Tumi Holdings, Inc. TUMI
November 27, 2014 - 2:50pm EST by
leob710
2014 2015
Price: 21.00 EPS $0.90 $1.22
Shares Out. (in M): 68 P/E 23 17.2
Market Cap (in $M): 1,425 P/FCF 22x 17x
Net Debt (in $M): 0 EBIT 99 132
TEV ($): 1,400 TEV/EBIT 14.1 10.6

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  • Travel
  • Luxury
  • Retail
  • Underfollowed

Description

 

TUMI is a leading premium-lifestyle brand that designs and sells travel and business-related products and accessories in multiple categories. Over the past decade, it has shifted its business model from primarily distributing luggage through “mom&pops” stores, to becoming a lifestyle brand in the niche travel and business segment with a broader and more innovative product offering mainly sold through its own retail stores. The business achieves retail-leading unit economics (~35% “4-wall” EBITDA margin and ~80% cash-on-cash returns) and has the potential to become a unique global retail growth story in the coming years through the opening of stores domestically and internationally, increasing brand awareness, growing the women’s category and essentially following the prior playbook of other global accessory brands. TUMI has a clear path to grow earnings by 20% for the foreseeable future.

While at $21/sh. TUMI trades at ~20x 2015 Consensus EPS TUMI (and 17-18x our estimates), and hence is not cheap on an absolute basis, we believe that TUMI’s underleveraged brand, high quality reputation and clear sightlines to growth and margin expansion should lead to a doubling of the stock in three to five years. Specifically, unlike other high-growth accessory brands, TUMI is not reliant on fashion trends but rather on highly-functional, innovative and IP-protected products for the business traveler. The Company will finish 2014 with ~150 retail stores globally which can generate at least $1.10 in EPS in 2016, which we believe deserves at least a $15/sh. value for the current store base.  Moreover, to an extent, EPS in 2014 was understated due to the transition away from its third party e-commerce provider to its own in-house operations, which should save 25 cents on the dollar for each sale. 

Under management’s current growth plan – which we believe is not aggressive and may even be conservative -- TUMI should generate an additional $1.00-$1.50+ in EPS in 3-4 years while still having ample runway for growth, all of which should justify a share price in excess of $35. The Company is currently unlevered and funds growth with cash from operations.

Business Overview and History

  • Leading global premium-lifestyle brand designing and selling a comprehensive line of travel and business related products and accessories in multiple categories.
  • Founded in 1975 by Charlie Clifford, Oaktree Capital acquired a majority stake in 2001 following the 9/11 travel slump.
  • Doughty Hanson acquired it in 2004 from Oaktree Capital and the founding family for $276m and held it privately until the IPO in April 2012.
  • Over the past 10 years, TUMI has steadily transitioned from a pure-play wholesaler of travel products to a retailer and wholesaler of premium branded lifestyle travel and business-related products and accessories.

 

  • TUMI is positioned as a prestige or “accessible luxury” brand at the top tier of the luggage and leather goods market.
  • It commands a price premium in travel and business products and accessories but is still priced well below top luxury brands such as Louis Vuitton and Hermes.
  • The premium positioning is based on a differentiated product achieved through the Company’s founding principles:
    • Excellence in design
    • Functional superiority
    • Technical innovation
    • Unparalleled quality
    • World-class customer service.

 

  • TUMI has a 12-person in-house design team, a Creative Director (George Esquivel) and utilizes outside industrial design resources to design its products.
  • Manufacturing/assembly are outsourced but closely managed by the Company’s +80 full-time employees located in Asia (e.g. contractor relationships, logistics, production, quality).
  • Direct-To-Consumer (DTC, ~50% of revenue) includes 142 company-owned full-price and outlet stores in N. America and Europe as of Q3 2014, as well as e-commerce sales.
  • Indirect-To-Consumer (ITC, ~50% of revenue) includes wholesale distribution through luggage specialty stores, department stores, Partner-owned stores, B2B, off-price channel and third-party e-commerce sites.

Investment Thesis

High quality business

  • TUMI is the pure-play leader in the highly fragmented $4bn Premium Global Luggage Market with an estimated 10% market share.
  • The Company benefits from significant secular tail winds:
    • Accessories as a percentage of fashion personal consumption continue to gain share since the mid-1990s.
    • Global personal luxury is expected to continue growing at a mid-single-digit rate over the next 3-5 years.
    • Men’s share of global luxury has grown, and continues to do so, from ~30% in the mid-1990s to close to 40% today.
    • The global luggage market provides a steady 3-4% growth globally.
  • TUMI has launched over a dozen new collections and over a dozen product collaborations in the past 6 years. The Company has steadily added innovative features to its products such as the Tracer Program in 1999, ballistic-grade nylon in 2000, ABS and Tegris materials in 2010 and 2012 and the TUMI ID lock in 2013. This has resulted in TUMI having over 190 patents and 70+ pending.
  • While TUMI has lower Brand Familiarity than its luggage and luxury peers due to its younger distribution, it commands the highest favorability rates.
  • TUMI’s business model delivers top-tier unit economics:
    • ~35% “4-wall” EBITDA margins vs. average retail of ~21%.
    • ~80% cash-on-cash returns vs. average retail of 49%.
    • ~37% fully-capitalized returns vs. average retail of 28%.
  • A lean and flexible operating model has allowed TUMI to remain profitable through the cycle, with a trough EBIT margin in 2009 of 8.2%.
  • In addition, TUMI has produced strong positive FCF through the cycle while continuing to fund the Company’s growth.

Major Retail Growth Opportunity

  • TUMI is following the early-Coach playbook in many aspects and there is a strong parallelism between TUMI today and COH in 2004:
    • While COH in 2004 was already pursuing the international and domestic markets, TUMI today is already more heavily penetrated in international on a relative basis.
    • TUMI has a smaller domestic store base than COH in 2004 (full-price and outlet), but already delivers higher productivity metrics (~$1150 vs. $850/sqft) and similar operating margins in the 30% range.
    • TUMI has selected a very similar strategy and partner group to build out stores sin Asia.
    • TUMI continues to decrease the share of wholesale revenue as a percentage of total revenue but lags COH in 2004 (50% vs. 40%).
  • TUMI has substantial drivers of growth going forward:
    • Target of at least 200 full-price stores, 50 outlet stores and 50 airport stores co-located with proven best performing COH locations. (company currently has a little over 100)
    • Grow brand awareness in line with peers while maintaining brand favorability.
    • Double international store base in APAC.
    • Women’s and Accessories grow to from current ~10% of total sales each to 20-30% in line with other peers.
    • International roll-out of in-house e-commerce platform launched in Q3 2014.
    • Grow penetration of N. America wholesale with the “shop-in-shop” model.
    • Acquire partner stores of distribution partners in APAC.

Top tier and aligned Management Team

  • Well-regard management team who has lead the company through the cycle under PE ownership and have maintained all their shares in the company, representing a large percentage of their net worth:
    • Jerome Griffith, CEO, President, Director (Age 56):
      • TUMI CEO and Director since 2009; previously President of Esprit N. and S. America and experience at Tommy Hilfiger and The GAP.
      • Owns ~$35MM in common stock (2.5% of s/o).
    • Mike Mardy, CFO, EVP, Director (Age 65):
      • TUMI CFO since 2003, Director since 2011; previously EVP of Finance at Keystone Foods LLC.
      • Owns ~$18MM in common stock (1.3% of s/o).
    • Deep bench has experience at similar companies during the growth phase that TUMI is now in.

Underfollowed

  • TUMI has hovered around $20/sh. since the IPO in April 2012. The analyst community has paid little attention with many major firms still not covering the stock.
  • Additionally, the lumpiness of the business due to the still small store base and the significant changes undergoing the business has caused skepticism on execution in the analyst community which are undeserved.

Attractive Valuation

  • Under conservative assumptions, TUMI should reach $800-$900m in revenue in the next 4-5 years and EPS in excess of $2.00 through the multiple growth drivers ahead. At such stage, the company would continue to have significant whitespace compared to other major global accessory brands and would still deserve a premium growth multiple. At a 17.5x multiple, the stock would be then worth $35/sh. and will have generated ~$350m in excess cash, or ~$5/sh.
  • Under management case assumptions, if TUMI gets to ~250 stores in the US and 30 stores internationally, and assuming a 5% same-store sale comp growth through 2018 excluding e-commerce would imply getting to revenue of +$1bn in 2018 and $2.50 in EPS warranting a premium multiple of at least 20x which would imply a $40+/sh. stock price.  As mentioned above, TUMI recently brought its e-commerce platform in-house, which should help the Company achieve its margin goals in all scenarios.
  • From a downside perspective, we believe the current store base already warrants a $15-16/sh. price which should grow as the company continues execute on its strategy.
  • In addition, TUMI is an attractive high-potential acquisition for retail groups such as LVMH (ENXTPA:MC), Richemont (SWX:CFR) or Samsonite (SEHK:1913).

Risks and Mitigating Factors

  • Macroeconomic risk: If the U.S. falls into a 2008-like recession, TUMI’s stock price would suffer due to the business’ sensitivity to GDP growth and consumer spending:
    • Based on the analysis of 2009-2010, a 2014 recession scenario share price would equate to approximately $10, and we believe that a subsequent rebound or a sale to a luxury conglomerate would enable the investor to recover over 70% of the initial investment.
  • Exposure to travel: TUMI suffers disproportionately of disruptions in global travel as a result of terrorist attacks (e.g. 9/11) or global health concerns (e.g. bird flu, Ebola):
    • Historically travel recovers to normal levels over the following two or three years after a major disruption (9/11).
  • Growth profile maturity: Most of the expected value creation relies on TUMI growing over the next few years (14% revenue CAGR 2013-2017). Total demand for travel and business products may be smaller and TUMI could present a waning growth profile sooner than expected:
    • Under a “Mature Growth” scenario (5% revenue CAGR 2013-2017) and the resulting multiple contraction, the investment would still break even by 2017 at the current price.
    • If growth were just moderately successful in N. America or internationally it would already make up for the investment at the current price and deliver positive IRR.
  • Brand value deterioration: As a premium lifestyle brand, TUMI sells to brand-conscious costumers and is exposed to a loss of brand value in the eyes of the customer:
    • TUMI’s value proposition relies heavily on quality, design, innovation, functionality and customer service – and not as much on fashion, thereby minimizing the main risk that most retail brands face.
    • TUMI’s management is laser-focused on the value of the brand and has proved over time that it can successfully, prudently and consistently launch new products.
  • Growth execution: In doubling the store base and expanding the wholesale distribution, TUMI may run into problems that ultimately impact the Company’s performance:
    • Management’s track record inside and outside TUMI, as well as their “marathon” vs. “sprint” mentality provides a high level of reliability in execution that could correct any misstep.
  • Governance/shareholder base: 13.4% of CSO continues to be held by Doughty Hanson and could create technical pressure:
    • Historically, PE-sponsored companies who IPO show no downward pressure on the stock price during the course of the sponsor’s exit.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Potential takeout (Samsonite for example)

Continued execution of store rollout

JV/partnerships/acquisitions in Asia

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