‘Bout time I revisited Saga Furs (SAGCV:FH). Loyal readers will hopefully recall my original investment write-up, two years ago now:
And boy, that’s what it’s proved to be ever since… Wisely, I wrapped up my last post with a potential health warning for readers (& included a scary looking chart). At first, it seemed unnecessary, as Saga managed to rally 20%+ in the following two months (hitting almost EUR 50.00 a share, which was gratifying). I must admit, I certainly didn’t expect what came next…
Now, I should encourage you, please go back & read my original post – it provides useful background on the fur industry & Saga Furs, which I don’t plan on revisiting here. [And I’m ignoring an anti-fur movement that’s become increasingly irrelevant…but I should clearly highlight Saga isn’t a stock for everyone, though obviously it’s not a fur producer itself]. Let’s recap my positive investment thesis at the time:
- Triple Threat: Saga Furs offers attractive exposure to three of my favourite things: Emerging Markets, Luxury Goods & Auction Houses.
- Supply: European/N American fur production is highly regulated (& superior to Chinese fur), with supply constrained despite generally increasing prices.
- Demand: High-growth/secular fur market trend in the past decade or so, driven by Western fashion/luxury revival & new emerging market demand.
- Resilience: Despite a 39% post-crisis collapse in sales, Saga’s P&L stayed close to break-even. [Aided by inversely-correlated commission rates, which increase as sales decline]. Auction sales rebounded 78% the following year.
- Investment: Significant percentage of Saga’s annual turnover is ploughed into expanding capacity, European/global fur lobbying, and the promotion of Saga Furs as a luxury brand.
- Market Share/Network Effect: Now permanent agreement with American Legend & Fur Harvesters Auction to sell via Saga auction, thereby creating some of the largest fur auctions in the world & significantly improving Saga’s effective market share.
- Valuation: Stock cheap in absolute terms, vs. long term earnings growth & an average adjusted operating FCF margin of 28.0%. Also cheap in relative terms, vs. auction house & luxury goods sectors.
Unfortunately, the perfect storm was ready to hit: Dec-2013 auction sales collapsed 76%, as prices & the number of pelts sold dropped precipitously. Despite the about-face, initially this seemed like a bit of a buyers’ strike really…brought on by a mild winter, sticker shock (after pelt prices doubled in 3 years), higher retail inventories, and signs of slowing Russian & Chinese growth. Looking back, we know better now. It did prove to be a temporary buyers’ strike (as I’ll highlight below), but clearly the December auction heralded a more serious & sustained market disruption – the Chinese crackdown on luxury gifts was just gathering momentum at the time, and Putin was on the verge of sending the Russian economy (& ruble) over a cliff by backing military intervention in Ukraine.
