Is the undervalued SAMSONITE in the Hong Kong stock market?

Two days before the Dragon Boat Festival, I made a travel plan. My long-time companion suitcase broke down at this critical moment, so I decided to include buying a new suitcase in my schedule. After reading some reviews on Zhihu, I found that the brand Samsonite has received high praise, and those who have used it all unanimously recommend it.

Many positive reviews indicate that the product is well-made. The quality of a product is closely related to corporate governance, and investors' sensitivity is starting to rise. Upon further investigation, I found out that Samsonite is a brand under the Hong Kong-listed Samsonite International S.A. (1910). However, contrary to the overwhelming positive reviews, the stock price of Samsonite is somewhat unexpected.

With a PE ratio of around 10 times, the stock price has dropped by 15% from its previous high. Despite the ongoing recovery in the tourism sector since the pandemic, even people like me who prefer staying at home specifically went to Foshan to watch dragon boat races. The product reputation is excellent, which is puzzling.

However, there must be reasons behind the stock price decline. The main reason for the short-term decline in Samsonite's stock price is that the Q1 24 performance fell short of market expectations, and the management subsequently revised down the full-year performance expectations.

Although the group announced a $200 million share buyback plan, the plan involves "intending to hold in inventory" rather than immediate cancellation, which the Hong Kong stock market temporarily finds unacceptable, leading to significant short-term pressure on Samsonite's stock price.

However, as far as I know, Samsonite is a global conglomerate, and poor performance in one market does not necessarily mean poor performance in all global markets. A short-term underperformance does not imply a lack of long-term value. As a consumer stock, with a PE ratio of only around 10 times, lower than historical averages and industry averages, the market may have overreacted to Samsonite's current price level.

1. Group Operation

As a global leader in luggage and bags, Samsonite has in recent years formed a series of luggage product portfolios covering high, medium, and low-end segments through self-construction and multiple acquisitions.

In terms of brands, Samsonite is the largest source of revenue for Samsonite International S.A., accounting for 50% of its revenue. Established in 1910, Samsonite was the first to adopt new technology to create a "leather-like" effect and the first luggage brand to introduce wheeled suitcases. The significance of the brand to the luggage industry is similar to Levi's in the denim industry.

To this day, Samsonite remains the most hopeful brand for the market and management. As Samsonite was the brand that Samsonite International S.A. started with, its reputation, sales channels, and product strength have accumulated deep competitive barriers.

Among these, Samsonite's product strength is particularly commendable. In the 1980s, it became the only IATA-registered travel luggage manufacturer. In 2008, it won the highest honor in the design industry, the Red Dot Design Award, with its exclusive material CURV.

CURV is known for its lightweight (a 20-inch model weighs only as much as two 1L bottles of mineral water) and shock-absorption and noise reduction features. The significance of lightweight luggage for those traveling long distances or going home for the holidays with large and small bags is self-evident, while the shock absorption and noise reduction of the wheels are lifesavers for people with social anxiety.

The long-standing brand reputation and product strength with excellent reviews have contributed to Samsonite's strong sales over the years

However, unless you are Hermès, a conglomerate cannot rely on a single brand to achieve globalization. To achieve the goal of larger and more solid business, establishing a diversified and complementary brand portfolio is what conglomerates pursue.

Samsonite is priced around two thousand, not exactly luxurious in the mid-range. In 2017, Samsonite acquired TUMI through debt, with its suitcase prices starting at ¥7,900, directly competing with RIMOWA under LV. The acquisition of TUMI has significantly helped the group expand its presence in Europe and America.

Today, TUMI has developed into the second largest brand in terms of revenue for Samsonite, accounting for 24% of total revenue. By 2023, TUMI's sales in Asia, North America, and Europe account for 19.2%, 39.6%, and 11.8% respectively by brand.

However, in Asia, where TUMI has a significant market share and is considered luxurious in terms of pricing, it does not align with the current trend of budget travel in China.

According to Ctrip's 1Q24 data, domestic and outbound flight and hotel bookings have both seen year-on-year growth rates exceeding 20% and 100% respectively. The recovery of domestic and international tourism is a positive sign, but based on this year's Dragon Boat Festival data, the average travel expenditure per person is 366 yuan, still lower than in 2019 (10.5% lower than 409 yuan).

The increase in travel market volume and decrease in prices also mean that most people are unlikely to choose overly luxurious travel bags.

On the other hand, American Tourister, a brand with prices similar to Xiaomi and belonging to the lower end of the group, seems to align with the budget travel trend. However, due to competition with Xiaomi and other white-label brands in the increasingly competitive Chinese travel bag market, American Tourister faces fiercer market competition.

Although the high, medium, and low brand combination achieves diversification, the different target audiences and market challenges result in each brand having its own revenue field. In 24Q1, Samsonite, TUMI, and American Tourister's revenues increased by +3.7%/-0.3%/-0.1% to 440/190/150 million USD.

With only three main brands, two of which have declining growth rates, the market has become jittery, and a stock price decline in response is quite normal. This performance-related negative news also needs performance to resolve it.

II. Accelerating Factors

On May 14th, Samsonite achieved a revenue of 860 million USD in Q1 this year, slightly lower than the market's estimated 890 million USD. In addition, management stated that due to a slower-than-expected flow of tourists this year, they have lowered the full-year revenue growth guidance. The stock price responded with a gap-down opening However, the group's adjusted EBITDA profit margin is 18.8%, exceeding the market's expected 18.6%. The adjusted EBITDA profit is $161 million, and the net profit attributable to the parent is $83 million. Management also emphasized that sales are expected to grow by 6-8% year-on-year in the second quarter, and are expected to accelerate to double-digit year-on-year growth in the second half of the year.

In my opinion, the development of the TUMI brand in Europe and the weakening of the US dollar after the Fed rate cut reducing exchange losses will be the driving factors for acceleration in the second half of the year.

Firstly, in terms of the brand, among the top three revenue-generating markets for the group - Asia, North America, and Europe, Samsonite's sales proportion is the highest. In Q1 of this year, Samsonite's strong trend remains evident, with year-on-year growth rates of +8.8% in Asia/North America/Europe/Latin America respectively.

However, TUMI also has a significant sales proportion in North America and a decent revenue growth rate in Europe. A weak performance in one market does not mean poor performance in all global markets. TUMI, which does not align with the domestic budget travel trend, has greater development potential in the more affluent consumer markets of Europe and America.

In 2023, TUMI brand's revenue is $880 million, with revenue in North America alone reaching $500 million. In the same year, in the North American market segmented by brand, TUMI's revenue proportion increased from 36.7% in the same period last year to 40%, while Samsonite decreased slightly from 48.3% to 47.4%. The trend of Americans buying more expensive products without hesitation is self-evident.

In the European market, TUMI's revenue grew by 31.7% year-on-year to $80 million in 2023. The growth rate is impressive, but the current revenue only accounts for 9.1% of the brand's total revenue. Therefore, compared to North America, TUMI has greater development potential in Europe.

As early as June 6th, the European Central Bank had already cut interest rates by 25 basis points. After the decision was announced, the market expected the ECB to cut rates by another 40 basis points this year. A more accommodative market environment is likely to stimulate higher consumer shopping desires and will also be more favorable for TUMI's sales growth.

Secondly, there are positive income factors. In the first quarter report of 24, Samsonite stated that its revenue was significantly affected by the strengthening US dollar. In Q1 24, revenue was $860 million, up 0.9% year-on-year, excluding the impact of exchange rates, up 4.1% year-on-year, achieving a net profit attributable to the parent of $83 million, up 12.3% year-on-year, and up 18.8% year-on-year excluding the impact of exchange rates Friends who have noticed that the latest CPI data in the United States is lower than market expectations and expect the Fed to cut interest rates once this year should already realize: Under loose monetary policy, the trend of Americans buying more as prices rise and selling more as prices rise will continue, while a Fed rate cut will likely weaken the US dollar, reducing the negative impact of exchange rate on Samsonite's revenue.

After the rate cut, the favorable factors of expectations for brands and income can be reflected in the short-term performance of the group. In the long term, for the overall market, the luggage market will continue to grow at a pace higher than GDP, and internally, structural reforms will still drive the sustainable development of Samsonite.

III. No Change in the Long Term

The global luggage market is valued at $38.8 billion in 2023 and is expected to reach $101 billion by 2035, with a compound annual growth rate of 8.3% from 2024 to 2035.

Furthermore, the global travel luggage market is a market where the strong get stronger, and Samsonite is the largest market share holder in it. Large groups often control most of the market and frequently acquire innovative startups to expand their product lines, so from the market trend perspective, the global travel luggage market share is consolidating towards large groups.

Just from the natural growth of the external market, Samsonite has promising long-term value. In terms of internal governance, especially DTC reform, will also bring considerable growth space for Samsonite.

In Q1 this year, the group's gross profit margin reached 60.4%, hitting a new high. In addition to TUMI raising brand portfolio prices and profit margins, the increase in DTC share is also crucial. In 2023, the group added a net of 67 directly operated stores, pushing the DTC revenue as a percentage of net sales up to 39%.

Since DTC does not have intermediaries to earn price differences and obtains first-hand information directly from consumers, it has improved operational efficiency. Therefore, the most direct positive effect of the increase in this channel's share is the improvement in Samsonite's global single-store sales.

As of 2023, the group's global direct-operated stores for all brands total 1,052, with less than one hundred in China, indicating significant growth potential for DTC. Drawing on the successful experiences of other groups (such as Anta Group and Deck), it is not difficult to see that with an increased proportion of DTC channels, profitability will also increase. Therefore, there is still room for profit margin growth for Samsonite.

However, there is a ceiling to the growth of DTC's proportion. Currently, offline remains the largest sales channel for luggage globally. Consumer habits in Europe and America still prefer to physically select travel bags in large offline stores. Wholesale channels will definitely retain a significant share. Moreover, the average price of American Tourister, accounting for 18% of sales, is lower than Samsonite's, making it unlikely for all direct-operated stores to be profitable.

Referring to the relatively mature North American market, it is expected that Samsonite's wholesale channel will still account for 55% of the share. This means DTC can only reach a maximum of 45%, currently at 39%.

With external natural growth rates not being low, internal DTC revenue increasing to 45% of the share, the group's profit is also expected to further increase. Therefore, despite short-term performance falling below market expectations, Samsonite's performance is unlikely to be poor in the long run.

IV. Conclusion

In March of this year, Samsonite's CEO Kyle Gendreau stated: "The board has decided to focus on seeking a dual listing," with an additional listing expected to increase liquidity and likely serve as a catalyst for stock prices.

From a long-term perspective, I have always believed in Graham's view that "the market is a voting machine in the short term and a weighing machine in the long term," with stock prices ultimately determined by company value. With the market still growing and internal structures still adjustable, Samsonite's growth potential remains.

Looking at the current 10x PE ratio and 3% dividend yield, Samsonite still offers good value for investors