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Samsonite (1910 HK) is the world’s largest luggage producer, with a market share of 17% and a presence in all corners of the world.
The company was founded in Denver, Colorado in 1910, producing wooden trunks. Since then, the business has passed from family ownership to private equity ownership. And since 2011, Samsonite has been listed on the Hong Kong Stock Exchange, in close proximity to the region that’s been driving the company’s growth.
Most people associate the company with its namesake mass-market luggage brand “Samsonite”. But it also owns several other high-quality brands, including luxury bag maker “Tumi” and value luggage brand “American Tourister”.
It’s safe to say that the luggage market is mature. Before COVID-19, the overall market grew in the mid-single digits, and Samsonite’s organic growth was probably in line with that. But after Samsonite’s listing in Hong Kong in 2011, it began to engage in a roll-up strategy, acquiring one competitor after another.
First, Samsonite acquired High Sierra and Hartman in 2012. Then Speck and Gregory in 2014. Finally, Samsonite acquired Tumi in a monster US$1.7 billion transaction for 17.7x EBITDA.
It all came undone in 2018 when short-seller Soren Aandahl at Blue Orca wrote a report on Samsonite, accusing then-CEO Ramesh Tainwala of earnings manipulation, faking his credentials and related party transaction in Samsonite’s Indian subsidiary. Blue Orca’s allegations were accurate, though not significant in the grand scheme of things.
Following the report, Ramesh Tainwala resigned and was replaced by previous CFO Kyle Gendreau. I do not see any signs of accounting shenanigans, and the number of related party transactions - while not zero - is practically insignificant.
Samsonite’s recent issues have nothing to do with Ramesh Tainwala or Blue Orca’s report. Instead, the shares have come down for two different reasons:
From 2018 to 2019, the US imposed 25% tariffs on Chinese travel goods. Samsonite used to produce 85% of its products in China, and the US was its biggest market. So the company was understandably hit hard by the tariffs.
In early 2020, global travel ground to a halt due to the outbreak of COVID-19. Border closures, airline restrictions and passenger caution weighed heavily on the travel sector for several years.
The good news is that Samsonite was proactive in cutting its cost, laying off 37% of its employees and reducing its company-operated stores by 22%. Over US$200 million per year in fixed costs were reduced through the program.
And we finally see the light at the end of the tunnel regarding company fundamentals. US President Biden is now talking about reducing tariffs on Chinese goods to bring down the inflation rate.
And global travel is recovering fast, especially in North America, Latin America and Europe. Google search queries for “luggage” are returning to pre-pandemic levels. IATA is predicting global passenger volumes to exceed 2019 levels by 2024.
Under a recovery scenario, Samsonite’s P/E would theoretically end up between 13-14x. This can be compared to the peer group’s 20-30x and Samsonite’s own historical level of about 20x. The peer group is not perfect, since luggage peers such as LVMH are conglomerate businesses with a greater focus on luxury. So take this peer group analysis with a grain of salt.
A risk for Samsonite is the company’s net debt burden at 2.1x full-recovery EBITDA. A prolonged recovery could, in theory, lead to renewed cash burn. Higher interest rates could also increase the debt burden and weaken the company’s creditworthiness.
Another risk is a slow reopening of borders, especially in China, where the government seems to be intent on achieving zero spread of COVID-19. China’s zero-COVID policy is incompatible with open borders. Then again, China’s domestic travel industry could recover even in the face of closed international borders, as we saw in the second half of 2020.
The catalysts to look out for are improving global tourist arrivals throughout the next 12-18 months. But also any potential reductions in US tariffs on Chinese travel goods and any easing of China’s zero-COVID policy.
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Deep-dive 2022-19: Samsonite