RBC reiterates 'outperform' rating, lifts target price on Jimmy Choo

Following Jimmy Choo’s first half results on 25 August, RBC believes there are two positive changes for the company’s investment case. These include the increased chance franchise conversions will drive growth in revenues and gross margin and the group’s commitment to improving profits with an "ambitious" 20% earnings before interest, tax, depreciation and amortisation (EBITDA) margin target.

“These provide additional support for the Jimmy Choo equity story driving 15% earnings per share compound annual growth rate to fiscal year 2020, amongst the best in our coverage,” said RBC.

RBC said Jimmy Choo looks increasingly likely to convert franchise stores in South Korea and in the Middle East, which is a “positive catalyst for the stock in our view”. The group is also planning to open 10-15 stores per year which could reach 200 directly operated stores by 2019 and complete the company’s store renovation plan by 2020.

Meanwhile, RBC also expects Jimmy Choo will meet its financial targets, apart from a 20% EBITDA margin, which appears “slightly stretched on our base assumptions”.

“We may be too prudent on selling and distribution cost leverage stemming from the maturity of new stores, which if properly executed could provide potential further upside to our EBITDA margin outlook.”

RBC raised its EBITDA forecasts for fiscal years 2017 and 2018 by 3% and 6%, respectively, as direct selling expenses are expected to be offset by overhead cost leverage and gross margin support.

The broker reckons Jimmy Choo has entered a potential re-rating cycle, with shares up 22% in the past month relative to its circa 5% EPS upgrades.

“The stock now trades at 16.3x fiscal year 2017 price-earnings ratio (versus 14.6x in mid-August), however still trades at a 15% discount to the luxury sector.

“We believe sentiment has improved given earnings upgrades, ambitious targets and improved understanding of the equity story."

Shares dipped 0.59% to 127p at 0845 BST.