Financial Services Brand Value - Via The Luxury Consumer Lens

(Source: Adobe Stock)

Introduction

A few years ago, having recently accepted an offer for my then-dream hedge fund job, I was milling around London’s West End and thought I’d treat myself with some upgrades to my existing wardrobe.

Insofar as it was the only store on Bond Street with a large coffee counter, and therefore attracting a large throng of decaffeinated tourists, I opted to head into Ralph Lauren. For me, it was the least uninviting-looking fashion outlet. As an individual of typically below-average sartorial mores, I find most of the luxury fashion stores on Bond Street rather intimidating. Perhaps it's something about the austere-looking security guards or the sparsely populated storefronts.

The other reason I chose Ralph Lauren was that a few weeks prior, I'd invested about 10% of my pension in buying up the company's shares.

Why had I bought the shares?

Ralph Lauren at that time was (and still is) a net cash business, growing top-line at double-digits. The company had nearly 70% gross margins, geographical diversification and a high return on equity. The business was also promising to return to investors the equivalent of approximately 9% of the market capitalisation in dividends and buybacks.

In the world of large-cap luxury fashion brands, I found this latter feature especially compelling. At the time, stocks like LVMH were growing much more slowly (it is a much bigger institution) and offering shareholder distributions of sub-4%. Distributions at the likes of Hermes, meanwhile, were even lower.

Beyond these basic relative valuation comparisons, though, I was attracted to the Ralph Lauren shares because of my positive perception of the company’s brand.

Shortly before logging into my brokerage account to execute the trades, I’d stumbled across a recording of the company’s Winter 2020 fashion collection.

Readers who are interested can see the video here.

What I found captivating here was the combination of Adonis-like models gliding down the runway, the classic yet creative features of their clothes, all bound together in a simple yet elegant cinematography and lounge-like music.

In short, I wanted to be either 1) wearing the clothes and/or 2) at that fashion show.

The link to financials

Fortunately, my Ralph Lauren shares have performed well, up approximately 50% year-on-year at the time (vs. c25% for the S&P 500, itself having experienced a significant rally), and one of my best single equity names.

Ralph Lauren – like Ferrari or Hermes – owes a large part of its financial success to its brand. It is brand, including the sense of brand in the mind of the end-consumer, that encourages said consumer to set aside thoughts or unit costs and value for money and pull out his or her credit card. Brand explains why Ralph Lauren's gross margins sit close to 70%.

When it comes to financials, one is hard-pressed to find an individual who is compelled in such a way by their bank's brand. Outside of private banking, the notion of a genuinely personalised banking experience is, at best, a historical anachronism. If HSBC offered you a 2-year fixed rate mortgage at 5.00% and Barclays offered you its own mortgage at 4.99%, all things being equal, you'd go for the latter. The strength of the Barclays brand vs. that of HSBC would be unlikely to enter your decision-making process.

The same, in my view, cannot be said for luxury fashion.

Does Brand Matter in Financials?

In recent months, the team here at Fighting Financials has been on the hunt for a financial institution that has a competitive advantage that's more than just scale (being the biggest), focus (being the best in a given segment), speed, or other qualities that are reducible to a set of numbers.

We asked:

• in which subsectors of financials does brand matter?
• Is the significance of select financials’ brands captured in current market prices?

Parsing through European and North American financials, we believe we’ve identified an institution that fits these criteria: Today we’ve initiated coverage on the equity of said institution with a BUY recommendation and a 1-year price target implying 22% upside to the current market price.

This marks investment idea No. 3 of eight in our planned pilot portfolio ahead of our June launch.

Clients of Fighting Financials can access the investment recommendation and associated reports here. Prospective clients interested in learning more about our complete investment research offering can do so here or reach out to us directly at info@fightingfinancials.com.

Ultimately, our view is that brand does matter within financial services, and for the investor in the sector, the challenge is to identify said brands, evaluate their strengths, and build an investment framework that sheds some light on the connection between brand and long-term intrinsic value.

We think we’ve made a good start and would love to discuss our analysis with you further.

The FFL Team