the “retail rush,” brand extensions and the quest for the highest product positioning, the industry has now entered a period of maturity. Firms are now focusing on more sustainable growth rates, effective and cost- conscious retail investments, and how to balance different distribution strategies. Despite Flavie Lacault Roberto Bonacina Marco Pier Mazzucchelli a generally more favorable outlook in Western countries, the economic environment Factbook global coordinator, Director, Lead Advisory M&A, Partner, Head of TAS* remains complex. Currency fluctuations and the growing importance of travel retail, are Fashion & Luxury — Milan Fashion & Luxury — Milan Mediterranean — Milan affecting pricing strategies. And while major emerging markets, such as China and Russia, [email protected] [email protected] [email protected] show negative trends, Japan and other Asian-Pacific markets are gaining pace. In terms of profitability, the slowdown in sales has clearly negatively impacted operating margins: the average margin of the industry’s listed companies declined by 1 percentage point compared with last year. Overall however, expectations for annual growth for the industry remain unchanged, in the range of 4% to 6% through 2017. This continued positive performance will be supported by the growth of luxury consumers and high-net- worth individuals (HNWIs), accessories and the continued development of online sales. The global cosmetics market grew by 3.6% in line with the previous year, reaching €181b in 2014. We expect a positive long-term trend in this segment. Steady growth will be led mainly by middle-class consumers’ aspiration for high-quality and innovative products. We also see development opportunities in the natural products and men’s segments. The luxury and cosmetics financial factbook 2015 Note: *Transaction Advisory Services

Executive summary PPage 3age 3 e summary utiv ec Ex The industry faces three main challenges in the year ahead: This edition of the factbook, based on your feedback, offers operational and financial • Manage demand worldwide — This year, the industry has been impacted by currency aggregates on the industry, along with key valuation parameters and multiples. It looks at volatility: many consumers have abandoned local markets and shopped abroad instead, the industry’s future trends and includes input from our sector leaders. We hope you find to benefit from pricing differences. Most dramatically, while domestic consumption this report insightful and that it provokes constructive thought and discussion within your in mainland China dropped 3% in 2014, Chinese consumers increased their spending organization. globally by 8%. Luxury companies have started to re-think the idea of a consistent offer Do not hesitate to contact us for any comments or suggestions. throughout the world, to minimize further effects of currency variations. The choice is between maintaining a consistent pricing policy without adapting to specific local fluctuations, or presenting a variable price for each area, chasing exchange rates and purchasing power. • Define an omni-channel strategy — Most companies are refocusing their strategies on the customer experience: omni-channel, flawless retail management, people excellence. Flavie Lacault Roberto Bonacina Marco Pier Mazzucchelli Brands are seeking to take control of their operations by managing a dedicated retail [email protected] [email protected] [email protected] network. In parallel, companies have to deploy their presence worldwide and thus continue to develop their wholesale portfolio, focusing on the high quality of their partners. Digital is increasingly important, both as a marketing tool and as a sales channel. Companies can no longer focus on a single channel: they have to define a consistent strategy for all distribution networks and adapt their DNA specifically for each channel, including social media. • Fine-tune the retail model — The muscular retail strategy carried out by the major international brands in worldwide tier-one cities has lowered the return of top-line growth that can be obtained by increasing direct distribution networks. Today clients are well informed about what they want to buy because of a combination of continuous on-line/off-line switches, word of mouth, social communities. This may lead to a partial redefinition of retail strategies, with selected closures of less-performing retail shops, focus on core locations and well-positioned flagships, reduction in the average size of directly operated stores (DOS) to improve main sale ratios and reduce costs. The luxury and cosmetics financial factbook 2015

Page 4 Executive summary Statistics and key facts Global personal The online The growth Asia-Pacific and Accessories For the second luxury market luxury market was helped Latin America have become year running, grew by3% has grown by the sharp represented the largest dermocosmetics in 2014. twelvefold in depreciation almost half category within was the most the past 11 of the euro, of the global luxury goods dynamic years and now which left the cosmetics and have grown market, 5% sector with an market with growth Demand is still makes up the fastest growing, mainly of total unbalanced in 2014. lately. of 5.1%. sustained by sales. price structure the touristic across regions. China continues Global cosmetics The digital Retail remained consumption, to be the top market remains revolution a key growth which has The global a supply-driven has driver in 2014, been heavily consumer cosmetics market, fueled by but the market country ( opened saw a slowdown influenced 1/3 market grew innovation where of the total by consumers are up huge in retail network by currency market). 3.6% always looking opportunities expansion, fluctuations in 2014. for quality, for both luxury illustrating the and local performance and and cosmetics players’ objective regulations. perceived results. industry. to focus on organic growth. The luxury and cosmetics financial factbook 2015

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 we included in the EY factbook) has outperformed ec the market over the last seven years with a total return of 87%, corresponding to an average yearly significant return of 9%, despite the economic downturn. This relative Ex performance actually illustrates the appetite of investors for an industry that is characterized by solid financial fundamentals in terms of sales growth, major profitability, resilient international client base and exposure to growing markets, attributing higher valuations to companies-related securities. The EY index is a representation of those luxury and cosmetics companies analyzed within the factbook. A specific weight has been attributed to each company included 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 at every company inclusion after its initial public offering (IPO). Finally, the evolution of the EY index has been compared to these of the S&P 500 and STOXX Europe 600 indexes using 1 January 2008 as a starting date (rebased to 100). EY luxury and cosmetics index evolution compared to major indices (base 100 as of 1 January 2008) 250 As of 31 1 March CAGR 2015 08-15 200 187 9% 150 143 5% 111 1% 100 (Base 100 as of 1 March 2014) 120 118 115 116 50 111 110 0 105 100 EY INDEX STOXX S&P 95 90 85 Source: Capital IQ EY INDEX STOXX S&P Note: 1) Compound annual growth rate The luxury and cosmetics financial factbook 2015

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 2015

Page 8 DCF and valuation parameters A Financial parameters Luxury companies continue to reflect high-potential growth combined with a limited risk profile • WACC ranges from 7.2% (Safilo) to 10.8% (Chow Tai Fook) depending on the company’s risk profile perception with an overall limited variance. • Long-term growth rate (LTGR) presents a larger range (2.0% to 5.0%) mainly depending on size, maturity stage of the retail network and product diversification. WACC and LTGR by company Companies are sorted in decreasing Market order based on the market capitalization Luxury capitalization WACC Gearing Beta LTGR in euros observed as of 31 March 2015 companies (in €m) (one-month average). LVMH 83,940 9.3% 6.3% 0.95 3.0% Richemont 44,067 9.8% (10.3%) 1.25 3.0% Hermès 31,827 8.4% (4.0%) 0.72 3.5% Luxottica 27,580 7.7% 3.8% 0.64 2.5% Kering 23,653 9.1% 16.4% 0.88 2.7% Swatch 21,873 9.5% (6.3%) 1.08 2.8% Prada 14,983 9.1% (0.5%) 0.53 2.6% Michael Kors 12,392 10.0% (7.7%) 0.74 3.0% Burberry 11,211 9.4% (3.9%) 0.98 3.2% Ralph Lauren 10,754 8.9% (9.4%) 0.81 3.5% Coach 10,666 10.0% (10.0%) 0.80 2.5% Tiffany 10,400 9.0% 6.8% 1.10 2.5% Chow Tai Fook 9,972 10.8% 6.3% 0.81 3.3% Note: Bubble size reflects market capitalization. Dotted lines represents average Hugo Boss 8,025 9.6% 1.1% 0.70 2.6% values. Salvatore Ferragamo 4,825 9.4% 1.2% 0.75 3.0% Moncler 3,759 9.1% 2.9% 0.64 3.0% Source: Tod’s 2,759 10.3% (3.8%) 0.83 3.5% • WACC and LTGR: based on consensus of several broker reports for each company Tumi 1,463 8.8% (3.5%) 0.91 na • Market capitalization and beta: EY elaboration based on S&P Capital IQ Brunello Cucinelli 1,194 9.2% 4.1% 0.62 5.0% • Gearing: companies’ financial statements Jimmy Choo 905 8.1% 16.1% 0.83 na Safilo 861 7.2% 18.7% 0.79 2.0% Notes: Hengdeli 804 10.2% 21.6% 0.69 2.0% • Market capitalization is based on a one-month average as of 31 March 2015. Average 9.2% 2.1% 0.82 3.0% • Gearing is defined as net financial debt/enterprise value. Median 9.2% 1.2% 0.80 3.0% • Beta corresponds to levered beta measured on a weekly basis over a two-year Maximum 10.8% 21.6% 1.25 5.0% period. • Beta figure for Moncler and Jimmy Choo might be influenced by an insufficient Minimum 7.2% (10.3%) 0.53 2.0% number of observations on the considered period. The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 9 A Financial parameters The cosmetic sample is characterized by a smaller number of companies, which significantly impacts the variance of financial parameters • Natura’s (Brazil) long-term growth rate continues to be significantly higher than the average sample, driven by its geographical coverage. • WACC sample levels are balanced by the two extremes of Natura (Brazil geographical risk) and Shiseido s er (Japan). aluationt ame ar p DCF and v WACC and LTGR by company Companies are sorted in decreasing Market order based on the market capitalization Cosmetics 11.0% in euros observed as of 31 March 2015 companies capitalization WACC Gearing Beta LTGR Natura (one-month average). (in €m) 10.0% L'Occitane L’Oréal 93,163 7.9% 2.3% 0.71 2.0% 9.0% Estée Lauder 28,982 8.3% 0.9% 1.04 2.5% L'Oréal C Estée Lauder C 8.0% Beiersdorf 18,242 7.8% (4.4%) 0.77 2.3% A Coty W Beiersdorf Coty 7,444 8.0% 23.5% 0.99 1.8% 7.0% Shiseido 6,788 4.1% 9.3% 0.72 na 6.0% L’Occitane 3,628 9.1% (5.3%) 0.68 3.0% 5.0% Natura 3,237 10.0% 17.0% 0.87 6.0% Average 7.9% 6.2% 0.83 2.9% 4.0% Median 8.0% 2.3% 0.77 2.4% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% LTGR Maximum 10.0% 23.5% 1.04 6.0% Minimum 4.1% (5.3%) 0.68 1.8% Note: Bubble size reflects market capitalization. Dotted lines represents average values. Source: • WACC and LTGR: based on consensus of several broker reports for each company • Market capitalization and beta: EY elaboration based on S&P Capital IQ • Gearing: companies’ financial statements Notes: • Market capitalization is based on a one-month average as of 31 March 2015. • Gearing is defined as net financial debt/enterprise value. • Beta corresponds to levered beta measured on a weekly basis over a two-year period. The luxury and cosmetics financial factbook 2015

Page 10 DCF and valuation parameters A Financial parameters EY luxury and cosmetics sample: summary of financial parameters WACC Beta Gearing LTGR Shiseido 4.1% Prada 0.53 Richemont (10.3%) Coty 1.8% Safilo 7.2% Brunello Cucinelli 0.62 Coach (10.0%) Safilo 2.0% Luxottica 7.7% Moncler 0.64 Ralph Lauren (9.4%) Hengdeli 2.0% Beiersdorf 7.8% Luxottica 0.64 Michael Kors (7.7%) L'Oréal 2.0% L'Oréal 7.9% L'Occitane 0.68 Swatch (6.3%) Beiersdorf 2.3% Coty 8.0% Hengdeli 0.69 L'Occitane (5.3%) Jimmy Choo 8.1% Hugo Boss 0.70 Beiersdorf (4.4%) Coach 2.5% Estée Lauder 8.3% L'Oréal 0.71 Hermès (4.0%) Tiffany 2.5% Hermès 8.4% Shiseido 0.72 Burberry (3.9%) Luxottica 2.5% Tumi 8.8% Hermès 0.72 Tod's (3.8%) Estée Lauder 2.5% Average 8.9% Michael Kors 0.74 Tumi (3.5%) Prada 2.6% Ralph Lauren 8.9% Salvatore Ferragamo 0.75 Prada (0.5%) Hugo Boss 2.6% Tiffany 9.0% Beiersdorf 0.77 Estée Lauder 0.9% Kering 2.7% Kering 9.1% Safilo 0.79 Hugo Boss 1.1% Swatch 2.8% Prada 9.1% Coach 0.80 Salvatore Ferragamo 1.2% Average 3.0% L'Occitane 9.1% Ralph Lauren 0.81 L'Oréal 2.3% Moncler 9.1% Chow Tai Fook 0.81 Moncler 2.9% Richemont 3.0% Brunello Cucinelli 9.2% Average 0.82 Average 3.1% Michael Kors 3.0% LVMH 9.3% Tod's 0.83 Luxottica 3.8% Salvatore 3.0% Ferragamo Salvatore Ferragamo 9.4% Jimmy Choo 0.83 Brunello Cucinelli 4.1% Moncler 3.0% Burberry 9.4% Natura 0.87 Chow Tai Fook 6.3% L'Occitane 3.0% Swatch 9.5% Kering 0.88 LVMH 6.3% LVMH 3.0% Hugo Boss 9.6% Tumi 0.91 Tiffany 6.8% Burberry 3.2% Richemont 9.8% LVMH 0.95 Shiseido 9.3% Chow Tai Fook 3.3% Michael Kors 10.0% Burberry 0.98 Jimmy Choo 16.1% Coty Hermès 3.5% Coach 10.0% 0.99 Kering 16.4% Natura 10.0% Estée Lauder 1.04 Natura 17.0% Ralph Lauren 3.5% Hengdeli 10.2% Swatch 1.08 Safilo 18.7% Tod's 3.5% Tiffany 1.10 Hengdeli 21.6% Brunello 5.0% Tod's 10.3% Cucinelli Chow Tai Fook 10.8% Richemont 1.25 Coty 23.5% Natura 6.0% WACC Beta Gearing LTGR 9.2% 9.2% 3.0% 9.2% 0.82 8.9% 9.2% WACC 3.1% Low High Low High Low High Low Low High Low High Low High High Low High Industry benchmark Industry benchmark Industry benchmark Industry benchmark 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 and Jimmy Choo The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 11 B Operating aggregates The sales outlook of luxury companies points to organic and more like-for-like growth Michael Kors and Moncler notably On average, revenue growth of listed companies is still high and almost doubles the growth of the industry. However growth rates are decreasing. Retail expansion as a growth driver is becoming less effective and still outperformed the average growth levels. requires high investments. Expected growth will mainly be driven by: s er • The touristic consumption, oriented by changing currency fluctuations aluationt ame ar • The internet channel, which is expected to experience the highest annual growth ever p • The rationalization of the retail network in search of a like-for-like growth DCF and v Sales CAGR, FY13A–FY16E – luxury companies *Kering sales for FY13A-FY16E exclude CAGR Michael Kors 20.7% numbers for Redcats, Sergio Rossi and Sales (in €m) FY13A FY14A/E FY15E FY16E Moncler Groupe Fnac (FY13A-FY16E) 16.3% Tumi 13.9% Notes: Michael Kors 3,082 4,055 4,779 5,422 20.7% Brunello Cucinelli 11.1% Jimmy Choo 10.8% • 2014 figures are estimated or actual Moncler 581 694 806 913 16.3% Hermès 10.7% depending on their availability as of Tumi 435 491 563 642 13.9% Burberry 8.6% the date of this study. Brunello Cucinelli 322 356 400 442 11.1% Luxottica 8.3% • Figures are converted into euros Jimmy Choo 130 138 158 177 10.8% Kering 8.3% using exchange rates as of 31 March 2015 (Source: Capital IQ). Hermès 3,755 4,119 4,646 5,089 10.7% Salvatore Ferragamo 8.2% • The results of 2014 are actual (A) if Burberry 3,222 3,472 3,816 4,122 8.6% Average 7.8% the financial results are closed and Luxottica 7,313 7,652 8,659 9,299 8.3% Hugo Boss 7.6% expected (E) if the financial year is Hengdeli 7.6% not closed yet. Kering 9,656 10,038 11,494 12,256 8.3% LVMH 7.3% Salvatore Ferragamo 1,247 1,321 1,469 1,582 8.2% Richemont 6.4% Hugo Boss 2,432 2,572 2,813 3,033 7.6% Ralph Lauren 6.2% Hengdeli 2,008 2,217 2,347 2,503 7.6% Tiffany 5.6% LVMH 29,016 30,638 33,604 35,839 7.3% Safilo 5.8% Richemont 10,649 11,042 12,022 12,831 6.4% Prada 5.5% Chow Tai Fook 4.4% Ralph Lauren 6,935 7,309 7,750 8,296 6.2% Tod's 4.0% Safilo 1,122 1,179 1,256 1,327 5.8% Swatch 1.6% Tiffany 3,752 3,956 4,091 4,419 5.6% Coach (6.3%) Prada 3,587 3,552 3,903 4,207 5.5% Chow Tai Fook 9,293 8,398 9,449 10,572 4.4% Tod’s 967 966 1,025 1,088 4.0% The negative CAGR of Coach is mainly explained by the management Swatch 8,111 8,353 8,042 8,503 1.6% plan to reduce square footage in its directly operated stores by Coach 4,724 4,474 3,892 3,892 (6.3%) about 5%, involving the closure of 70 retail stores and 50 outlet Average 7.8% stores by the end of FY15. Median 7.6% Max 20.7% Source: Data based on consensus of several brokers’ reports for each company Min (6.3%) The luxury and cosmetics financial factbook 2015

Page 12 DCF and valuation parameters B Operating aggregates Sales growth expectations for cosmetics players are lower than for the luxury segment but still show an average annual growth of 5% over the FY13A-FY16E period L’Occitane and Natura significantly Majority of players are expected to grow at lower single digits except for L’Occitane and Natura. outperformed the cosmetics sample The cosmetics market is still driven by: expectations. • Innovation and emphasis on quality and new ideas • Increased focus on customized and green cosmetics • A regional focus on new markets to compensate the slow growth expected in Europe Sales CAGR, FY13A–FY16E – cosmetic companies Notes: CAGR • 2014 figures are estimated or actual Sales (in €m) FY13A FY14A/E FY15E FY16E L'Occitane 11.7% depending on their availability as of (FY13A-FY16E) the date of this study. Natura 9.5% • Figures are converted into euros L’Occitane 1,055 1,180 1,333 1,471 11.7% using exchange rates as of 31 March Natura 2,040 2,155 2,438 2,676 9.5% Average 5.4% 2015 (Source: Capital IQ). Estée Lauder 9,478 10,210 10,142 10,833 4.6% L’Oréal 22,124 22,532 24,033 25,136 4.3% Estée Lauder 4.6% Beiersdorf 6,141 6,285 6,595 6,946 4.2% L'Oréal 4.3% Shiseido 5,913 5,972 5,695 6,455 3.0% Coty 4,328 4,237 4,195 4,422 0.7% Beiersdorf 4.2% Average 5.4% Median 4.3% Shiseido 3.0% Max 11.7% Min 0.7% Coty 0.7% Source: data based on consensus of several brokers’ reports for each company The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 13 B Operating aggregates The luxury sample average earnings before taxes, depreciation and amortization (EBITDA) margin shows that profitability will not materially grow, even if it still reaches significant level EBITDA remains largely above 20% with few The slightly lower 2014 EBITDA margin vs 2013 is mainly due to: • Lower growth experienced in the emerging markets notable exceptions higher than 30%. s • Sharp currency movements leading to unprecedented price cuts putting pressure on margins er aluationt • Partially compensated by the good performance of accessories ame ar p DCF and v Average EBITDA margin, FY13A–FY16E — luxury *Kering margin for FY12A-FY15E Average ratio companies exclude numbers for Redcats, Sergio EBITDA margin FY13A FY14A/E FY15E FY16E Rossi and Groupe Fnac (FY13A-FY16E) Hermès 36.0% Note: the 2014 EBITDA margin is Hermès 36.0% 35.1% 36.2% 36.7% 36.0% Moncler 33.4% computed on the basis of either Moncler 33.0% 33.5% 33.4% 33.8% 33.4% Michael Kors 32.5% actual or estimated figures for Michael Kors 32.9% 32.5% 32.5% 32.0% 32.5% Prada 29.2% 2014 sales, depending on their Richemont 27.1% availability. As some groups are listed Prada 31.7% 26.8% 28.5% 29.6% 29.2% under different jurisdictions around Richemont 26.8% 28.2% 26.5% 26.9% 27.1% Coach 27.1% the world, they may use different Coach 33.2% 27.2% 23.3% 24.5% 27.1% Tiffany 25.3% generally accepted accounting Tiffany 23.9% 25.5% 25.6% 26.1% 25.3% Burberry 23.9% principles (GAAP), and therefore a direct comparison of EBITDA may Burberry 24.7% 23.4% 23.3% 24.1% 23.9% LVMH 23.8% be less meaningful than if their LVMH 24.6% 23.0% 23.4% 24.2% 23.8% Swatch 23.6% results were presented under the Swatch 24.8% 21.6% 23.9% 24.0% 23.6% Hugo Boss 23.6% International Accounting Standards. Hugo Boss 23.2% 23.0% 23.8% 24.2% 23.6% Average 22.5% Salvatore Ferragamo 20.8% 22.2% 22.1% 22.9% 22.0% Salvatore Ferragamo 22.0% Tumi 21.5% 21.2% 21.6% 21.3% 21.4% Tumi 21.4% Tod’s 24.0% 19.9% 19.8% 20.4% 21.0% Tod's 21.0% Kering 21.2% 19.8% 20.1% 20.9% 20.5% Kering 20.5% Luxottica 19.5% 20.1% 20.8% 21.2% 20.4% Luxottica 20.4% Brunello Cucinelli 18.6% 18.4% 18.1% 18.4% 18.4% Brunello Cucinelli 18.4% Ralph Lauren 18.7% 17.6% 18.0% 18.7% 18.3% Ralph Lauren 18.3% Jimmy Choo 15.2% 16.8% 18.1% 18.8% 17.2% Jimmy Choo 17.2% Chow Tai Fook 12.4% 13.0% 13.1% 12.9% 12.8% Chow Tai Fook 12.8% Safilo 10.0% 9.4% 11.0% 12.0% 10.6% Safilo 10.6% Hengdeli 8.0% 7.2% 7.8% 8.0% 7.8% Hengdeli 7.8% Average 23.0% 22.1% 22.3% 22.8% 22.5% Median 23.6% 21.9% 22.7% 23.5% 22.8% Maximum 36.0% 35.1% 36.2% 36.7% 36.0% Minimum 8.0% 7.2% 7.8% 8.0% 7.8% Source: Data based on consensus of several brokers’ reports for each company The luxury and cosmetics financial factbook 2015

Page 14 DCF and valuation parameters B Operating aggregates Cosmetic companies confirmed last year’s average EBITDA of 17.4% for the FY13A-FY16E period Natura and L’Oréal are showing Cosmetics companies are expected to improve their operating margin in the coming years. outperforming profitability. The key drivers of margin growth are: • Higher sales of prestige products (which bear higher price tags and margins) in emerging markets • Consumers still aspiring to more innovating and high-quality products Average EBITDA margin, FY13A–FY16E — cosmetics Note: the 2014 EBITDA margin is Average ratio companies computed on the basis of either EBITDA Margin FY13A FY14A/E FY15E FY16E actual or estimated figures for 2014 (FY13A-FY16E) sales, depending on their availability. Natura 21.9% As some groups are listed under Natura 22.8% 21.1% 21.6% 22.2% 21.9% different jurisdictions around the L’Oréal 20.5% 21.1% 21.5% 21.8% 21.2% world, they may use different GAAP, Estée Lauder 18.0% 20.2% 18.8% 20.3% 19.3% L'Oréal 21.2% and therefore a direct comparison of EBITDA may be less meaningful L’Occitane 17.4% 18.2% 19.1% 19.5% 18.6% Estée Lauder 19.3% than if their results were presented Beiersdorf 15.1% 15.5% 16.0% 16.4% 15.7% under the International Accounting Coty 14.3% 13.9% 16.1% 16.6% 15.2% L'Occitane 18.6% Standards. Shiseido 12.0% 8.1% 9.5% 9.6% 9.8% Average 17.4% Average 17.1% 16.9% 17.5% 18.1% 17.4% Median 17.4% 18.2% 18.8% 19.5% 18.6% Beiersdorf 15.7% Maximum 22.8% 21.1% 21.6% 22.2% 21.9% Minimum 12.0% 8.1% 9.5% 9.6% 9.8% Coty 15.2% Shiseido 9.8% Source: Data based on consensus of several brokers’ reports for each company The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 15 B Operating aggregates The average capital expenditure (capex) sales ratio of the sample confirms an industry with intensive capital requirements Prada continues to outperform on capex ratio; The stable average level of 5% to 6% of the capex sales ratio is mainly explained by the requirements of the retail network (openings, renovations, etc.). however it is expected to moderate as the s company slows down its store expansion pace. er aluationt ame ar p DCF and v Average capex ratio, FY13A–FY16E — luxury companies Note: the 2014 capex ratio is computed Average ratio on the basis of either actual or estimated Capex ratio FY13A FY14A/E FY15E FY16E Prada 10.9% figures for 2014 sales, depending on (FY13A-FY16E) Swatch 8.5% their availability. Jimmy Choo 8.2% Prada 15.3% 10.2% 9.0% 9.0% 10.9% Brunello Cucinelli 7.8% Swatch 7.1% 12.4% 7.3% 7.1% 8.5% Michael Kors 7.4% Jimmy Choo 7.7% 9.1% 7.9% 8.1% 8.2% Burberry 7.2% Brunello Cucinelli 9.3% 8.8% 7.8% 5.4% 7.8% Coach 6.9% Michael Kors 5.6% 9.1% 8.1% 6.7% 7.4% Hermès 6.1% Burberry 6.4% 7.9% 7.4% 6.9% 7.2% Hugo Boss 6.0% Coach 4.8% 4.6% 10.5% 7.7% 6.9% Salvatore Ferragamo 6.0% Hermès 5.6% 6.8% 6.1% 5.8% 6.1% Tumi 6.0% Hugo Boss 7.1% 5.0% 6.0% 5.8% 6.0% Moncler 5.9% Salvatore Ferragamo 6.6% 6.3% 6.4% 4.7% 6.0% Tiffany 5.8% Tumi 5.4% 6.9% 5.8% 5.7% 6.0% Average 5.8% Moncler 5.6% 7.1% 5.8% 5.2% 5.9% Richemont 5.7% Tiffany 5.5% 5.8% 6.0% 6.0% 5.8% Tod's 5.5% Richemont 6.0% 5.3% 5.8% 5.5% 5.7% LVMH 5.2% Tod’s 5.1% 6.5% 5.3% 5.2% 5.5% Ralph Lauren 5.1% LVMH 5.4% 5.0% 5.3% 5.2% 5.2% Kering 4.7% Ralph Lauren 5.2% 5.4% 5.0% 4.8% 5.1% Luxottica 3.7% Kering 6.9% 1.8% 5.0% 4.9% 4.7% Safilo 3.1% Luxottica 3.7% 3.7% 3.8% 3.7% 3.7% Chow Tai Fook 2.0% Safilo 3.2% 3.2% 3.1% 3.0% 3.1% Hengdeli 0.3% Chow Tai Fook 1.7% 3.0% 1.8% 1.4% 2.0% Hengdeli 0.9% (1.6%) 0.9% 0.9% 0.3% Average 5.9% 6.0% 5.9% 5.4% 5.8% Median 5.6% 6.0% 5.9% 5.4% 5.9% Maximum 15.3% 12.4% 10.5% 9.0% 10.9% Minimum 0.9% (1.6%) 0.9% 0.9% 0.3% Source: Data based on consensus of several brokers’ reports for each company The luxury and cosmetics financial factbook 2015

Page 16 DCF and valuation parameters B Operating aggregates Overall, the capital requirements are lower for the cosmetics sample, with the exception of those with retail networks Natura and L’Occitane capex ratios outperform the sample due to their retail profiles. Average capex ratio, FY13A–FY16E — cosmetic Note: the 2014 capex ratio is computed Average ratio companies on the basis of either actual or estimated Capex ratio FY13A FY14A/E FY15E FY16E figures for 2014 sales, depending on (FY13A-FY16E) their availability. Natura 6.3% Natura 7.6% 6.8% 5.6% 5.2% 6.3% L'Occitane 5.7% L’Occitane 5.7% 6.3% 5.5% 5.5% 5.7% Estée Lauder 4.6% Estée Lauder 4.5% 4.7% 4.8% 4.6% 4.6% L’Oréal 4.6% 4.4% 4.4% 4.4% 4.4% Average 4.5% Coty 3.6% 4.4% 4.2% 4.0% 4.0% L'Oréal 4.4% Beiersdorf 3.5% 4.3% 3.3% 2.7% 3.4% Shiseido 1.4% 2.7% 4.3% 3.8% 3.1% Coty 4.0% Average 4.4% 4.8% 4.6% 4.3% 4.5% Beiersdorf 3.4% Median 4.5% 4.4% 4.4% 4.4% 4.4% Shiseido 3.1% Maximum 7.6% 6.8% 5.6% 5.5% 6.3% Minimum 1.4% 2.7% 3.3% 2.7% 3.1% Source: Data based on consensus of several brokers’ reports for each company The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 17 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 EY luxury and cosmetics factbook. While growth and average profitability are decreasing within the increasingly competing and challenging environment, capex are not. The market still demands a high operating leverage. s er aluationt ame Luxury ar p DCF and v Average sales CAGR Average EBITDA margin Average capex ratio 14% 12.3% 25% 24.6% 7% 11.8% 24.1% 24.0% 6% 5.8% 5.6% 5.9% 12% 10.1% 24% 4.9% 10% 9.7% 5% 4.7% 8% 7.8% 23% 22.5% 4% 6% 22% 21.6% 3% 4% 2% 2% 21% 1% 0% 20% 0% FY11 FY12 FY14 FY14 FY15 FY11 FY12 FY14 FY14 FY15 FY11 FY12 FY14 FY14 FY15 Sales Growth Ebitda Margin Capex ratio After the rebound due to the financial crisis, reaching a peak of 12.3% in FY13, the estimated CAGR of sales for FY15 reached its minimum over the past five years. Nevertheless, the pace is still significant, and the foreseen growth around 8% reflects a reduced but more sustainable development rate. Actually, after a phase of accelerated development (mainly driven by retail expansion, product diversification and geographic extension), companies are now more focused on organic growth. This slowdown in sales growth directly impacts the EBITDA margin aggregates, also showing a slight contraction over the considered period, as a consequence of the slowdown of emerging markets and a higher pressure on margins. The capex ratio has remained close to 6%, at its highest over the past five years, confirming the need of high operating leverage of the industry. Source: Data based on consensus of several brokers’ reports for each company The luxury and cosmetics financial factbook 2015

Page 18 DCF and valuation parameters 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 EY luxury and cosmetics factbook. Cosmetics Average sales CAGR Average EBITDA margin Average capex ratio 10% 19% 5% 4.4% 4.7% 4.5% 9% 8.2% 8.8% 4.0% 8% 7.7% 18.1% 18.3% 4% 7% 3.3% 5.4% 5.4% 18% 3% 6% 17.4% 17.4% 5% 4% 17.0% 2% 3% 17% 2% 1% 1% 0% 16% 0% FY11 FY12 FY14 FY14 FY15 FY11 FY12 FY14 FY14 FY15 FY11 FY12 FY14 FY14 FY15 Sales Growth Ebitda Margin Capex ratio • The cosmetics sector on average has lower sales CAGR and EBITDA margin than the luxury sector. • Sales CAGR observed in 2014 is in line with the 2013 figure, at the lowest point over the last five years. • The EBITDA margin has remained globally stable over the considered period, at a solid level of around 17-18%. • The capex ratio is slightly lower than for the luxury companies, mostly stable at 4.5%, which illustrates the lower exposition to retail and thus a lower requirement for investment. Source: data based on consensus of several brokers reports for each company The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 19 C Advertising expenses Advertising remains a key cost of the industry • Marketing and advertising represent a significant cost component for both global luxury and cosmetics manufacturers. • Advertising expenses will remain a major operating topic, especially for cosmetics companies focusing on top-line growth and brand awareness sustainability. s • Cosmetics advertising expenses are significantly influenced by their mass-market positioning. er aluationt • Luxury companies have a lower incidence of advertising costs; however, in addition to advertising, one should consider the additional costs/investments to promote ame ar their brands embedded in flagship stores and ambassadors. p DCF and v Selected companies — advertising expenses as a percentage of sales, FY14A/E Average 25.1% 35.0% 30.0% 29.1% 23.5% 23.9% 25.9% 25.0% 23.2% 20.0% Average 6.6% 15.0% 11.0% 11.4% 10.0% 6.7% 6.7% 9.2% 4.8% 5.0% 5.2% 6.6% 5.0% 2.7% 3.1% 0.0% h i a s o r y a t o H f y o r l c m d è e e n c n l r t d e e a a u a r m l a i o fi M o o i é d é r m o a c f t a d e t u r o T r t g n f t m S V s C s s a O C P e a a o i o e L r i E ' H v r T x h e h L L l r M u c i S a e L i e S F R B Luxury companies Cosmetics companies Source: Data based on actual or estimated numbers based on availability as of the date of this report The luxury and cosmetics financial factbook 2015

Page 20 DCF and valuation parameters D SOTP and segment analyses LVMH: SOTP • LVMH SOTP analysis implies a total enterprise valuation of €100.6b in FY15E. • The fashion and leather goods segment is the largest contributor both in terms of sales (35%) and EBIT (57%). Sales breakdown FY15E (in €b) EBIT breakdown FY15E (in €b) Enterprise value breakdown FY15E (in €b) 10.9 34.7 1.1 6.6 13.9 0.3 100.6 1.3 16% 22.6 0% 14% 31% 0.3 20% 5.2 4.4 0.5 8.0 22% 3.1 13% 3.7 5% 55.1 7% 5% 4.4 9% 8% 12.2 13% 57% 55% 35% (0.4) (0.3) (4.4) -5% -4% Fashion and Perfumes and Watches and Wines and Selective Eliminations Total Fashion and Perfumes and Watches and Wines and Selective Eliminations Total Fashion and Perfumes Watches and Wines and Selective Elimination Surplus Total leather goods cosmetics jewelry spirits retailing leather goods cosmetics jewelry spirits retailing leather and jewelry spirits retailing assets goods cosmetics Luxury products Luxury products Luxury products (excluding spirits) (excluding spirits) (excluding spirits) Source: SOTP based on EY analysis and on the following brokers reports: RBC Capital (11 February 2015), Deutsche Bank AG (23 February 2015) and JP Morgan (23 March 2015) The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 21 D SOTP and segment analyses Kering: SOTP • Kering SOTP analyses imply a total enterprise value of €28.1b in FY15E. • Contributing around 97% of the total EBIT for 69% of sales, Gucci group is the most profitable segment in terms of operating margin. s er aluationt ame ar p DCF and v Sales breakdown FY15E (in €b) EBIT breakdown FY15E (in €b) Enterprise value breakdown FY15E (in €b) 0.0 0.2 0.0 2.0 3.2 0.3 11.3 28.1 0% 1.9 8% 1.0% 2.2 0.2 3.0% 28.1 8% 29% 1.0% 7.8 97% 100% 69% (0.1) (2.4) Gucci Group Puma Other brands Eliminations Total -6% -8% 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 Source: SOTP based on EY analysis and on the following brokers reports: RBC Capital (11 February 2015), JP Morgan (11 February 2015), Societe Generale (18 February 2015) and Deutsche bank (23 February 2015) The luxury and cosmetics financial factbook 2015

Page 22 DCF and valuation parameters D SOTP and segment analyses Kering: further analysis of Gucci Group through SOTP approach • Gucci Group SOTP analyses imply an enterprise value of €28.1b in FY15E. • Within the Gucci Group segment, the Gucci brand alone represents 49% of the top line and 61% of EBIT in FY15E, meaning that the Gucci brand is expected to constitute the largest segment within the Gucci Group and also the most profitable in terms of operating margin. Sales breakdown FY15E (in €b) EBIT breakdown FY15E (in €b) Enterprise value breakdown FY15E (in €b) 1.8 7.8 0.2 1.9 3.3 28.1 0.1 2.4 0.4 10% 7.0 12% 0.9 23% 7% 9% 1.3 1.2 15.3 11% 22% 3.8 25% 17% 61% 49% 54% 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 Source: SOTP based on EY analysis and on the following brokers reports: RBC Capital (11 February 2015), JP Morgan (11 February 2015), Societe Generale (18 February 2015) and Deutsche bank (23 February 2015) The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 23 D SOTP and segment analyses L’Oréal: segment analysis • The two main divisions of L’Oréal are Consumer Products and L’Oréal Luxe, accounting together for 76% of the group’s revenues and 90% of the EBIT. In particular, the L’Oréal Luxe division accounts for 28% of the total sales in FY14A. • This division is expected to register a sales growth at a CAGR of 7.8% over the 2013A-17E period when its operating income is anticipated to grow from €1.17b to s er €1.65b (or at a CAGR of 8.9%) over the same period. aluationt ame ar • The L’Oréal Luxe division will remain one of the biggest divisions within L’Oréal. p DCF and v Sales breakdown FY13A–FY17E (in €b) EBIT breakdown FY13A–FY17E (in €b) EBIT margin FY13A-FY17E 25% 20% 20% 21% 21% 21% 30 27.6 4.9 20% 26.3 4% 4.6 18% 18% 18% 25.1 4% 6 4.4 2% 17% 18% 25 22.1 22.5 4% 7% 3.9 2% 4% 7% 3.8 2% 10% 10% 4% 7% CAGR 5 2% 10% CAGR 15% 7% 7% 29% 7.8% 2% 8.9% 20 28% 28% 9% 10% 34% 4 33% 33% 27% 28% 15 31% 33% 10% CAGR 3 CAGR 4.6% 5.5% 10 48% 47% 47% 2 56% 55% 56% 49% 48% 58% 56% 5% 5 1 13% 13% 14% 13% 13% 16% 16% 15% 15% 15% 0 0 0% (16%) (16%) (15%) (15%) (15%) 2013A 2014A 2015E 2016E 2017E -1 L’Oréal Luxe Total cosmetics 2013A 2014A 2015E 2016E 2017E 2013A 2014A 2015E 2016E 2017E Professional Products Consumer Products Professional Products Consumer Products L’Oréal Luxe Active Cosmetics L’Oréal Luxe Active Cosmetics Body Shop Eliminations Body Shop Source: Analyst research H2 2014 The luxury and cosmetics financial factbook 2015

Page 24 DCF and valuation parameters E Trading multiples Level of multiples illustrates the still-high attractiveness of the luxury industry • The level is quite stable with respect to last year’s figures, even considering the slightly lower margins, showing a good resilience of the industry and confidence of the analysts in future strong growth and significant margins. • The decreasing trend observed over the years is actually explained by the expected improvement of the operating performance. EV/sales (FY14A/E-16E) EV/EBITDA (FY14A/E-16E) Price to earnings (FY14A/E-16E) 18.0x 30.0x 4.0x 15.0x 25.0x 24.1x 3.5x 13.3x 13.4x 23.4x 21.4x 3.0x 11.9x 21.7x 3.0x 2.9x 2.8x 12.1x 19.1x 19.4x 2.7x 2.5x 12.0x 10.8x 10.9x 20.0x 2.5x 2.5x 2.0x 9.0x 15.0x 1.5x 6.0x 10.0x 1.0x 3.0x 5.0x 0.5x 0 0 0 2014A/E 2015E 2016E 2014A/E 2015E 2016E 2014A/E 2015E 2016E Average Median Average Median Average Median Source: Data based on consensus of several brokers reports for each company Notes: • The trading multiples are based on: • Fixed EV computed as market capitalization as of 31 March 2015 (one-month average) and latest-available net financial debt • Projections estimated by analysts for successive years The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 25 E Trading multiples Improvement of multiples level for the cosmetics companies illustrates the growing dynamism of the industry • Trading multiples of the cosmetics companies are globally in line with those of the luxury industry, even with slightly higher figures for EBITDA multiples, illustrating analysts’ expectations for margins to improve in the next years. s er aluationt ame ar p DCF and v EV/sales (FY14A/E-16E) EV/EBITDA (FY14A/E-16E) Price to earnings (FY14A/E-16E) 3.5x 18.0x 35.0x 15.6x 16.0x 3.0x 2.8x 14.4x 14.8x 30.0x 27.7x 28.5x 28.9x 28.3x 15.0x 2.6x 2.5x 2.6x 13.0x 13.3x 2.5x 2.3x 2.3x 25.0x 24.4x 23.9x 12.0x 2.0x 20.0x 9.0x 1.5x 15.0x 6.0x 1.0x 10.0x 0.5x 3.0x 5.0x 0 0 0 2014A/E 2015E 2016E 2014A/E 2015E 2016E 2014A/E 2015E 2016E Average Median Average Median Average Median Source: Data based on consensus of several brokers reports for each company Notes: • The trading multiples are based on: • Fixed EV computed as market capitalization as of 31 March 2015 (one-month average) and latest-available net financial debt • Projections estimated by analysts for successive years The luxury and cosmetics financial factbook 2015

Page 26 DCF and valuation parameters E Trading multiples EY luxury and cosmetics sample: summary of EV/sales multiples EV/sales (FY14A/E) EV/sales (FY15E) EV/sales (FY16E) Hermés 7.4x Hermés 6.6x Hermés 6.0x Moncler 5.6x Moncler 4.8x Moncler 4.2x L'Oréal 4.2x L'Oréal 4.0x L'Oréal 3.8x Prada 4.2x Prada 3.8x Prada 3.6x Luxottica 3.7x Salvatore Ferragamo 3.4x Richemont 3.1x Salvatore Ferragamo 3.7x Richemont 3.3x Salvatore Ferragamo 3.1x Richemont 3.6x Luxottica 3.3x Luxottica 3.1x Brunello Cucinelli 3.5x Brunello Cucinelli 3.1x Brunello Cucinelli 2.8x Hugo Boss 3.2x Hugo Boss 2.9x Estée Lauder 2.7x Burberry 3.1x Estée Lauder 2.9x Hugo Boss 2.7x Average 3.0x Burberry 2.8x Burberry 2.6x LVMH 3.0x Average 2.8x Tiffany 2.6x L'Occitane 2.9x Tiffany 2.7x Average 2.6x Kering 2.9x LVMH 2.7x LVMH 2.5x Tumi 2.9x Beiersdorf 2.7x Beiersdorf 2.5x Estée Lauder 2.9x Tod's 2.6x Coach 2.5x Michael Kors 2.8x L'Occitane 2.6x Tod's 2.4x Tiffany 2.8x Swatch 2.6x Swatch 2.4x Beiersdorf 2.8x Kering 2.5x Kering 2.4x Tod's 2.8x Tumi 2.5x L'Occitane 2.3x Jimmy Choo 2.6x Coach 2.5x Coty 2.2x Swatch 2.5x Michael Kors 2.4x Tumi 2.2x Coty 2.3x Coty 2.3x Michael Kors 2.1x Coach 2.2x Jimmy Choo 2.3x Jimmy Choo 2.0x Natura 1.8x Natura 1.6x Natura 1.5x Ralph Lauren 1.3x Shiseido 1.4x Shiseido 1.2x Chow Tai Fook 1.3x Ralph Lauren 1.3x Ralph Lauren 1.2x Shiseido 1.3x Chow Tai Fook 1.1x Chow Tai Fook 1.0x Safilo 0.9x Safilo 0.8x Safilo 0.8x Hengdeli 0.5x Hengdeli 0.5x Hengdeli 0.5x EV/sales (FY14A/E) EV/sales (FY15E) EV/sales (FY16E) 9.2% 9.2% 9.2% 3.0x 2.8x 2.6x Low High Low High Low High Low High Low Industry benchmark High Low High Industry benchmark Industry benchmark Industry benchmark Industry benchmark Industry benchmark Source: Data based on consensus of several brokers reports for each company Note: Market capitalization is based on a one-month average as of 31 March 2015. The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 27 E Trading multiples EY luxury and cosmetics sample: summary of EV/EBITDA multiples EV/EBITDA (FY14A/E) EV/EBITDA (FY15E) EV/EBITDA (FY16E) Hermés 21.2x L'Oréal 18.4x L'Oréal 17.4x s L'Oréal 20.1x Hermés 18.1x Hermés 16.3x er aluationt Brunello Cucinelli 19.1x Brunello Cucinelli 17.3x Beiersdorf 15.4x ame Luxottica 18.6x Beiersdorf 16.6x Brunello Cucinelli 15.4x ar p Beiersdorf 17.9x Luxottica 15.9x Luxottica 14.6x DCF and v Salvatore Ferragamo 16.8x Estée Lauder 15.4x Coty 13.8x Moncler 16.6x Salvatore Ferragamo 15.2x Salvatore Ferragamo 13.6x Coty 16.6x Coty 14.8x Estée Lauder 13.3x Shiseido 16.0x Shiseido 14.7x Shiseido 12.7x L'Occitane 16.0x Moncler 14.4x Moncler 12.6x Prada 15.7x L'Occitane 13.5x Prada 12.0x Jimmy Choo 15.5x Prada 13.4x Tod's 12.0x Kering 14.6x Tod's 13.1x L'Occitane 12.0x Estée Lauder 14.2x Jimmy Choo 12.6x Richemont 11.6x Tod's 13.9x Richemont 12.6x Kering 11.4x Average 13.8x Kering 12.6x Average 11.3x Hugo Boss 13.7x Average 12.5x Hugo Boss 11.1x Tumi 13.6x Hugo Boss 12.2x Burberry 11.0x Burberry 13.1x Burberry 12.0x Jimmy Choo 10.8x LVMH 12.9x Tumi 11.7x LVMH 10.5x Richemont 12.9x LVMH 11.6x Tumi 10.3x Swatch 11.5x Swatch 10.8x Coach 10.2x Tiffany 11.1x Coach 10.7x Swatch 10.2x Chow Tai Fook 9.9x Tiffany 10.7x Tiffany 9.8x Safilo 9.6x Chow Tai Fook 8.7x Chow Tai Fook 8.0x Michael Kors 8.7x Safilo 7.7x Safilo 6.7x Natura 8.6x Natura 7.4x Michael Kors 6.6x Coach 8.0x Michael Kors 7.4x Natura 6.6x Ralph Lauren 7.6x Ralph Lauren 7.0x Ralph Lauren 6.3x Hengdeli 7.2x Hengdeli 6.3x Hengdeli 5.8x EV/EBITDA (FY15E) EV/EBITDA (FY16E) EV/EBITDA (FY14A/E) 9.2% 9.2% 9.2% 12.5x 11.3x 13.8x Low High Low High Low High Low High Low Industry benchmark High Low High Industry benchmark Industry benchmark Industry benchmark Industry benchmark Industry benchmark Source: Data based on consensus of several brokers reports for each company Note: Market capitalization is based on a one-month average as of 31 March 2015. The luxury and cosmetics financial factbook 2015

Page 28 DCF and valuation parameters E Trading multiples Regression analysis: EV/sales multiple vs EBITDA margin • Regression analyses show strong correlation between EV/sales levels and profitability. • Actually, this analysis illustrates that the premium paid on multiples is mainly explained by the good profitability performance. Regression analysis: EV/sales multiple vs EBITDA margin 2015 Regression analysis: EV/sales multiple vs EBITDA margin 2016 7.0x R² = 0.64 7.0x R² = 0.63 Hermès 6.0x Hermès 6.0x 5.0x Moncler 5.0x s Moncler e L'Oréal s l 4.0x Prada e 4.0x l L'Oréal sa Salvatore a / s Prada V Kering Ferragamo / Salvatore E V Richemont E Ferragamo Brunello 5 Brunello Cucinelli Burberry Hugo Boss 6 Richemont 1 3.0x 1 3.0x Cucinelli 0 Estée Lauder Michael Kors 0 Estée Lauder Hugo Boss 2 Tod's Tiffany 2 Beiersdorf LVMH Beiersdorf Tod's LVMH Swatch Kering Tiffany Coty TumiCoach 2.0x Jimmy Choo 2.0x Coty L'Occitane TUMI Coach Michael Kors L'Occitane Jimmy Choo Swatch Shiseido Chow Tai Luxottica Luxottica Natura Natura Chow Tai Burberry 1.0x Ralph Lauren 1.0x Shiseido Ralph Lauren Safilo Hengdeli Hengdeli Safilo - - 0% 5% 10% 15% 20% 25% 30% 35% 40% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2015 EBITDA margin 2016 EBITDA margin 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 2015. The analyses based on sales growth are not presented, as they resulted in an absence of correlation between sales multiples and growth. 2 2 For information, the results of the analyses performed are: R for EV/sales multiple vs sales growth 2015: 6%; R for EV/sales multiple vs sales growth 2016: 0%. The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 29 F Transaction multiples Transaction multiples in the luxury industry remain at a significant premium to many other sectors • There are several parameters that influence the valuation multiples. In particular: the brand positioning, the historical and expected growth, profitability and cash flow generation, management and organization, premium to rarity, etc. s er • Transaction multiples confirm that the industry kept its attractiveness over the past few years. aluationt ame ar • The average sales multiple over the last years ranged between 1.4x and 2.0x, where the average EBITDA p multiple ranged between 11.7x and 15.3x. DCF and v EV/sales (FY11-1Q15) EV/EBITDA (FY11-1Q15) 2.5x 18.0x 2.0x 1.9x 2.0x 16.0x 15.3x 1.8x 1.8x 13.5x 13.5x 1.6x 1.6x 14.0x 12.3x 13.2x 1.5x 1.4x 12.0x 11.5x 11.7x 1.5x 1.3x 12.0x 10.7x 1.2x 10.0x 10.2x 1.0x 8.0x 6.0x 0.5x 4.0x 2.0x 0.0x 0.0x 2011 2012 2013 2014 1Q15 2011 2012 2013 2014 1Q15 Average Median Average Median Source: Capital IQ The luxury and cosmetics financial factbook 2015

Page 30 DCF and valuation parameters F Transaction multiples The M&A deals in the cosmetics industry show a similar trend as the luxury industry • The average sales multiple over the last five years ranged between 1.1x and 1.9x, when the EBITDA multiple ranged between 10.0x and 16.6x. • 1Q15 multiples went back to previous 2014 levels. 2014 multiples illustrated an exceptionally positive trend, mainly driven by strategic acquisitions carried out by the major players to foster growth in emerging markets, and broaden the products’ offering into innovative segments. EV/sales (FY11-1Q15) EV/EBITDA (FY11-1Q15) 18.0x 16.6x 2.0x 1.9x 16.0x 14.9x 1.8x 1.6x 1.6x1.7x 1.6x 1.6x 14.0x 1.4x1.5x 11.7x 11.1x 1.4x 12.0x 10.1x 11.1x 10.1x 10.2x 1.2x 1.1x 1.0x 10.0x 10.0x 8.8x 1.0x 0.9x 8.0x 0.8x 6.0x 0.6x 0.4x 4.0x 0.2x 2.0x 0.0x 0.0x 2011 2012 2013 2014 1Q15 2011 2012 2013 2014 1Q15 Average Median Average Median Source: Capital IQ The luxury and cosmetics financial factbook 2015

DCF and valuation parameters Page 31 F Transaction multiples Analysis of worldwide M&A transactions in the luxury industry since 2011 • The number of completed deals on global scale is still significant, despite the financial crisis. The M&A activity from both strategic and financial investors in the industry experienced a strong first quarter in 2015 with 18 completed deals. • PE activity was intense and stable during the past years, showing an always-stronger interest for the industry, confirmed through the creation of dedicated funds. s er aluationt • As presented in the graph about the top 10 markets by the number of completed deals over the FY11-1Q15 period, Italy turns out to be the first country as a target ame ar nationality, proving the attractiveness of Italian companies for investors (investors’ interest for ‘‘made in Italy’’ and brands’ high quality). p DCF and v Number of completed deals in the luxury industry Number of completed deals by type of buyer Number of completed deals sorted by nationality of the (global) (global) target over FY11–1Q15 (among the top 10 markets) 70 62 50 32% 35% 45 44 42 33% Germany 60 52 37 30% 30% HK China Netherlands 48 40 1% 2% 1% 1% 50 44 s35 31 25% India s l l a 23% a40 e30 3% e d 20% d f25 f o 20 o . 15% UK 30 o 15% . 20 Italy o 18 N 13 8% N20 15 11 12 10% 30% 10 8 6 10 5 5% 0 0 0% Switzerland FY11 FY12 FY13 FY14 1Q15 FY11 FY12 FY13 FY14 1Q15 14% Corporate PE PE/total France 12% United States 28% Source: Capital IQ, Mergermarket, Factiva The luxury and cosmetics financial factbook 2015

Page 32 DCF and valuation parameters F Transaction multiples Analysis of worldwide M&A transactions in the cosmetics industry since 2011 • The number of deals completed in 2014 and in the first quarter 2015 illustrates a return to a sustained level of M&A activity after a drop in 2013. • The dynamism of the cosmetics industry recently attracted a larger number of PE funds, respected to past years: in 2014, they were involved in 62% of the transactions globally. • As presented in the graph about the number of completed deals by markets, quite interestingly, the first three positions are similar to those of the luxury industry, even if in a different order (US, France and Italy). Number of completed deals Number of completed deals by type of buyer Number of completed deals sorted by nationality of the (global) (global) target over FY11-1Q15 (amongst the top 10 markets) 45 35 31 62% 70% 40 39 30 60% Canada China 35 30 25 50% Japan 3% 3% s 30 22 4% l 26 s Spain a l 38% e a20 40% d 25 e 4% d 16 f o f 27% 14 17 o . 20 15 30% o . N o 21% 10 United Kingdom 15 N 8 18% 5% 8 10 8 20% 10 5 5 5 3 3 10% South Korea United States 0 0 0% 7% 36% FY11 FY12 FY13 FY14 1Q15 FY11 FY12 FY13 FY14 1Q15 Germany Corporate PE PE/total 7% Italy 8% France 23% The luxury and cosmetics financial factbook 2015

s er aluationt ame ar p DCF and v The luxury and cosmetics fi nancial factbook 2015

Industry overview LUXURY AND COSMETICS THE EY FINANCIAL FACTBOOK 2014

G Global luxury goods market H Global cosmetics market I Points of view from EY’s global sector specialists and outside experts w ervie v try o Indus The luxury and cosmetics financial factbook 2015

Page 36 Industry overview Global luxury goods market s er aluationt ame ar p DCF and v The worldwide personal Monobrand stores The online luxury goods The Chinese luxury luxury goods market is represent close to 30% market continued its market in 2014 was in estimated to have of the overall market, successful run with the line with 2013 at €15 while monobrand Chinese consumers are The share of company- share of online purchases billion, primarily due to 3.0% in increasing to grown by distribution across now focused on owned retail sales has slowdown in the 2014. However, at formats already claims purchasing more from gained 10 percentage 5.0% in 2014 demand for watches, constant exchange 52%. overseas, with points and represents men’s wear and leather rates, the market- nearly one third of the from 4.5% goods. observed growth (4.0%) Korea and luxury goods market. was comparatively In 2014, the historical This reflects a trend of recorded last year. As accessible status slower than the 7.0% pattern held true, as Japan brands increasingly Retailers are still the symbols, shoes benefit recorded in 2013. accessories grew seeking global control of top-performing players emerging online, followed by from strong tailwinds 4.0% as hot new destinations. their operations. e-tailers and individual and have been growing — more than any other brands. faster than the overall personal luxury goods leather-goods category category and more than for the last three years. the market overall. The luxury and cosmetics financial factbook 2015

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 H Global luxury goods market e summary G growth is leveling off • The worldwide personal luxury goods market is estimated to have grown by 3.0% in 2014. However, at 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 constant exchange rates, the market-observed growth (4.0%) was comparatively slower than the 7.0% DCF and v Financial Factbook for the luxury and cosmetics L’Occitane and Natura from FY11A to FY14E. s recorded in 2013. p X ar er Increased demand through innovative products will cater to underserved emerging markets. aluationt sector. The Factbook combines financial • The growth was helped by the sharp depreciation of the euro, which left the sector with an unbalanced price ame data, insight from EY’s global team of sector X aluation ame Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate t ar structure across regions. er specialists and opinions of external experts. s DCF and vp demand in established geographies. • Retail remained a key growth driver in 2014, but the market saw a slowdown in the retail network expansion, illustrating the players’ objective to focus on organic growth. Titles for charts • The online luxury goods market continued its successful run with the share of online purchases increasing to 5.0% in 2014 from 4.5% recorded last year. Retailers are still the top-performing players online, followed by Indusw e-tailers and individual brands. try oervie v v ervietry o 1 w Worldwide personal luxury goods market trend Indus 300 13% 15% 250 11% 10% 250-265 200 8% 10% and disMe 7% 218 224 thodology 150 159 167 173 192 212 claimer 153 n 100 170 3% 3% 5% o h Titles for charts i t l 50 l i w b o r € 0 0% G -2% and specific analyS -50 ample s -100 -5% election -150 -8% s e s -200 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2017e -10% Market size Growth Source: Data based on consensus of several brokers’ reports for each C Glo company. Sources: Altagamma/Bain and other selected research on t s act uss Notes:Market capitalization is based on a one-month average as of December 2012. Note: 1) Luxury Goods Worldwide Market Study Fall–Winter 2014, Altagamma/Bain ary The 2012 growth corresponds to the sales growth rate between FY11A and FY12A/E. The luxury and cosmetics financial factbook 2015

PPage 38age 38 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 1 2 Sales of industry players are expected to grow at a healthy rate, led by double-digit annual growth rate for Luxury goods demand growth by nationality and by area (2015F) Global personal luxury goods market, by channel and format (2014E) Welcome to the third edition of EY’s annual L’Occitane and Natura from FY11A to FY14E. Financial Factbook for the luxury and cosmetics 10% X 5% Increased demand through innovative products will cater to underserved emerging markets. sector. The Factbook combines financial 8% 5% 8% X data, insight from EY’s global team of sector 7% Introduction of eco-friendly, sustainable and naturally derived beauty products and cosmetics will stimulate 6% 6% 9% 29% specialists and opinions of external experts. demand in established geographies. h 6% t 4% w o 4% r Titles for charts g 2% F 5 2% 1% 1% 1% 1 0 2 0% 25% -2% -4% -3% 27% Europe Americas Japan Mainland China ROW Monobrand stores Department stores Nationality Area Specialty stores Off-price stores Airport Online 1 Currency fluctuations and tourism flows heavily impact luxury 2 Company-owned retail continues to gain share consumption • Demand is still growing, mainly sustained by touristic consumption, which has been • The share of company-owned retail sales has gained 10 percentage points and Titles for charts heavily influenced by currency fluctuations and local regulations. represent nearly one third of the luxury goods market. This reflects a trend of • As illustrated in the graph above, there is a clear dichotomy between area of brands increasingly seeking global control of their operations. consumption and nationality, based on the exchange rate evolutions. • Monobrand stores represent close to 30% of the overall market, while monobrand • China continues to be the top consumer country (1/3 of the total market), but distribution across formats already claims 52%. Chinese customers tend to consume outside their home country. • The airport channel has generated a CAGR of 11.0% from 2011 through 2014 and • Conversely, Europe and Japan will benefit from this trend in 2015, with Japan now represents 5.0% of total luxury sales and is particularly critical in Asia and reaching a growth leadership position and Europe particularly benefiting from Europe. dynamic touristic inflows. • The online luxury market has grown twelvefold in the past 11 years and now makes up 5.0% of total sales, mainly led by the accessories and apparel categories. Source: Data based on consensus of several brokers’ reports for each company. Sources: Altagamma/Bain and other selected research NNootteess:: 1Ma) Brkuest cinaepss Mitalioznaittioor In ins bteransaetd oionn a oal ne-month average as of December 2012. T he 20122 g) Lurxouwrty Gh cooorrdes Wspoonrdlds two tide Mhe saraklees gt Srtuodwy Fth raall-tWe binettewr 2ee0n F14Y, A11ltA aaganmd FmYa1/B2aAi/nE. The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 39age 39 Ex ec The Chinese luxury market is experiencing a contraction in utiv Global luxury goods Title for section H Global luxury goods market e summary G growth, yet Chinese consumers continue to represent about a third of the global market 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. The Factbook 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. Mainland Chinese personal luxury goods Top three global personal luxury goods 1 1 Slowdown across the board market (2011-2014E) markets (2014E) 1 Titles for charts 15.3 15.3 • The Chinese luxury market in 2014 was in line with 2013 at €15 billion, primarily 16.0 15.0 Second position globally after including Hong Kong due to slowdown in the demand for watches, men’s wear and leather goods. Indusw 12.9 80 try oervie 12.0 72.0 • Like-for-like sales struggled the most due to change in customer behavior across v 70 v n 60 demographic groups — increased diversity of preferred brands, and exclusivity, ervietry o o i l quality and value for money becoming increasingly more important than logos. l 8.0 w i n 50 Indus b o i € l l 40 i • Continued impact of anti-corruption and frugality campaigns undermined luxury b 4.0 € 30 23.2 demand and was further exacerbated by the economic slowdown. 20 17.9 10 0.0 0 and disMe 2011 2012 2013 2014E US China and Hong Japan thodology Kong claimer China luxury demand by luxury consumer cohort2 Chinese consumers continue to dominate as top global Titles for charts 60% 2 customers 49% 50% 40% • Chinese consumers are now focused on purchasing more from overseas, with and specific analyS 40% 39% 36% 32% Korea and Japan emerging as hot new destinations. In 2014, there has been a 61% ample s 30% 27% 28% 25% increase in the number of trips by Chinese nationals to these destinations. 23% election 20% • This dominance has further increased with the development of new outlet sites in s China and the fact that Chinese travelers have been enthusiastic visitors of the e 10% s many outlet malls in Europe. 0% Middle class Affluent High net worth • In terms of outlook, a softer economy and political pressures on gifting and 2004 2014 2024 high-end spending are continuing to put pressure on overall spending. However, a Source: Data based on consensus of several brokers’ reports for each C Glo company. weak euro and the low price points are making both travel and shopping in Europe on Sources: Altagamma/Bain and other selected research t s increasingly attractive. act uss NNootteess: 1:M) Warkoert cldawpidite Lalizuaxtuiory Mn is barakseetd os Mn a oonitonre, 2-m0o1n5 Sth aprvienrg Uage apdas otef D, Meacy 2em0b1e5r 2, A0lt1a2g.a mma/Bain ary The 2021) E2 gurroowpteh c: Borarrnedsepd Condos tnso tumhee sr Gaoleos gds, Growotldh rmaatn Se baecthwse, Fen FebrYu1a1rA ay 2n0d F15Y12A/E. The luxury and cosmetics financial factbook 2015

PPage 40age 40 DCF and valuation pIndustry oaramevervieterws Accessories remain the biggest category, and it is the fastest Global luxury goods Title for section G Global luxury goods market H growing 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. The Factbook 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. Global personal luxury goods market by Growth rates of global personal luxury 1 1 Accessories: outperformer product type (2014E) goods market by product type 1 Titles for charts Others* • Since 2012, accessories have become the largest category within luxury goods and 4% have grown the fastest lately, with a CAGR of 11% from 2010 through 2014. Beauty Accessories 20% 29% Accessories 11% • In 2014, the historical pattern held true, as accessories grew 4% — more than any Apparel 5% other personal luxury goods category and more than the market overall. Hard luxury 9% • The online channel is developed well in the accessories segment and constitutes Beauty 4% 41% of total sales. Others* 15% • Soft accessories have been the top-performing luxury category in both the short Hard luxury 0% 5% 10% 15% 20% and the long term. 22% Apparel CAGR 10-14E 25% Luxury leather goods and shoes, 2011-14E2 Titles for charts Soft accessories driving the growth 40 36 37 2 35 34 30 29 • As accessible status symbols, shoes benefit from strong tailwinds and have been n 25 growing faster than the overall leather-goods category for the last three years. o i l l 20 i b 14 Shoe specialists are outpacing lifestyle brands, especially in the men’s segment. € 15 12 13 11 • However, price as a contribution to growth has reached an unsustainable level, and 10 5 implies the brands have been overpricing, particularly in the leather/accessories 0 category, which is expected to limit the growth in the near future. 2011 2012 2013 2014E Luxury leather goods Luxury shoes • The increase in competition is also expected to put some price pressures in the Source: Data based on consensus of several brokers’ reports for each leather/accessories segment. Sources: Altagamma/Bain and other selected research company. Notes: 1) Worldwide Luxury Markets Monitor, 2015 Spring Update, May 2015, Altagamma/Bain N otes:M2a) Lrkuext curay Gpitoaolizdas Wtioon irls bdwaidse Med oan a orket Snetu-mdy Fonath all-Wvienrtaegr 2e a0s o14f D, Aeltcaegmambemr 2a/0B1a2in. The 201*2 gOthreorws ith cnclourdre “espAornts dds te lo ta thae sblael”e, ts gexrotiwle fth rurantie bturee etwtece. n FY11A and FY12A/E. The luxury and cosmetics financial factbook 2015

w ervie v try o Indus The luxury and cosmetics fi nancial factbook 2015

Page 42 Industry overview Global cosmetic goods market The global cosmetics With growth The beauty market is Skin and hair care market grew by an set to double account for more than 3.6% of 5.2%, the the half of the total estimated selective market The consumer Cosmetics world has in size in market. during 2013, which was continued to grow at a behavior has not been reinterpreted by slightly lower than the steady pace in 2014, changed since the the digital arena, the next 10 average of 3.8% bolstered by Asia, the crisis, and illustrating the growing to 15 years, observed in the past United States and interest for beauty and all the world’s decade. e-commerce. It the market topics in the social regions will grow, with contributed 29% of has world, an interest that China, the US, Brazil, global growth. continued comes from a larger India and Japan and more aware expected to become to expand consumer base the top markets. receptive to new steadily. product launches. The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 43age 43 Ex ec The global cosmetics market continues to grow steadily … utiv Global luxury goods Title for section H Global cosmetics market e summary H X Welcome to the third edition of EY’s annual • TShae mles oaf irknedt cuostnrty pinulaeys tero es axrpe eanxd spetcetaedd tily ao gnrd how aas pt a hroveead rlthy resiliateen, lt eed bven dy duoruinbg tle-idmigeis ot anf tnouuagl gh erocwotnh romatice f or Financial Factbook for the luxury and cosmetics cLo’Oncdcititioanns ae as tnd Nhe catounrsa fumroem Fr beYh1a1vA tior ho FaYs n14oEt c. hanged after the crisis. The size of the global cosmetics DCF and v p market reached €181b, recording growth of 3.6% in 2014, which is slightly lower than the average of 3.8% ar X Increased demand through innovative products will cater to underserved emerging markets. sector. The Factbook combines financial observed in the past decade. Consumers’ aspirations for quality have increased, and they are open to new 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 technology, more sophisticated dermocosmetics products and new retail distribution models. er specialists and opinions of external experts. s demand in established geographies. • The market remains supply-driven, fueled by innovation, where consumers are always looking for quality, performance and perceived results. Titles for charts Indusw 1 1 Global cosmetics industry market growth, YOY (2005-2014) Global cosmetics market segmentation by products and geographies (2014) try oervie v v 200 6.0% ervietry o Eastern Africa, w Indus 180 5% 5% 5% Hygiene Other Europe Middle East 5% 5.0% 11% 1% 7% 3% 160 4% Latin 140 4% 4% Fragrances Skincare America Asia, Pacific 4% 4.0% 12% 35% 120 13% 35% and disMe n 3% thodology o claimer i 100 l 3.0% l i b € 80 2.0% Makeup North 60 Titles for charts 17% America 1% 21% 40 1.0% 20 Hair care Western and specific analyS Europe 127 134 141 145 147 153 161 168 175 181 23% 22% ample s 0 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E election s Cosmetics market Growth % e s Source: Data based on consensus of several brokers’ reports for each C Glo company. on t s act uss SNooutercse:M: La’rOkreét cal Aapnitnauliazl Ratieopn iors bt 2a0s1e4 ad onn a od otnhee-r smeolnetch ated rveerasgee aarcs oh f December 2012. ary NTohte 2e: 101) L2 g’Orroéawl eth cstiomrraetseps oonf tds the wo tohre sldwalieds ge crooswmteh rticas ite bn neetwt meean FnuYfa1c1tA aurenr cd FosYt1s, e2Ax/cElu. ding soaps, oral hygiene, razors and blades as well as currency effects. The luxury and cosmetics financial factbook 2015

PPage 44age 44 DCF and valuation pIndustry oaramevervieterws … and remains a supply-driven market underpinned by innovation Global luxury goods Title for section H Global cosmetics 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. The Factbook 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. 1 Natural products 3 Strong potential from the men’s segment Titles for charts • The product portfolio of industry players has expanded into natural and green • The demand for men’s products has also boomed during the past five years, with products, replacing commonly used chemicals and synthetic ingredients with Asia emerging as the most crucial market. organic inputs, responding to changes in consumer tastes and preferences. • Consumers in Asia account for 64.0% of the global men’s skin care market, which • Initially introduced into the skin-care product segment, the natural product shelf still pales in comparison with the overall women’s skin care, but is reportedly has now expanded to other segments of the industry. growing at a rapid 9.4% per annum. • The new product lines have created new markets for the industry, and new • Moreover, spending on men’s skin care still totals less than 3.3% of the total companies have entered the industry to satisfy this demand. women’s skin care market, further indicating potential room for growth. • The demand for research and development personnel has increased significantly, which is key to remaining competitive and staying on top of the latest industry trends. 1 2 Key role of digital media 4 Widespread growth Titles for charts • The digital revolution has opened up huge opportunities for the beauty world as it • For the second year running, dermocosmetics was the most dynamic market, with allows mass-market brands to foster closer relationships with their consumers growth of 5.1%. through web interaction. • Makeup, which provides consumers with a medium to express themselves and their • It has enabled brands to provide new ways to reach, educate and inspire new creativity, was in 2014 the fastest growing category worldwide at 5.0%. consumers, as well as loyal customers, in order to stimulate the market’s future • The market was buoyant on all continents, even in Western Europe, with growth of growth. nearly 3.0%. • Today’s consumers are informed and connected, and are looking to personalize • With growth of 5.2%, the selective market continued to grow at a steady pace in their routines. The tendency is also clear in the prescription-based dermocosmetics 2014, bolstered by Asia, the United States and e-commerce; it contributed 29% of sector, which meets the health and beauty expectations of a growing number of global growth. consumers. Source: Data based on consensus of several brokers’ reports for each company. SNooutercse:M: La’rOkreét cal Aapnitnauliazl Ratieopn iors bt 2a0s1e4 ad onn a od otnhee-r smeolnetch ated rveerasgee aarcs oh f December 2012. NTohte 2e: 101) L2 g’Orroéawl eth cstiomrraetseps oonf tds the wo tohre sldwalieds ge crooswmteh rticas ite bn neetwt meean FnuYfa1c1tA aurenr cd FosYt1s, e2Ax/cElu. ding soaps, oral hygiene, razors and blades as well as currency effects. The luxury and cosmetics financial factbook 2015

w ervie v try o Indus The luxury and cosmetics fi nancial factbook 2015

PPage 46age 46 DCF and valuation pIndustry oaramevervieterws I Points of view from EY’s global sector The Italian luxury market from an M&A and investor perspective specialists and outside experts The fashion and luxury market is continuing to grow The Italian M&A market was characterized in the despite the difficult macroeconomic and financial recent years by the foreign acquisition of Italian landscape. This sector remains highly attractive to brands. financial and strategic investors, both national and In 2014, the so-called inbound M&A accounted for international. 75% of the total number of transactions carried out in M&A in the fashion and luxury sector, unlike others Italy. In the same year in Italy, two-thirds of the deals Roberto Bonacina industries that experienced a decrease after the were completed by financial investors, in contrast financial crisis, is facing a positive pattern. with prior years, where corporates had a greater EY Lead Advisory M&A 2014 registered a slight decrease in the total number percentage of successful deals than PE. Fashion & Luxury of completed deals compared to the last three years; however, the first quarter activity of 2015 boosts hopes for strong growth for this year. The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 47age 47 I Points of view from EY’s global sector The Italian luxury market from an M&A and investor perspective specialists and outside experts Number of completed deals (Italy vs global) Outbound/inbound/domestic — Italian deals Deals by nature of buyer (corporate vs PE) — Italian deals 70 62 18 60 16 18 52 14 6 16 50 48 44 7 14 s 12 l a 2 12 e 40 45 10 11 d 13 10 4 f 31 6 o 40 8 . 30 8 o 32 N 18 6 8 10 w 20 11 9 6 4 6 2 4 8 3 10 13 1 6 ervie 17 12 17 12 2 2 4 v 5 0 - - 2 1 2 2 2 0 0 try o FY11 FY12 FY13 FY14 1Q15 2011 2012 2013 2014 1Q15 2011 2012 2013 2014 1Q15 Italy Global Outbound Inbound Domestic Indus PE Corporate Top luxury houses are looking for unique brands and Italy remains the place to be for its strong backbone Interest from financial investors is related not only to new stylists and talents with a quasi-venture capital of entrepreneurs and companies that come from the high-margin/high-growth companies with clear approach. Strategic investors’ interest is in art of doing and the unparalleled tradition in the use positioning, but also to fashion houses that, although supporting/investing in product excellence: of hands in manufacturing, crafting and made-to- small, have a good equity story to grow, operating in uniqueness of brand, made in Italy, craftsmanship, measure products. Today, the most illuminated market niches with proved capabilities to expand superior quality and privileged access to raw entrepreneurs are becoming aware that such business in fast growing countries. In all cases, the materials and heritage. These qualities are key to knowledge and art need to be renewed and presence of a relevant share of international sales is being positioned as high end, absolute luxury and to transferred to the younger generations, and they are key to proving the scalability of the business also on winning in certain niche segments (tailor-made suits, therefore investing in training in order to transmit the foreign markets. precious leather goods, jewels, etc.). traditions of old experience and craftsmen to them. The luxury and cosmetics financial factbook 2015

PPage 48age 48 DCF and valuation pIndustry oaramevervieterws I Points of view from EY’s global sector The Italian luxury market from an M&A and investor perspective specialists and outside experts Emerging market investors are heavily looking for In fact, the execution risk of an investment in the A recent survey that compares the major European opportunity, but so far, only a very limited number of fashion and luxury sector, although potentially very countries clearly shows that if, on average, family- transactions have taken place, mainly driven by rewarding, is perceived as high, particularly by owned businesses are often led by a CEO member of Middle-East investors (Valentino being a landmark financial investors. The level of complexity is growing the family, when it goes down to the key transaction). Overall, they usually act through local in terms of consumers, purchasing behaviors, management team, Italy changes the situation. contacts that sometimes have a limited knowledge of distribution models, geographies. Executing an In fact, in family businesses in Italy, 66% of the the market, like to invest in minority stakes with the appropriate development strategy that would management is composed of family members, a big strategy of working closely with the entrepreneur in envisage internationalization, brand/product difference if compared to 10.4% in UK, 25.8% in order to plan credible growth strategies, identify extension, retail investments and distribution rollout France, 28.0% in Germany and 35.5% in Spain. value creation levers and deploy resources to in various channels is very challenging and needs This could at least partially explain why Italian fashion accelerate developments in local markets such as vision by entrepreneurs and management capabilities companies have always excelled in growing and China, Japan, Korea and Russia. by key executives. extending a single brand name (usually the family If brand and uniqueness of products is usually the key Management can be a value multiplier when coupled name), but more rarely have successfully achieved a driver for acquisitions and values, for strategic, with high brand recognition and products. The recent conglomeration/portfolio strategy through financial and alternative investors, recent experience Versace and Pomellato transactions are a clear acquisitions and the integration of different brands shows that the presence of an experienced example for this: good management coupled with under the same umbrella. management and an adequate organization is able to exceptional brands. And investors pay for that! In this Summarizing, Italy remains the place to be, where command much higher valuations. respect, Italy has great room for improvement. brands, craftsmanship and product innovation lie. However, to grow in such a competitive industry, companies and entrepreneurs need to reinforce their structures to bring their own organizations to the next phase of growth. This will pay off and not only in terms of value paid by investors. The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 49age 49 I Points of view from EY’s global sector Managing performance improvement of luxury stores specialists and outside experts The luxury sector is showing an inconsistent trend. Marketing of locally manufactured items with a global In Asia, the luxury sector slowed in 2013. It levelled appeal is for sure a key differentiator: luxury brands out in 2014 and over the coming years, it will hardly want people to know that their products are sourced see the rapid growth as in the previous years. The and crafted locally. An example of this approach main reasons are anti-corruption campaigns in the comes from a major high end fashion company that Chinese market and increased prudence and maturity hosted an artisan in selected US stores to create Paolo Lobetti Bodoni of consumers. Anti-corruption measures in mainland handbags live in front of the customers. Another way China have reduced the use of public funds for to promote effectively a global brand locally is to Mediterranean Retail and consumer products Advisory high-end gifts, and in the meantime, for people with leverage media and communication: a leading w Leader spending growth driven by rising incomes, luxury clothing manufacturer opened recently its Shanghai ervie v purchase are made in Hong Kong or other low-tax flagship store using a Chinese local messaging try o destinations. That is not enough anyway for the platform, WeChat, as a medium for advertising the Indus luxury growth in the entire area. launch, plus it has included its global followers in the Brazil, Russia, India, China and South Africa (BRICS) preparation, posting a series of photos of the journey consumers recently developed a more sophisticated from London to Shanghai. awareness of luxury: many have become more The physical store is the opportunity to present selective and mature. Moreover, in countries such as high-end goods evoking an aspirational lifestyle: Brazil and Mexico, strong import taxes limits foreign many of the top brands are embracing the luxury brands growth. “New BRICS” emerging environmentally friendly movement by choosing countries in the Middle East and Asia are fast specific store design and furniture (green, steel, glass becoming core drivers of domestic and tourist and wood are main patterns), along with a peaceful spending growth, with national birth rate decreases and comforting atmosphere, all in order to and discretionary spending increases. In mature communicate specific brand values and deliver an markets, consumer confidence slightly increased in exclusive customer experience. the last month’s driving rise of leisure spending. The Store staff preparation is vital since sales assistants US remains the world’s number one nation for luxury are acting as permanent ambassadors of the brand, goods consumption thanks to renewed consumer and the one to one relationship with the customer is confidence and soaring GDP. a key factor for the accomplishment of the sale. With those light-and-shadows scenarios the luxury Chinese consumers list meager customer service and sector is facing, it becomes crucial to identify critical inadequate knowledge among retail staff as a success factors, risks and opportunities for store primary reason for shopping abroad. performance improvement. The luxury and cosmetics financial factbook 2015

PPage 50age 50 DCF and valuation pIndustry oaramevervieterws I Points of view from EY’s global sector Managing performance improvement of luxury stores specialists and outside experts The majority of luxury consumers are willing to A relevant example comes from a leading jewelry Both luxury retailers and many luxury hotels, such as interact with a digitally enabled sales associate. retailer that in October 2013 revealed an in-store a leading Asian hotel chain, are already using mobile Bringing mobile technology into stores and investing iPad application that helps customers to create a devices to increase the effectiveness of CRM: to in training and coaching for the sales representatives made-to-measure engagement ring. The app allows quickly and effectively help customers check out and may help enforce trust while creating an even-more customers to compare features for their perfect find products in store, and sales staff pull up made-to-measure experience for consumers. diamonds ring. With the help of a sales associate, the consumer preferences, giving them a tailored Brands and retailers that wish to distinguish their client uses the app to select specific elements of the shopping experience. On the hotel’s side, the customer experience should take into consideration ring such as diamond shape, color, clarity, etc. If you advantage of mobile integration helps with traveler the omni-channel approach. Specifically, mobile will are wondering if digital apps will eventually replace check in as well as with concierge and in-room continue to be an essential medium for reaching the sales associate, the iPad app gets the best from services, etc. international, affluent consumers, and marketers the two in order to enforce customer service. A US-based leading jewelry retailer stands out for its should work to create an optimized, user-friendly A leading department store chain in New York also CRM attitude: people into the stores able to provide shopping environment on mobile devices. created an iPad application to recreate its in-store outstanding customer service or product-related Although there is no reason, for example, why experience. The app combines products’ contents information. customers could not go online, choose items they with online shopping features to provide customers a It has a database that includes more than 60,000 want to try on and send that information to the store, thorough brand experience. customers who have spent more than US$5,000 in that would eliminate a lot of pre-work that could be Digital technology can also be helpful on the the past 18 months. These customers are offered a automated. In any case, digital should be used to customer relationship management (CRM) side: made-to-measure experience, such as: meetings with enrich, not disrupt customer experience. today, only few luxury players are fully aware of the personal shoppers, free engraving, shipping, potential of customer relationship management; that champagne receptions on the mezzanine of the New opens large opportunities for improvement through York flagship store and occasional private events. digital integration — for instance, by having the sales team using iPads to scan and record customer details and social media information and retrieve data from previous customers’ visits. The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 51age 51 I Points of view from EY’s global sector Managing performance improvement of luxury stores specialists and outside experts Then, CRM should be accompanied by customer As a result, to fully exploit stores’ performance and to • Enforce CRM by using new technologies: the sales satisfaction analysis: today, only 10% of luxury drive more customers and more profit, luxury brands staff sees on iPad all the track records and statistic brands measure customer satisfaction, huge will need to: of the customer they are serving (without improvements can be realized by properly • Ensure a made-to-measure customer experience interfering with sales process or bothering the implementing customer satisfaction analyses. along with a coherent brand image worldwide customer) Not less relevant is store’s efficiency, new for the • Tailor the store concept and customer experience • Promote efficiency in order to decrease lead time luxury sector, which is driven by margin reduction, to meet local needs during customer service by implementing lean increased competition, improved consumer maturity • Activate specific training and coaching modules for principles into the in-store processes w and awareness: a lean organization can deliver the sales staff in order to continuously improve the ervie benefits to a variety of services or processes. capability to communicate brand values v A luxury handbags retailer in-store’s lean • Analyze competition through mystery shopping, try o reorganization regards service lead time reduction: in and implement customer satisfaction measurement Indus the past, salespeople counseling customers would • Omni-channel approach through adoption of all the vanish into storerooms when goods weren’t available possibilities made available by technology such as a on the shop floor. Now, at each store, a few specific iPad app to be used either from home by employees are assigned to the storeroom to convey the customer alone (in order to generate interest in goods not available. At a large store in Paris, items the products and encourage customers to buy or are sent via a service elevator from the storeroom to move to the nearest store) or as a support (not the cashier, already wrapped to be sold. replacement) of sales personnel The luxury and cosmetics financial factbook 2015

PPage 52age 52 DCF and valuation pIndustry oaramevervieterws I Points of view from EY’s global sector Recent challenges for luxury business in China specialists and outside experts Recent tax challenges for the luxury determined on the retail value of the product) is business in China clearly under review and may be implemented in Please note that the issues hereafter presented are the following months. valid June 2015 Finally, the point of taxation may also be shifted to The luxury business in China has definitely a later stage of the supply chain/value chain experienced various types of challenges during the rather than the stage of production/importation Ivan Chan last years/months (anti-corruption measures, slowing (having of course an impact on the taxable basis) down of the economy, distribution structure’s and may also necessitate a consideration of an Partner, Tax — Shanghai challenges); but had at the same time to deal on a output/input taxation model. daily basis with the evolving tax rules applicable here 2. China value-added tax (VAT) reform into the in Mainland. real estate industry: We will summarize below what makes China so Luxury groups usually run their businesses by challenging — to some extent — from a tax point of renting stores/flagship stores in prime locations view for the luxury groups, but we will also give you that usually command higher rental. With the VAT some insights on what could allow you to improve reform to come involving the real estate industry, your tax position and make your tax journey into the including purchase and rental in the late 2015, Chinese market more successful: landlords will pay VAT rather than Business Tax Stephane Rinkin 1. The China consumption tax (CT) reform: (BT) going forward. Partner, Tax — Shanghai It seems now clear that a CT reform policy is Under the BT regime, leasing of immovable expected to be promulgated in late 2015. A property is subject to BT at a rate of 5%, this being possible expansion in charge scope, possible often embedded into the overall rental charges changing CT rates and computation method for and constituting a final cost for the landlord and some of the already in-scope CT items would be an indirect cost for the tenant. also altered, depending on the extent of shift in Under the new VAT regime, landlords should the point of taxation. collect from its tenants VAT at a rate of 11% on In that respect, some consumer goods with a their rent. This VAT should be however highly luxury character, such as private aircrafts, recoverable as input VAT (i.e., input VAT could be may be newly included into the CT scope. In used to offset the subsequent output VAT due on addition, the taxation or not on certain luxury sales). merchandises (based, for instance, on a threshold The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 53age 53 I Points of view from EY’s global sector Recent challenges for luxury business in China specialists and outside experts The above VAT development could represent a The SAT has however taken action to amend the basis such as wines. Compulsory commodities substantial VAT and cost saving opportunity for documentation regulations. It remains to be seen inspection has been in addition removed for the the luxury groups — part of the payments made whether the new requirements will replicate those export of ready-to-wear and shoes effective 2014 becoming input VAT. Hence, the rental costs could under Action 13 transfer pricing documentation and 2015 respectively. Theoretically, luxury therefore be reduced. For instance, if the overall of BEPS, or escalate to another level of detail and goods companies may now sell back imported annual rental charge for a store is RMB1.11m complexity. merchandise overseas with less governmental now, the rental charges would be brought down to Nonetheless, companies will need to strike a bureaucracy. Nonetheless, it is still costly due to RMB1m if the lease becomes subject to VAT at balance in complying with regulatory import duty and VAT leakage if a proper tax w 11%. RMB110k could be used as input VAT to requirements and protecting trade secrets and regime has not been implemented. Finally, offset the output VAT charged on sales, and this positive VAT outcomes have been obtained lately ervie confidential information. v would reduce the overall VAT payable. An in relation with the destruction of products. try o adequate and proactive preparation to re- 4. Stock management — related VAT and customs Luxury groups shall clearly take initiative to Indus negotiate the leasehold contracts with the costs: review their trading models and current tax landlords should be therefore a top priority for the Overstocking and slow moving products are treatment in relation with these overstocking and luxury groups active in China. ongoing operation issues for some luxury brands slow moving products in order to optimize as 3. Transfer pricing (TP) documentation ever since the luxury goods market in China much as possible their tax position in China. requirements: slowed down, especially after the anti-gifting On the other hand, in recent years, we have initiative in 2014. frequently heard voices from SAT that the luxury As a member of G20, China has been very active In general, moving imported goods back overseas in the Base Erosion and Profit Shifting (BEPS) is not easy and potentially not at all tax efficient business is one of key industries that the SAT usually project. The Chinese State Administration of due to the customs and VAT regulations in place in keeps an eye on its new development while the other Taxation (SAT) is likely to welcome the actions to China. In addition, the destruction of products key industries include automobiles, pharmaceuticals, improve transparency and disclosure, and to (seasonal products) could lead, in certain etc. obtain information regarding taxpayers’ global circumstances, to significant amount of VAT As examples, please find below two main challenges value chains and financial and tax positions. corrections if not properly handled. coming from the China tax authorities that we have Although the current transfer pricing One reason, then, why luxury goods companies seen real cases incur recently: documentation circular in China contains the explore the option of free trade zones is to 1. Overseas intercompany charges: requirement for certain global information, in facilitate selling products overseas and to suspend practice, it still focuses largely on China the payment of import duty and taxes. We understand China tax authorities have operations. Bonded arrangements should operationally work recently reinforced the review on outbound for luxury goods companies that sell on wholesale intercompany royalty and service payments in selected luxury good companies and requested The luxury and cosmetics financial factbook 2015

PPage 54age 54 DCF and valuation pIndustry oaramevervieterws I Points of view from EY’s global sector Recent challenges for luxury business in China specialists and outside experts such information from 2004 to 2013, with advertising and promotion campaign in China bring the Chinese tourists back to the local market stringent criteria being proposed to substantiate arguing that it represents brand building that and to promote domestic consumption. the deduction. This may be particularly relevant benefits the brand owner at least partly, and As you can see, we are in a very complex to many companies in the luxury sector that have some expenses should be borne by the brand environment where good news contrasts with a lot of been charging royalty and/or service fees to their owner and charged out from China. tax/regulatory doubts and risks for the luxury sector Chinese distribution subsidiaries and leaving There has been a rising trend that Chinese in China. The right approach to have is certainly then routine returns to the Chinese entities. tourists purchase luxury goods while traveling to accept, understand and share broadly that it is The aforesaid review may call for transactional overseas. In the meantime, luxury brands may inevitable to encounter tax challenges in China and to transfer pricing analysis on outbound royalty and have continued their investment in China, along always have a proactive and opened approach service payments; it may also bring up the with the cost in advertising, marketing, store allowing the journey into the Chinese market to question of whether these transactions are closely decoration, etc. that can enhance the brand remain full of great success and opportunities. linked to the importation of goods and whether awareness to Chinese consumers. the payment should be included in the dutiable If any of the direct or indirect brand building cost value if not taxed before. In case any deduction in China is deemed to benefit overseas affiliates claim for the outbound payment is denied by the due to the purchase by Chinese tourists overseas, tax authority, there may be limited means to the Chinese tax authorities may demand that reconcile the adjustment with customs duty and arm’s-length compensation should be received by import VAT already paid, resulting in double the Chinese entities or that the relevant cost be taxation. disallowed for deduction in China. In addition, the Chinese tax authority has been As you see, tax challenges have to be properly keen on examining location-specific advantages handled in order to comply with the Chinese tax due to local regulatory, demographic, economic requirements. and other characteristics and taxing on the profits associated. At the same time, China is however also really This development may also place significant concerned by the development of its internal curbing implications to intercompany charges. economy and very strong and good messages have been delivered at multiple levels during the last 2. Deductibility of advertising and promotion weeks. We cannot avoid mentioning for instance the expenses: decrease of the customs duty on some very specific We have also seen China tax authorities challenge luxury products by the Customs Tariff Commission a deduction claim for expenses incurred in a mega (CTC) effective from June 1, 2015, mainly aiming to The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 55age 55 I Points of view from EY’s global sector Challenges of the Swiss watch industry specialists and outside experts Watches are one of the iconic products made in Yet it is Apple and its smartwatch that have been the Switzerland, and watchmaking is a key industry for talk of the town. Could the Silicon Valley wreak havoc the country, with nearly 60,000 people employed in on the Watch Valley(s) and could the industry relive 2013. The Swiss watchmaking industry is currently the existential threats of yesteryear? Experts and facing macro-economic and market challenges that would-be experts have discussed at length the are likely to last after 2015 and will be changing the success of the Apple Watch and its future iterations, Amaury Bonnaire industry durably. and we do not pretend to have a clearer view. We do however have an opinion: this challenges the industry w Executive Director, TAS — Geneva By the numbers … to step up its game and is likely to favor those Last year, Switzerland shipped nearly 30 million products that are distinctive, at the expense of the ervie v watches. Mechanical watches, typically the most less exceptional. try o valuable, represented approximately 25% of the Indus volume but almost 80% in value. The industry 现在几点 (Xiàn zài jī diăn) [What time is it] remains among the top three export sectors for the Hong Kong and mainland China have been leading Swiss economy (the export value of watches was the growth story, and while they remain the main CHF22.2b in 2014, compared to gross exports of markets of Swiss exporters, they have shown signs of CHF107.6b in 2014 for Switzerland as a whole). The stalling that are another challenge to the industry. A industry rode a very strong rebound after the dip in recent trade agreement between China and 2009 (13% CAGR over 2009–2013). But Swiss watch Switzerland has been a positive sign. But distributors exports have seen decelerating growth (+1.9% in are looking at historically high inventories, and some 1 2014, same in 2013). Recent trends are a challenge watchmakers have announced price cuts (Panerai, to the Swiss exporters and magnify some of the Patek Philippe for prices in HKD). While the evolutions that were already at play. underlying global trends are favorable, and emerging Time does not stand still for Swiss watchmakers. wealth in other parts of Asia and the world are a Innovation is at the heart of the craft, with new significant opportunity, it is yet unclear which products, new markets, new forms and metals, and markets can provide a second wind to the industry. new industrial processes constantly being embraced. This has profound implications, as the level of 1 Sources: Fédération de l’industrie horlogère suisse, Bundesamt für Statistik The luxury and cosmetics financial factbook 2015

PPage 56age 56 DCF and valuation pIndustry oaramevervieterws I Points of view from EY’s global sector Challenges of the Swiss watch industry specialists and outside experts investment — both in marketing as well as The future of the manufacture Of course, the industry is also closely watching the tax reform (RIE III4 verticalization capex (e.g., for monobrand stores) and It might almost seem old news, but the industry is ), which is expected to be debated M&A (for the integration of distribution) — is sizable, still feeling the effects of both the more stringent in the second half of 2015. and this adds complexity to capital allocation “Swiss Made” requirements (60% of the cost) and the decisions. phasing out of the supply of movements and Time is up! 3 We have looked at some of the challenges that the Riding the CHF tsunami assortments by ETA (Swatch Group) in the second half of the decade. In recent years, this has driven the Swiss watchmaking industry faces. Those challenges At the start of the year, the Swiss National Bank has verticalization of production. And while the strongest all combine to exert pressure on the industry. Will released the floor it had hitherto maintained against players have taken steps to adapt — also at the cost of this pressure create diamonds? We believe that the the euro, sending the Swiss franc to new heights significant investment (design of internal movements, forces at play require a renewed and relentless focus (currently at or around 1.05 CHF/EUR, or construction of production capacities and more) — on what makes the industry unique: a distinctive approximately 15% higher than the previous 1.20 this continues to challenge the smaller and watch and a distinctive brand. Those who do not minimum exchange rate). While the shock effect has independent players. possess such attributes risk becoming irrelevant. This passed, the repercussions of this event will long be will fuel transformation and concentration, and we felt. Some watchmakers have quickly announced Location Switzerland expect to see strong interest for M&A activity, not price increases (Patek Philippe in EUR, Rolex and The home country of the watchmakers is known for least among the suppliers to the watchmakers. Omega, Longines for instance), but margins in the its friendly attitude towards businesses. And people A generation ago, the quartz crisis all but wiped out industry will continue to be under pressure. For seem to react positively as Switzerland has been the low-end segment in Switzerland, with China now example, Richemont’s operating result on the voted the happiest country in the world in a recent being by far the largest producer. Today, the watchmaking segment decreased from 26.1% in the poll. Yet, there is currently some degree of political challenges magnify the importance of the most year ending 31 March 2014 to 23.4% in the year and economic uncertainty affecting the Swiss watch distinctive watchmakers (mainly, but not only, the ending 31 March 2015.2 And this affects the full industry and Swiss industry as a whole. The high-end, as distinctive organizations are also value chain, from distributors to watchmakers to uncertainties stems in particular to the popular vote well-equipped to resist and to thrive) relative to those their suppliers. Again, we believe this will be on 9 February 2014 in favor of the initiative aiming at whose proposition is less compelling, those stuck in contributing to the accelerated transformation of the restricting immigration, while a significant part of the the middle. However, this is a trend observed in many industry. people of the trade are not Swiss citizens or cross- industries; it is called the hourglass effect. border commuters. 2Source: Richemont 2015 annual report 3 4 ETA is Switzerland’s dominating manufacturer of movements and watch Tax reform resulting from EU and OECD critics on the Swiss favorable tax parts and is part of Swatch Group, which decided in 2009 to reduce policy for certain types of corporations (including holdings) supplying of mechanical movements to competitors. The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 57age 57 I Points of view from EY’s global sector Back to Italy: reshoring is not for everyone specialists and outside experts Reshoring is becoming a central topic in economical in Italy is tied to the growth in the luxury market, discussions in main industrialized countries, including which has grown, mainly thanks to Asia, at a 30% rate Italy. in the last five years and which will grow of another The so called “back to Italy” phenomenon can be 17% in the next four years according to market analyzed dividing companies in three main groups: forecasts. • Italian luxury groups, which strengthen their In the luxury world, quality is one of the key factors David Pambianco production plants bringing back part of production of success of the brand, given that for the in Italy international consumer, ‘‘Made in Italy’’ is a synonym w Vice President, Pambianco • International luxury groups, which increase their of quality, it is obvious that this is leading the big Strategia d’Impresa ervie production in Italy, outsourcing it or acquiring Italian luxury groups to the decision to bring back v productive companies production in Italy in order to have a product in which try o • Medium-sized companies, which operate in the the ‘‘Made in Italy’’ brand becomes a certification of Indus medium/high segment, which bring part of superior quality. Made in Italy is particularly production back to Italy important for some product categories more than other. The image below shows the main production With regard to the first two types of operators, the districts per product category. key to the increase of the share of production made Puglia (Casarona), Marche, Toscana (Firenze, Pontassieve, Campania, Veneto, Lombardia Emilia Romagna (Carpi), Veneto (Belluno) Veneto (Riviera del Brenta), Scandicci, Valdarno), Marche Umbria (Perugia), Toscana Lombardia (Vigevano), (Tolentino), Campania (Napoli) (Prato), Veneto Emilia Romagna (Fusignano- Bagnocavallo, San Mauro in Pascoli) The luxury and cosmetics financial factbook 2015

PPage 58age 58 DCF and valuation pIndustry oaramevervieterws I Points of view from EY’s global sector Back to Italy: reshoring is not for everyone specialists and outside experts This is true for the larger luxury groups, but what This means that companies in the high luxury about the medium-sized Italian companies? To segments could increase their share of production understand how the latter are positioned on made in Italy, while those in the medium segment reshoring Pambianco carried out a research through have to make a strategic choice: improve their questionnaires and interviews, considering a panel of positioning with a more-qualified offer by increasing 45 companies (revenues on average €100m) which the share of goods made in Italy or lower their have an overall market value of €4.5b. positioning aiming at a more accessible price Twenty-seven percent of the panel declares it positioning. produces everything in Italy while 71% declares it has According to the research, reshoring, i.e., the trend a mix of production between Italy and foreign of bringing back production to Italy, is still marginal. countries. In terms of trend, in the last three years, This could be due to a scarce flexibility of companies, these companies only slightly increased their share of which are thus slow in changing their production production in Italy, going from 52% to 53%. When strategy, but also to the fact that production costs in asked what they expect the production mix to be in Italy continue to be very high, and this is a strong the next three years, companies gave different factor in slowing down the process of reshoring. This answers depending on whether their positioning is in is true particularly for smaller companies, which, the high or low segment. having lower margins, can’t afford to have higher Seventy-six percent of the companies positioned in production costs as a consequence of reshoring. For the high luxury segment, which already produce 83% big Italian and foreign luxury groups on the other in Italy, said they will keep their share of production hand, the made in Italy factor is very strong, and the in Italy stable; only a minority (24%) declared they will increase in costs are more than offset by the benefits increase it. Answers coming from companies of image and quality of the product. positioned in the medium luxury segment were more varied: 39% said they will keep the production mix stable, 35% that they will increase the share of production in Italy and 26% that it will diminish. The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 59age 59 I Points of view from EY’s global sector #digital beauty: how to make a new model an opportunity — the specialists and outside experts challenge of captivating a technological shopper Social media has radically changed the traditional relationship between brand and consumers, introducing new actors and changing the perception that the consumer has of himself and of the brand. In beauty, like in no other market segment, the consumer has officially become a “prosumer.” Lucia Fracassi General Manager, Deborah Group w Producer Consumer ervie + v try o Indus Prosumer “Prosumer” is a mashup of the terms producer and As a matter of fact, the prosumer not only expects to consumer. The concept is not new, but rather dates play an active role in consuming the product, but also back to the ‘80s. Today though, in the world of on the phases that are upstream in the process. In internet 2.0, the concept has a new edge to it. More other words the prosumer wants to participate specifically, today’s prosumer is a consumer who actively in the creation, production and distribution of wants to be a protagonist. the product. The luxury and cosmetics financial factbook 2015

PPage 60age 60 DCF and valuation pIndustry oaramevervieterws I Points of view from EY’s global sector #digital beauty: how to make a new model an opportunity — the specialists and outside experts challenge of captivating a technological shopper This has implied a considerable change in marketing Therefore, beauty is one of the most active and There have always been more or less efficient ways strategy for cosmetic companies, which have shifted competitive sectors in social media. to raise awareness on the web, but if at the very from product-oriented marketing to consumer- According to some market research, the beginning of digitalization, making noise, no matter oriented marketing. Cosmetic companies have effectiveness of communication and the share of how, was sufficient, today more than ever, the actual decided to pursue this one-way path knowing that the voice of brands on social media is not directly quality of word of mouth is vital to succeed. journey will have some risks but will on the other proportional to the available advertising budget, hand offer incredible opportunities. leaving significant opportunities for low-spender Numbers show that the cosmetics world has been dynamic and proactive brands (earned media vs paid reinterpreted by the digital arena: there are more and owned media). than 15 billion views overall on YouTube on the topic “beauty,” 10 billion of which are focused on makeup. Digital marketing trifecta 1 Every month, there are around 700 million new Earned, owned and paid media views on beauty, which is a 133% increase from 2 2010. This data proves the growing interest for Propel sharing and engagement beauty topics in the social world, an interest that Sharing with paid promotion Advertising (ADS) comes from a larger and more-aware consumer base, • Mentions • Pay per click • Shares • Display ADS receptive to new product launches. • Reposts • Retargeting In the described context, beauty brands control only • Reviews • Paid influencers • Paid content promotion 3% of the 15 billion views and they appear only in Earned Paid • Social media ADS 2.5% of the searches per keyword on YouTube. On media media the other hand, the top 25 beauty bloggers have Leverage owned, earned and 2,600% more comments than beauty brand’s paid media for a comprehensive channels. This means that 97% of the conversations marketing strategy on beauty are controlled by bloggers and haul girls.3 Search engine optimization (SEO) Owned and brand content media drive earned media (sharing) and traffic. Gain more exposure to web Web properties properties with SEO and pay • Website per click (PPC) 1 2013 Data • Mobile site 2 ©2014 Pixability, Inc. • Blog site 3 See note 1 • Social media channels The luxury and cosmetics financial factbook 2015

DCF and vIndustry oaluation pverview arameters PPage 61age 61 I Points of view from EY’s global sector #digital beauty: how to make a new model an opportunity — the specialists and outside experts challenge of captivating a technological shopper The most effective communication comes from those The winners will thus be the all-line companies that Traditional cosmetics have shown signs of weakness brands that have acknowledged the shift from know how to reach the perfect mix of digital appearing almost in a mature phase especially with consumer to prosumer and have consequently set up community, influencers, brand and point of sales by regard to retail makeup brands with a low price/ a level playing field with the prosumers by focusing linking the online and off-line world. young positioning. Pushing digital has been a on listening to the consumer’s needs. As the Companies have to exploit all the data that the web fundamental driver to relaunch traditional cosmetics. Cluetrain Manifesto states, in beauty “markets are offers, using social media as a way to anticipate For example, meet-and-greet events in which conversations.” However, the opposite is true as well. market trends and to create offers made to measure followers meet their favorite bloggers in point of Listening to the buzz online and creating bonds with for each type of client. This can be achieved only by sales or couponing activities with made-to-measure w bloggers/vloggers/influencers in order to reach a adding new professionals in the company, like a chief promotions online and in the stores have allowed companies to reach this goal. ervie huge audience that would be otherwise hard to reach digital officer or a shopper marketing manager, who v with traditional media not only translated into a know how to combine the know-how deriving from The most effective promos are those that go online, try o strong improvement of online brand reputation, but marketing and IT, from retail and trade marketing as because that they bring new consumers in addition to Indus also allows off-line business opportunities. well as neuroscience applied to consumer behavior. the most loyal consumers of perfumes. The digital So, in such a complex context, how can a beauty The goal for beauty brands in the last years has been world (earned, but also owned and paid) is linked to company remain competitive? There is evidence of to shift younger targets’ behavior, pushing them to the point of sale and to the consumer. This never- how the most successful firms are those who listen to purchase in stores instead of online. ending circle brings benefits to a business that at this the online buzz (listening to comments on products, point is not only digital (anymore). valuation of opportunities of improvement, etc.) and those who meet and interact constantly with bloggers, because in this way, they succeed in transferring all the preferences and opinions that come from social media into the product. Today, the key to success is the relationship with the consumer who has become more demanding and mature, who appreciates hearing the equity story of the brand through multimedia, and who asks for highly innovative products and looks for the ability of cosmetics companies to anticipate his needs. The luxury and cosmetics financial factbook 2015

Methodology

ApAppprrooaacch ah annd Sd SOOTTP aP annaalylysseess SSampampllee s seelleeccttiioonn FFoocucus os on Jn Jiimmmmy Chy Choooo thodology Me The luxury and cosmetics financial factbook 2015

Page 64 Methodology Approach and SOTP analyses Approach There are many criteria to analyze the operating and financial performances of listed companies. The aim of this survey is not to conduct a detailed analysis of the selected companies. The approach implemented in this fifth 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 29 major actors 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 TAS teams of EY who participated SOTP analyses in drafting this document have not had access to any confidential information. For the companies that have diversified activities (LVMH, If the information used turns out to be incomplete or Kering, L’Oréal), we performed a sum-of-the-parts analysis to incorrect, EY will not be held responsible for any impact this isolate the pure luxury segment and to better understand its may have on the results or the analyses presented in this characteristics as well as its contribution to the company’s document. performance. It must be noted that the information provided in this study is This analysis was not possible for Swatch, Beiersdorf and based on the latest available financial statements of each Shiseido as no accurate data was available. company as at 31 March 2015. Market data has been considered as of 31 March 2015, unless stated otherwise or apart from subsequent pieces of information included in this survey. Any modification of the analyzed group’s financial performances or any evolution of the financial markets that occurred since 31 March 2015 could lead to partially or completely different conclusions. Please note that we have presented the actual 2014 figures for the companies, that have already released their 2014 annual results as of 31 March 2015. The luxury and cosmetics financial factbook 2015

Methodology Page 65 Sample selection Sample selection The sample analyzed is composed of 29 listed companies from the luxury and cosmetics Please note that the sample has been adjusted in this fifth edition. Actually, one company industry, of which 22 were mostly in the luxury business and 7 were in the cosmetics was added: Jimmy Choo PLC, as it has recently been listed on the London Stock segment. Exchange. To select these companies we proceeded as follows: • We firstly identified pure players of the luxury sector: Brunello Cucinelli S.p.A. (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 SA (Kering), LVMH Moet Hennessy Louis Vuitton S.A. (LVMH), Micheal Kors Holdings Ltd (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 with other players in cosmetics: Beiersdorf AG (Beiersdorf), 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 thodology Luxottica Group S.p.A. (Luxottica) and Safilo Group S.p.A. (Safilo). Me • Finally we decide to include an actor, not part of the luxury environment, but acting 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 2015

Page 66 Methodology Focus on Jimmy Choo Jimmy Choo: overview We included Jimmy Choo in the sample as it was listed on the London Stock Exchange on 17 October 2014. Key facts: Share trading pattern (since October 2014) • Founded in 1996, Jimmy Choo is a luxury accessories 130 brand focused on designer shoes that has expanded to include handbags and small leather goods over the years 120 • The company operates through three segments: retail (including online), wholesale and other 110 • Retail revenue is generated via the company’s directly operated stores and the group’s website. Wholesale 100 revenue is generated through sale to distribution partners, multi-brand department stores and specialty 90 stores worldwide. Other revenue is predominantly Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 through receipt of royalties from the group’s global Jimmy Choo PLC FTSE All Share Index licensees of Jimmy Choo branded fragrance, sunglasses Source: Capital IQ and eyewear products. Note: 17 October 2014 = 100 IPO details: Key financials (in €m) FY13A FY14A FY15E FY16E FY13–FY16 • Total offered shares: 110.6m, all secondary shares, CAGR including 9.6m additional shares upon exercise of Sales 389 414 474 530 10.8% over-allotment option (out of 15.1m initially made EBITDA 59 69 86 100 18.8% available) EBITDA margin 15.2% 16.8% 18.1% 18.8% n.m EBIT 43 51 62 72 18.6% • Final offer price: £1.40: EBIT margin 11.1% 12.4% 13.1% 13.6% n.m • The stock had a modest return of 2.9% on its listing Net profit -24 -15 43 51 n.m date and closed at £1.44 on first trading day. Capex ratio 7.7% 9.1% 7.9% 8.1% n.m Net debt 169 174 145 109 -13.5% Source: Capital IQ Note: Financial figures are at 31 December n.m = not meaningful The luxury and cosmetics financial factbook 2015

OPENINGGlossary Page 67 EXE Ex C ec UTIVE SUMMAR 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: discounted cash flow 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 with back-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 year claimer quality and supply of crucial raw materials, such Focus on Brunello Cucinelli and Y GDP: gross domestic product as increasingly rare skins and ethically traceable D Michael Kors gems, is a big challenge for some houses. It has LTGR: long-term growth rate led to an increase in vertical acquisitions in the AND SPE and specific analyS AMPLE SELE supply chain. For example, crocodile farms in S M&A: mergers and acquisitions ample s Australia and African ostrich ranches have been CIFIC ANAL on the acquisition menu of larger luxury groups. SOTP: sum of the parts election But the challenge is not just to secure supply. C s TION WACC: weighted average cost of capital Y e The focus is on sustainable development in all SE s S its forms. It is important to consider the ethics YOY: year on year behind the products and images of luxury; the act us perceived and actual wastage in production E GLOt 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 Ys S s Glo LUXURY AND COThe luxSMETICury and cS THE EosmeY FINANCIAL Ftics financial fACactbook 2015TBOOK 2014

PPage 68age 68 ConOpeningtact us ECxoentcauctitv use summary Welcome to the third edition of EY’s annual Financial Factbook for the luxury and cosmetics sector. The Factbook combines financial data, insight from EY’s global team of sector specialists and opinions of external experts. EY TAS Italy EY contributors Fashion & Luxury team to the 2015 factbook Flavie Lacault Paolo Lobetti Bodoni Ivan Chan Factbook global coordinator, MED RCP Advisory Leader — Turin Partner, Tax — Honk Kong Fashion & Luxury — Milan [email protected] [email protected] [email protected] +39 335 760 0436 +861 05920751307 +39 366 578 7676 Laurent Bludzien Roberto Bonacina Amaury Bonnaire Stephane Rinkin Director, Lead Advisory M&A, Executive Director, TAS — Geneva Partner, Tax — Shanghai Fashion & Luxury — Milan [email protected] [email protected] [email protected] +41 58 286 5517 +86 21 2228 8888 +39 335 138 1950 Marco Pier Mazzucchelli Partner, Head of TAS MED — Milan Full Name [email protected] +39 334 818 0103 The luxury and cosmetics financial factbook 2015

Seeking sustainable growth - The luxury and cosmetics financial factbook - Page 71

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’s 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. © 2015 EYGM Limited. All Rights Reserved. EYG no. EN0704 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.