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Morningstar | Samsonite's Earnings in Line, Weak Outlook Already Factored in. Our FVE Remains HKD 34

Samsonite's weak fourth quarter and management's cautious outlook were well expected and we leave our earnings forecast and fair value estimate of HKD 34 unchanged. Following a well-anticipated operating performance, we think its share price should get a boost from increased confidence in management's ability to contain margin pressure and improve inventory turnover, while a U.S.-China trade truce will reduce worries over a second tariff hike. For 2019, we see flat operating income but an 8% rise in EPS, barring other one-off items, helped by lower finance costs. At the current level, we think Samsonite remains attractive. Free cash flow averaging USD 376 million through 2020 and a lower net gearing of 50% should allow the company to pursue acquisitions of non-travel-related bag brands in 2020.

The first half of 2019 is likely to remain challenging given uncertainty of the U.S.-China trade talks and more cautious consumer sentiment. In addition, we should see continued impact from the 7%-8% price hike introduced in the U.S. in the third quarter of 2018. To recap, the higher prices are to help offset a 10% rise in import duties on China made goods to the U.S. While we have factored in a second tariff hike in our bear-case scenario, we think it looks like the U.S. and China will be able to come to some trade agreement. If so, this should lift a key near-term risk for Samsonite. But it should not change the company's strategy of diversifying some production to other countries to counter future trade war risks.

Gross margin improved 40 basis points to 56.5%, in line with our estimate, driven by increasing sales of higher-margin Tumi products and synergies from reducing wholesale arrangements. Operating margin was stable at 12.6% with the company scaling back on its marketing and distribution costs in the fourth quarter. We think this will remain consistent in 2019. We expect margin improvement to resume in 2021 as sales growth recovers.

Working capital is seeing signs of improvement. The jump in inventory days in 2017 and for the first half of 2018 was a concern but this has eased slightly for the full year. This remains a key priority for CEO Kyle Gendreau. We have factored in inventory days to decline further to 120 days in 2022 from 137 in 2018. This, coupled with stable capital expenditure, should enable Samsonite free cash flow to improve over the next five years, reaching around USD 550 million in 2022 and 2023. So it's reasonable to see the company resume acquisitions in 2020. By then the debt from the Tumi purchase should be largely digested and partly repaid.