The year 2018 proved to be fairly disappointing in terms of shareholder return, and also one in which Samsonite was affected by a surprising scandal. However we do not see any signs of changes to the fundamentally strong sides of the company which we continue to appreciate. The company’s board of directors showed the ability and willingness to act when necessary, which convinces us that trust will be slowly, but surely, restored – and with that also the market’s valuation of the company.
Samsonite is the world’s largest manufacturer of luggage and travel bags, selling in more than 100 countries worldwide. The company, established in 1910 in Denver, Colorado, owns leading brands such as, Samsonite, Tumi, American Tourister, Hartmann, High Sierra, with annual sales just short of four billion US dollar.
Samsonite is practically speaking the only global luggage and travel bag manufacturer, and the majority of competitors are smaller, regional or national, family-owned companies or parts of a larger company where focus may be on other endeavours. Samsonite is six to seven times larger than its closest competitors and therefore massive economies of scale relative to competitors can be maintained. This enables more efficient distribution, marketing and procurement. Samsonite’s economies of scale and brands enables the company to generate a return on invested capital above 40 percent excluding goodwill.
The year 2018 did, unfortunately, present a negative, unexpected event for Samsonite, as their CEO was revealed for having embellished his resumé. This was disclosed in a report from a hedge fund with a short position in the share. The report revealed that the company’s CEO had claimed a doctorate in his resumé which he did not hold, and at the same time questioned the company’s accounting policies. However, the response of the board of directors, to quickly identify his replacement, combined with the company’s future potential, shores up our continued trust in the long-term value-creation in Samsonite.
It is highly regrettable that the now former CEO, Ramesh Tainwala, embellished his qualifications. To us, it is without a doubt a positive and confidence-inspiring fact that Timothy Parker, the CEO before Ramesh Tainwala, is still active in the company as chairman of the board in such an unpredictable situation. Timothy Parker still owns more than four percent of the company personally.
Furthermore, it is positive that the company had a solid internal candidate in the shape of Kyle Gendreau, who was the CFO before taking over the position of CEO. The risk of a strategic or management vacuum is reduced when promoting an internal candidate. Kyle Gendreau has been with Samsonite since 2007 and CFO since 2009.
Underlying consumer trend provides the basis for growth
When analysing a company and its business model, our focus is on the companies’ ability to generate cash-flow as the ultimate proof that the financial reports do not just express managements’ judgments, but actually indicate the financial development of the company – income statements can be distorted, but the same does not apply to the same extent to cash-flow statements. Profit is an opinion – cash is a fact. We have seen no indications that cash-flow provides an inaccurate image of Samsonite. The company generates free cash flows equal to just under eight percent of the market value, and this is for a company growing its free cash-flow around ten percent per year.
The company has a stronger focus on growing organically, where in the past several acquisitions were made. The focus will, therefore, be on sales in the major brands and improving margins. And opportunities do exist. The global luggage and travel bag market is growing by five to six percent per year, supported by an increasing global wealth enabling more and more people to afford travelling, leading them to acquire a suitcase or travel bag. One example is China, where the number of people with a passport is expected to increase from 87 million in 2016 to 145 million in 2020. Samsonite’s total revenue is expected to continue to grow by a high single-digit rate.
Samsonite’s largest brand shares the company’s name. Sales of Samsonite-branded suitcases and bags are expected to grow by four to six percent per year. The Samsonite brand is a continuously smaller proportion of the overall business – an objective declared by management – and now constitutes just under half of the company’s total sales, down from a level of almost 70 percent five years ago. This is not due to falling sales, but the fact that the other brands are growing faster. The brands Tumi and American Tourister are showing strong growth and are expected to grow by more than ten percent per year over the coming years. For the luxury brand Tumi, acquired in 2016, increased sales are partly due to new stores being opened in Europe and Asia, where the brand is not yet particularly known, and online sales via Tumi.com.
Samsonite has increased the marketing investments in Tumi, given that the brand was under-invested under the previous owners. Combined, Samsonite, Tumi, and American Tourister cover more than 80 percent of the company’s total sales.
The company focuses on reducing the debt, which was primarily the result of the acquisition of Tumi in 2016, to a level double the operating income before depreciation and amortisations by 2020, from the current level of 2.7 times. In addition, the company pays dividends equivalent to a yield of 2.5 percent of the market value to shareholders.
New customers must be captured – and one way is through technology
It is still part of the strategy to diversify the portfolio to make the tourism segment a smaller part of the business than the almost two-thirds that it represents today. This leads to a focus on increasing Samsonite’s share of the business and leisure segments, one of the reasons for the acquisition of Tumi which was generally known only to business people. It is also a target to increase sales to women, who currently represent less than ten percent. The target is for women to represent a quarter of the future growth. In order to reach their targets, Samsonite has increased investment in their brands so that six percent of the company’s revenue is now invested in marketing.
Marketing is not enough, however, to ensure that customers purchase the suitcases or travel bags. They also have to be functional and not least attractive. This makes innovation an important element for Samsonite in the effort to maintain the company’s position as the leading manufacturer. Innovation can be many things and is not necessarily something visible to the customer’s naked eye. Other than design, there is a constant search for new materials that are lighter, stronger, and cheaper than those currently used.
The same goes for digitisation, where the company has introduced tracking devices that enables the consumer to know the location of their suitcase or bag at all times. Samsonite is currently performing experiments with self-propelled suitcases where the suitcase, using a sensor, drives next to the owner.
The target of increased earnings is intended, among other things, to be generated by increased sales of Tumi products which have lower productions costs per sales dollar than the remaining brands. At group level, Samsonite features impressive gross margins in excess of 55 percent, and Tumi shows gross margins in excess of 70 percent. Better margins for the group are also intended to be generated via an increased focus on profitability for all brands.
Sales via Samsonite’s own sales channels are also intended to contribute. Sales channels are primarily via online sales, but also selected brick-and-mortar stores, primarily in travel retail. The target is for direct sales to account for half of the company’s total sales in future. The brick-and-mortar stores are expected to function more as display windows after which the customers will purchase the suitcases and bags online.
Samsonite’s production options via different sub-suppliers means that the company has the flexibility to move production between countries – to a limited extent, yet still to a higher degree than their competitors.
This can prove to be an advantage if the tariff on the import to the USA of goods manufactured in China is increased further than the tariff increase implemented in 2018. Most of Samsonite’s sales are in Asia and North America. Those two regions each represents around 40 percent of total Samsonite sales. The threat of further tariff increases has caused Samsonite to accelerate the measures to reduce dependency on Chinese production and to move parts of production to countries such as Vietnam and Bangladesh.
The size and brand recognition of Samsonite also give them a stronger pricing power than many of their competitors, which benefits in relation to passing on the costs related to implemented tariff increases. Samsonite expects that they can absorb the effect of the tariff increases implemented in 2018 via price increases. This will enable them to defend their profitability and the high return on investment.
The board of directors and day-to-day management of Samsonite face a serious task of rebuilding the general confidence in the company after a 2018 in the doldrums. However the company owns powerful brands and does not depend on any single individual. The share price development has been anything but satisfactory in 2018, and all signs indicate that it is caused by the lack of confidence. Better communication combined with reaching financial targets is the way towards rebuilding this confidence. We trust that the chairman of the board of directors, Timothy Parker, and Kyle Gendreau, will be able to take Samsonite to new heights.