3Q23 largely in line; promising outlook from high-margin divisions
- Outstanding 3Q23 results saw sales expansion across all core brands and regions, with gross margin and Adjusted EBITDA margin attaining new record highs. Adjusted Net Income doubled to US$126m, largely in line.
- 4Q23 stays on track, which is crucial given its heavier weighting under the normal conditions (e.g., 4Q earnings weighed 40-58% in 2016-2018).
- In view of positive prospects over the near- and medium-term, we maintain BUY with TP of HK$39.41.
Sound 3Q23 with new record margins. Samsonite posted outstanding 3Q23 results, seeing sales expansion across all core brands and regions. Revenue up 21.2% y-o-y to US$958m, largely driven by the resilient travel demand in the summer. Both gross margin and Adjusted EBITDA margin reached record-high levels of 59.6% (up 4.6ppt y-o-y) and 20.3% (up 3.3ppt y-o-y), respectively, reflecting better sales-mix from higher-margin Asia region (up 5.6ppt y-o-y in terms of group revenue) and the “Tumi” brand (up 1.4ppt y-o-y in terms of group revenue), as well as reduced promotional activities and benefits of a more efficient cost structure. Adjusted EBITDA surged 44.7% y-o-y to US$194m and Adjusted Net Income doubled y-o-y to US$126m in 3Q23. Even comparing to the pre-COVID level of 3Q19: revenue went up by 14.2% (or up 22.4% ex-Russia and Speck); gross margin up 3.9ppt; Adjusted EBITDA margin up 5.8ppt, Adjusted EBITDA up 44.9%; and Adjusted Net Income up 102.9%.
Positive multi-year prospects. Strong profits and free cash flows (up US$88.8m y-o-y) in 3Q23 allowed voluntarily repayment of US$70m outstanding borrowings under its revolving credit facility, reducing net debt to US$1.2bn and further de-leveraging its balance sheet to net leverage ratio of 1.81x as of Sep 2023, the lowest since its “Tumi” acquisition in 2016. Given that the outbound travel from China remains in an early stage of recovery and should improve in the coming quarters, while other markets like the US starts normalizing from COVID-19, Samsonite is also well positioned to strategically prioritize its investments in product innovation, global retail network expansion and marketing activities towards higher-margin “Tumi” and “Samsonite” brands for better returns. The company currently targets 4Q23 revenue to grow by about 16-17% y-o-y (or comparing to 4Q19), and 2024 revenue to grow at low-teens. With Asia to move at relatively faster pace in the next few years, plus “Tumi” also to grow from nearly US$1bn to c.US$2bn over the medium-term, Samsonite should still see ample room for a better margin profile ahead.
Key highlights of 3Q23 & 9M23 performance and other briefing takeaways:
In terms of 3Q23 brand performance: “Samsonite”, “Tumi” and “American Tourister” brands achieved y-o-y sales growth of 20.1%, 29.8% and 19.8%, respectively. Overall, travel product category continued to sustain a robust recovery in both leisure and business travels, seeing revenue up 19.7% y-o-y and accounted for 67.3% of group revenue (3Q22: 68.1%), while non-travel product category saw 24.3% y-o-y sales growth to account for 32.7% of group revenue (3Q22: 31.9%), primarily driven by strong growth in Asia and for the Tumi brand.
In terms of 3Q23 regional performance: Sales up 44.9% y-o-y to US$373m in Asia (including China up 72.6%, Japan up 69.2%, South Korea up 42.2%, Hong Kong up 69.4%) where travel reopened later than other regions, while sales up 10% y-o-y to US$321m in North America (including the US up 9.5% and Canada up 17.8%), up 6.7% y-o-y to US$214m in Europe (including Germany up 24.5%, Spain up 15.4%, Italy up 4.5%, and France down 0.2%, the UK down 6.2% due to a higher base), and up 16.5% y-o-y to US$49m in Latin America (including Mexico up 25.9%, Chile up 3.5%, and Brazil down 8.2% due to nonrecurrence of certain 3Q22 sales). Comparing to 3Q19: Asia up 24.4%; North America up 9.1% (ex-Speck) or up 15.3% (ex-Speck and ex-ebags’ third-party brand sales); Europe up 20.2% (or up 31% ex-Russia); and Latin America up 65.6%.
Samsonite’s direct-to-consumer (DTC) channel, comprising company-operated retail stores and DTC e-commerce, saw a 26.9% y-o-y sales growth to US$361m in 3Q23, represented 37.7% of group revenue (3Q22: 35.9%). The company also opened 25 self-operated stores and closed 5 stores in 3Q23, resulted in a net increase of 20 self-operated stores (3Q22: +3 stores) to bring the total number to 1,021 self-operated stores as of Sep 2023 (Sep 2022: 965; Sep 2019: 1,285).
In 9M23, Samsonite scored a 35.6% y-o-y growth in sales to US$2.7bn (or up 36.2% ex-Russia), seeing the “Samsonite”, “Tumi” and “American Tourister” brands achieving sound y-o-y revenue growth of 36.3%, 43.6% and 33.8%, respectively. In terms of y-o-y regional growth, revenue up 69.9% in Asia (where travel reopened later than other regions), up 19.6% in North America, up 18.5% in Europe (or up 20.9% ex-Russia), and up 23.3% in Latin America. Gross margin increased by 3.7ppt y-o-y to 59.1% along with better sales-mix from higher-margin Asia region (+7.2ppt y-o-y to 39.1% of group revenue), Tumi brand (+1.4ppt y-o-y to 23.2% of group revenue), and DTC sales as well as reduced promotional activity. Adjusted EBITDA margin surged by 3.3ppt y-o-y to 19.3% despite the planned increase in marketing spend to 6.4% of sales (+1.4ppt y-o-y). Adjusted EBITDA jumped by 60.2% y-o-y to US$528m, and Adjusted Net Income surged by 100.1% y-o-y to US$297m.
Comparing to the pre-pandemic level of 9M19: revenue increased by 18.3% y-o-y, and gross margin increased by 3.2ppt y-o-y fueled by high-margin divisions of Asia (up 2.6ppt to 39.1% of group revenue) as well as the “Samsonite” brand (up 5ppt to 50.4% of group revenue) and “Tumi” brand (up 2.8ppt to 23.2% of group revenue). Adjusted EBITDA margin increased by 6.3ppt to 19.3% despite the increase in marketing expense by 0.9ppt to 6.4% of sales), Adjusted EBITDA increased by 52.1% to US$528m, and Adjusted Net Income jumped by 86.5% to US$297m.
During results briefing, Samsonite expects the company should continue to outperform the industry’s potential growth of a high-single-digit rate along with the normalizing North America, and to some extent, Europe, and prudently looking at approximately 16-17% y-o-y growth for 4Q23 as well as a low-teens’ growth for 2024.
China merely saw a mid-teens growth in 3Q23 vs. 3Q19, hence still in its early recovery phase for outbound travels and should see stronger momentum in the coming quarters, especially upon the normalization of international flight capacities (e.g., India: almost 90-100% growth in past few months vs. 2019 level). Overall business travel should also continue to recover strongly too in the coming quarters as more conferences and trade shows are expected by 4Q23. In general, early indications of holiday sales also seem on track.
On “Tumi”, some real opportunities could be found in Asia, Europe as well as Latin America ahead, while North America could also deliver good growth at a low-double digit CAGR from category and product expansions, including its acceleration of the women’s category by 2024-2025. Other markets, like India, has also seen great success from “American Tourister”, with the “Samsonite” and “Tumi” brands also doing well there.
Store expansions, on the whole, will be prioritized in great locations with tremendous traffic, and an increased focus will be placed in Asia, and then Europe, with more selective openings in Latin America and North America. Additionally, the company will continue to invest more in advertising to further strengthen its brands, aiming at close to 7% of sales for 4Q23 (3Q23: 6.2%; 9M23: 6.4%) to round off full-year ad spend at around 6.6% of sales (within target range of 6.5-7%), with 2024 ad spend capped at c.7% of sales.
Riding on better operating leverage and strong cash flows, and careful management of inventory days and working capital, management also aims to start returning cash to shareholders by next year. As Asia is moving at a faster pace (e.g., double-digit CAGR in the coming few years), while “Tumi” is also growing from US$1bn revenue to US$2bn, Samsonite should also see further room for better Adjusted EBITDA margin of perhaps c.20% or higher in the medium-term.