The Uk Handbag Market 2007: Mike Dennis

I N V E S T M E N T
R E S E A R C H
July 2007
THE UK HANDBAG MARKET 2007
Mike Dennis
Senior Analyst European Food & General Retail +44(0)20 3142 8719 mike.j.dennis@pjc.com
In this Piper Jaffray UK survey of accessories we have compiled data on trends and pricing within the UK handbag market on 73 retail brands out of 107 reviewed. The brands are predominantly focused on producing leather products or have accessories as a part of their mainline clothing range. The brands we have chosen range from premium high street leather goods brands to edge-of-town supermarket retail brands. In order to make this survey representative of the most accessible handbag brands, we have excluded brands with handbags predominantly priced over 500. Within this survey we have identified which brands are the rising stars in terms of fashion ability and price and which are the potential losers. Overall, we believe the accessories market is undervalued as a growth industry and is a potential target for consolidation.
Key Findings
We estimate the UK handbag market is worth 1.5bn at retail prices nearly four times more than current estimates, and has been growing at a compound rate of 10% or more per annum since 1999, with many brands growing 20% or more. We estimate 80% of the 25.6m women over 15 years old in the UK purchase one handbag a year costing 73. Our frequency of purchase assumption is conservative given Coach Inc. state women in the US purchase over three handbags p.a. The European handbag market is highly fragmented with 54 of the brands surveyed belonging to private companies and 30 based in Italy. The majority of established accessories brands have retail and wholesale revenues of between 20- 300m. We believe the key to long-term sales and profits growth in accessories is only achievable through improving the accessibility of the brand via an extensive range of fashionable products at various price points. Both Mulberry and VF Corp have stated that new product lines account for 10%-20% or more of sales volumes. The rising stars within our survey of the premium handbag market are Marc by Marc Jacobs, Orla Kiely, Fontanelli, Furla, Francesco Biasia and Caterina Lucchi. We estimate their growing brand equity could place them at the top of purchase lists for many retailers. We also rated Roccobarocco, Maschera, C. Ferrici, Dents, Coccinelle, Nuovedive, Mandarina Duck, Kipling and Brics as providers of affordable luxury. From the High Street brands Monsoon/Accessorize and Zara stand out as the strongest brands in terms of fashion ability and price points. Topshop and Ollie and Nic provided innovative yet commercial levels of fashion ability. Risks: Margins could be impacted by weather conditions, disposable income, high floor space and rental cost growth. Note: This research report has been prepared in whole or part by non-US research analysts who may be associated persons of Piper Jaffray & Co. These research analysts are not registered/qualified as research analysts with the NYSE and/or NASD, but instead have satisfied the registration/qualification requirements or other research-related standards of a non-US jurisdiction that have been recognized for these purposes by the NYSE and NASD.
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July 2007
TABLE OF CONTENTS
Coach: Our Benchmark Retail Brand............................................................................ 3 How We Selected Better Priced Products ................................................................... 5 Industry Risks ............................................................................................................... 6 Sizing Up The Uk Market Opportunity......................................................................... 7 Uk High Street Sales Participation Of Handbags ........................................................ 10 Market Value Of Premium Brands.............................................................................. 11 Coach Inc- International Brand................................................................................... 12 The Trend Survey And How It Works ........................................................................ 13 Summary Of Results ................................................................................................... 15 Price Differences In The Handbag Market .................................................................. 17 Price Accessibility ....................................................................................................... 19 Affordable Fashion - A Review Of High Street Handbag Brands ................................ 22 Handbag Fashion Ability Related To Price On The High Street ................................. 22 Price And Fashion Ability Within Premium Accessory Brands .................................... 26 Tk Maxx Accessories- Competition For The High Street............................................ 30 Top Brands ................................................................................................................. 34 Conclusion.................................................................................................................. 36 Important Research Disclosures.................................................................................. 38 Exhibits 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Premium Handbag Brand Prices Compared To Coach........................................... 4 Better Price Points .................................................................................................. 5 Distinguishing Handbag Styles............................................................................... 5 UK Frequency Of Purchase Per Annum.................................................................. 7 Market Value ......................................................................................................... 8 Assumptions For UK Handbag Market Size ........................................................... 9 Valuation Comparables ....................................................................................... 11 17 Key Handbag Trends 2007 .............................................................................. 13 High Street Handbag Brands Level Of Fashion Ability Ranked By Total Looks Achieved Score ..................................................................................................... 15 Premium Handbag Brands Level Of Fashion Ability Ranked By Total Looks Achieved Score ..................................................................................................... 16 Price Differences In The Handbag Market Within Our Chosen Brands ............... 18 Price Accessibilty- High Street To Premium Handbag Brands Pricing Structures . 20 Top 20 Key Brands ProvidingAccessible Luxury Within Our Survey ................ 21 Picking The Rising Stars From The High Street ................................................... 22 Rising Stars Within The Premium Handbag Market ............................................ 26 TJX Inc. Company Highlights ............................................................................. 30 Sales And Profits Growth- 1998-2007E................................................................. 31 Handbag Price Points Within TK Maxx............................................................... 32 TK Maxx Price Compared To The High Street.................................................... 33
2 | The UK Handbag Market 2007
Piper Jaffray Investment Research
July 2007
C O A C H : O U R B E N C H M A R K R E T A IL BR A N D
For this Piper Jaffray UK handbag trend survey we have selected 73 brands out of 107 researched brands that we felt provided a comprehensive overview of the UK handbag market. In order to compare the breadth of handbag pricing we selected a brand we believed to be a good example of an accessible and affordable luxury that also has a strong trend-inspired product and a wide product range. We selected Coach as our comparison brand. We did this by collecting all the prices across good, better, and best handbag ranges from 107 brands ranging from top designer labels like Fendi, Gucci, and Louis Vuitton to High Street value brands like Jane Shilton, Guess, and Primark. We selected the prices of the better ranges and aggregated them to give a mean price of 199. Coach matched the mean price point within our survey of the 107 handbag brands and also had the broadest range. The latter point is critical as Coachs breadth of range and pricing allows for a wider comparison against other brands. For the survey to be more representative we removed several of the premium designer brands such as Ralph Lauren, Gucci, Louis Vuitton and YSL as they were not suitable comparisons for price (1000+) or fashion ability within this survey. In this group the gap between High Street price points and luxury brands prices points was too vast to make any credible comparisons. We have therefore only included the more affordable luxury brands such as Lamarthe and Coccinelle as examples of premium leather accessory brands.
The UK Handbag Market 2007 | 3
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Exhibit 1 illustrates the high pricing of the top end luxury handbag market which had price points ranging up to 654% higher than Coach. Therefore to keep this survey focused on the accessible part of the handbag market we have not included any of these brands in the survey.
Exhibit 1
PREMIUM HANDBAG BRAND PRICES COMPARED TO COACH

65
600%
% Price Difference Compared to Coach
38 2% 37 7% 37 2% 35 0% 35 0% 34 2%
41 5% 40 0%
45 3%
500%
4%
700%
400%
C
Coach average price point of 199
30 2% 29 9% 29 2% 28 2% 27 6% 27 0%
300%
32 2%
23 9%
23
4% 19 19 9% 5% 19 4% 15 9% 15 1% 14 9% 14 6% 14 0% 13 % 77 % 16 16 4% 9%
200%
100%
0%
Alexanda McQueen
Mulberry
Bottega Veneta
Asprey London
Burberry
Anya Hindmarch
Roberto Cavalli
Mui Mui
YSL
D&G
Micheal Kors
Versace
Louis Vuitton
Botkier
Celine
Chloe
Prada
Luella
Zagliani
Christian Dior
Jimmy Choo
Roberta di camerino
High End Premium Handbag Brands
Source: Piper Jaffray
LuLu Guiness
Ralph Lauren
Marc Jacobs
Hogan
Kate Spade
Coach
Fendi
Gucci
Tods
Marni
0%
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HOW WE SELECTED BETTER PRICED PRODUCTS
Exhibit 2 shows examples of how we approached the pricing survey in terms of selecting brands that are within the better price range. We ensured the mid price points were chosen from each brands accessory range (i.e., we selected the better price out of good, better, best price ranges)and made sure the handbags chosen had as many similarities as possible in design and shape to enable a fair price comparison. We selected better products out of good, better, best price ranges within each of our chosen brands. The below styles in Exhibit 2 represent a better priced bag from three brands current spring/summer collections. We took the size, shape, and buckle details as the similarity between these three styles. Exhibit 3 classifies the most popular handbag shapes, which are visible on the High Street, in department stores, and designer boutiques.
Exhibit 2
BETTER PRICE POINTS

Ri2k 90
Next 60
Coach $360
Exhibit 3
DISTINGUISHING HANDBAG STYLES
Hobo Bag
Handbag
Clutch Bag
Across Bag
Backpack
Tote Bag
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Industry Risks
The UK handbag and accessories market sales and margins could be impacted by unseasonal weather conditions, lower disposable income, terrorist activities in major city centres, higher levels of promotional activity, poor interpretation and commercialisation of fashion trends, high floor space, and rental cost growth.
July 2007
SIZING UP THE UK MARKET OPPORTUNITY
Many reports on the UK handbag market have stated the market size at retail in 2006 being between 350m - 450m (the EU market survey of leather goods and Mintels UK accessories survey), and some UK department stores have quoted figures of 500m, yet we believe it is a lot higher. Our view is that the UK handbag market is worth c.1.5bn at retail and sells more than 20m handbags per annum. From our estimated calculations and market research presented in Exhibits 4 and 5 we believe there is evidence to suggest that the number of handbags sold in the UK could be closer to 40m as the weighted average number of handbags bought per shopper in the UK is anticipated to be two. However, we are comfortable with our 20m estimate as we expect internet sites and overseas travel could account for a substantial amount of womens purchases especially for Christmas and special occasion gifts. Another view could be that we have underestimated the number of shoppers (1million or more) who purchase not only several handbags per season (3-4) but also buy various colours of one style.
Exhibit 4
UK FREQUENCY OF PURCHASE PER ANNUM

8.00 7.00 6.00 shoppers (m) 5.00 4.00 3.00 2.00 1.00 0.00 0 1 2 3 4 5 6 7 Hand bags per annum
6.91 5.89 5.12 3.58
1.79 1.28 0.51 0.51
Exhibit 5 shows how we calculated the UK market value for handbags. We used our pricing survey data to give an average of all mid-range prices, across premium (610), department store (151) and High Street own brands (40), of 199. Next, we segmented the 25.6m UK women aged over 15 years (using market research where 5m women do not buy a handbag in any one year, see Exhibit 4) into three groups; premium shoppers (0.75m, 3.6%), department store shoppers (6.6m, 32%) and high street shoppers (13.25m, 64.3%) giving a total of 20.6m handbag shoppers. We also noted from various sources that 75% of handbag buyers are 25-50 years old and in full/part time employment or mothers at home. From the above data we generated an average weighted price per handbag of 73.6 and applied an average frequency of purchase of one per annum across all segments giving a total value of 1.516bn per annum. This is over three times more than the current market estimates which we
July 2007
believe substantially underestimate the true market value. Another view on market size could be constructed by assuming the UK supports over 150 handbag brands with the average retail sales per brand of c.10m per annum. The fact is that if 45% of the UK market is wholesale and only 5% is direct to consumer then it does not surprise us that the current market value estimates are understated or that we still live in rip-off Britain in terms of accessories pricing compared to European and U.S. consumers.
Exhibit 5
MARKET VALUE
2007 Premium brand Branded dept store High Street own brand Total Source: Piper Jaffray Full price per bag 610 80 40 73.6 Shoppers (m) 0.75 6.6 13.3 20.6 Participation 3.6% 32.0% 64.3% 100% Value (m) 458 528 530 1516 Frequency Units (m) 1.0 0.8 1.0 6.6 1.0 13.3 1.0 20.6
Applying Different Market Assumptions
Furthermore, in our view the 1.5bn market estimate for handbags looks to be conservative given that our purchase frequency of only one per annum per shopper seems low. Coach Inc has stated that over the last three years the purchase frequency in the United States had increased to 3.2 per annum by 2006 which, if applied to our assumptions for the UK, would indicate a market size over 4.5bn per annum, see Exhibit 6 (i.e., 3 x 73.6 x 20.6million shoppers). In addition, manufacturers know that through regular use many handbags only last two years as edges fray, linings rip, and zips break, so the replacement market is also a key driver for growth and probably means that more than 20m handbags are sold per annum in the UK. If we assume trading up in the premium sector continues as a trend (as researched by Ipsos and the International Luxury Business Association Worldwide Luxury Tracker) and then change our assumptions on premium buyers to 1.5m purchase per annum from 750k and reduced our department store buyers by 750k per annum, then the total market value would rise to 1.9bn. This then gives us an average weighted handbag price of 92.9. Exhibit 6 shows a sensitivity analysis of frequency of purchase from 1 to 3.5 per annum (pa) and average handbag value from 40 to 100, giving market sizes from 824million to 7.2bn. Moreover, with consumers polarizing into
Exhibit 6
ASSUMPTIONS FOR UK HANDBAG MARKET SIZE

Frequency of purchase (x) Units sold (m) Avge weighted price () 40 45 50 55 60 65 70 75 80 85 90 95 100 1 20.6 m 824 927 1030 1133 1236 1339 1442 1545 1648 1751 1854 1957 2060 1.5 30.9 m 1236 1391 1545 1700 1854 2009 2163 2318 2472 2627 2781 2936 3090 2 41.2 m 1648 1854 2060 2266 2472 2678 2884 3090 3296 3502 3708 3914 4120 2.5 51.5 m 2060 2318 2575 2833 3090 3348 3605 3863 4120 4378 4635 4893 5150 3 61.8 m 2472 2781 3090 3399 3708 4017 4326 4635 4944 5253 5562 5871 6180 3.5 72.1 m 2884 3245 3605 3966 4326 4687 5047 5408 5768 6129 6489 6850 7210
July 2007
more premium and value buyers with fewer mid-market department store buyers, a higher UK market value than our estimate looks very plausible. If we were to believe the retail value of handbags sold in the UK was as low as 400m then with 20m women buying one handbag per annum, the average purchase price would be 20 or under 2% of womens total clothing expenditure pa. In our opinion, it seems obvious that these reports are either valuing this segment by using wholesale turnover from distributors rather than average retail values or the authors have never visited the high street or noted women carrying tote canvas bags and leather handbags together. According to our pricing survey the average UK handbag is retailed at 199 full price and on a customer weighted average basis 73.6, see Exhibit 5. This is 9% lower than the average selling price of most UK department store handbags and seems a fair reflection of the average price paid by shoppers across the UK. Compared to our estimate of the UK market value we believe the U.S. handbag market could be 5.5bn or more at retail, over 4x the UK. This assumption is based on Coachs 20% market share of the mid/premium segment within the $11bn U.S. handbag market at retail value based on c.105m units/handbags sold per annum at a retail cost of $105. On this basis, the average U.S. handbag costs 30% less at equivalent prices, which we believe is about right. A High Growth Segment, 10%-20% Per Annum
In terms of the growth rate we have been informed by several distributors and designers of handbags that the market has been in double-digit value growth for most years since 2000, which would imply that the total market value has more than doubled from 700m in 1999, assuming the growth rate averaged 10% or more per annum. In the context of the 30bn UK clothing market growing at 4%-5% per annum, this category provides far superior growth potential and opportunities to extend brands into premium and value ranges. On this basis, we could conclude that this segment looks set for consolidation and international interest from larger U.S., Asian, and European companies looking for new global brands. The other major attraction to acquiring established handbag brands with 10m of sales is the opportunity to diversify into sunglasses, jewellery, shoes, clothes, perfume, and many other segments that can broaden and build the brand into a global name with global distribution. Finally, as more brands develop broader ranges like Coach with small incremental price steps and more on-trend interpretations, so the UK market should support more 50m - 100m brands. In terms of the outlook, we do not foresee any slow down in purchasing habits as handbags are not only becoming more functional (such as a laptop bag) but also a window on a womans psyche and home-from-home for personal items. Unless clothing styles change immeasurably, we do not foresee any reason why handbags would become obsolete; far from it, the number owned and frequency of purchase seems to be rising.
July 2007
U K H I G H S T R E E T SA L E S P A R T IC I P A T IO N O F H A N D BA G S
In Exhibit 7 we show our estimate for the sales of accessories across the main high-street brands and estimate the value of handbag sales within their accessories segment to be 361m. Within these brands handbags account for 16% of all accessories sales and 24% of our estimate for the total UK market. In terms of sales participation TK Maxx, part of TJX companies Inc, has the highest percentage of sales participation at 26%, and Debenhams has the highest absolute value of handbag sales at 65m across its 142 department stores and Desire format. However, while Debenhams should benefit from the growth in the handbag market, it would seem they are losing market share as we estimate this category is growing at c.6% in Debenhams but by 10% or more across the wider UK market.
Exhibit 7
SALES PARTICIPATION ACROSS UK HIGH STREET BRANDS

2007/08E Topshop Debenhams New Look Mango Zara River Island Primark John Lewis M&S Miss Selfridge H&M Oasis Monsoon French Connection Next Urban Outfitters Esprit Ted Baker Warehouse Dorothy Perkins Bershka TK Maxx Matalan Total Accessories sales (m) 28 310 80 4 25 44 125 305 370 12 50 20 290 15 260 2 3 8 8 55 0.3 135 86 2235 % of total UK sales 9% 14% 8% 9% 7% 10% 11% 12% 10% 10% 9% 8% 58% 8% 8% 11% 9% 7% 6% 9% 8% 12% 9% Handbags sales (m) 4 65 12 0.5 3 7 25 38 50 2 8 3 45 3 35 0.3 0.4 1 1 9 0.1 35 14 361 % of accessories 14% 21% 15% 13% 12% 16% 20% 12% 14% 17% 16% 15% 16% 20% 13% 15% 13% 13% 13% 16% 17% 26% 16% 16.2%
July 2007
M A R K E T V A L U E O F P R E M I U M B R A N DS
In Exhibit 8 below we compare the key valuation metrics of 14 premium accessories retailers that sell accessories albeit across several categories, from eyewear, shoes, to handbags, with sales from 19m to 17.1bn. The relatively high multiples in terms of PER (24x) and EV/sales (2.3x) indicate the strength of many of these premium brands as sales and operating profits are growing at c.20%or more per annum indicating a sector close to a PEG of 1x. More importantly, many of these companies have acquired brands for multiples of 0.5x-1x sales which are now valued at 2x-3x sales. In our view many more premium accessory brands have yet to attain global status but are open to being acquired similar to Oakley by Luxottica, Coccinelle by Mariella, and Puma by PPR. We believe the potential to unlock value within the accessories market could be 2x-3x the total current sales that are privately held. This would indicate that if another 35bn of branded accessory sales was acquired that could generate 8bn of EBITDA, then the market value today would be 80bn. However, value creation is unfortunately not that simple. There are fewer potential brands available and of the right size (500m of sales), and there is more competition trying to acquire them pushing up multiples of sales to 2x-3x. However, given the fragmentation of this segment and the high growth rates, we foresee more brands becoming attractive to the growing list of companies that already manage several premium and high fashion brands (e.g., VF Corp, PPR, Luxottica, Mariella, and Burani).
Exhibit 8
VALUATION COMPARABLES
Year to FY07/08E Currency Consensus estimates Mariella Burani Antichi Perellieri Coach USD Hermes Benetton Burberry GBP Christian Dior Luxottica Safilo Tod's Group Essilor Lamarthe Mulberry GBP Monsoon GBP Total/sector weighted avge Source: Piper Jaffray, Consensus estimates Year end Month Dec Dec Jan Dec Dec Mar Dec Dec Dec Dec Dec Dec Mar May Share price 02/07/2007 26 11 47 83 13 688 95 29 5 66 87 12 263 394 Mkt Cap (m) 787 496 17,842 9,037 2,330 3,075 16,941 13,034 1,385 2,016 8,903 21 150 701 76,719 EPS FY07/08E 0.84 0.41 1.68 2.65 0.82 32 5 1.23 0.24 2.95 3.5 0.45 6.9 17 Net Debt/(Cash) EBITDA (m) (m) 258 103 55 51 -1,000 1,065 522 475 427 316 6 234 4,490 3,953 1,327 1,127 470 202 133 166 -200 683 1 2 -7 7 -26 60 6,456 8,444 Sales (m) 711 311 2,600 1,601 2,048 892 17,154 5,098 1,214 650 2,890 19 47 260 35,494 EV/Sales EV/EBITDA (X) (X) 1.5 10.1 1.8 10.8 6.5 15.8 6.0 20.1 1.3 8.7 3.5 13.2 1.2 5.4 2.8 12.7 1.5 9.2 3.3 12.9 3.0 12.7 1.2 10.7 3.1 20.4 2.6 11.2 2.3 9.9 P/E (X) 31.3 26.6 28.1 31.3 15.7 21.5 19.1 23.2 20.3 22.5 25.0 27.1 38.1 23.2 24.0 EV (m) 1,045 551 16,842 9,559 2,757 3,081 21,431 14,361 1,855 2,149 8,703 22 143 675 83,175
Source: Piper Jaffray, Consensus estimates
July 2007
C O A C H I N C - I N T E RN A T I O N A L B R A N D
In the following section we outline the key characteristics of Coach Inc of the USA. Coach Inc design, produce, and market quality-made accessories, primarily handbags, worldwide with net sales up 19% to $2.035bn in 2006 and EBIT margins of 35.1%. Coach inc. was established in 1941 in Manhattan New York making wallets. Miles & Lillian Cahn acquired the family business and in the 1960s started to make refined and durable handbags. The company was acquired by Sara Lee in 1985 for c. $30m based on $19m of sales and projections of $25m for 1986. In June 2000 17% (7.38m shares) of Coach was listed on the NY stock exchange at $16 per share, with Sara Lees remaining equity released in April 2001 netting $1.1bn. Coach formed a JV in Japan with Sumitomo Corp in June 2001 to expand their global presence, and acquired the remaining 50% in July 2005 to gain greater control of their product in Japan. In March 2007 Coach exited their corporate gifts business which made $76m in sales. In FY06 Coachs primary channel of distribution generated $1.61bn of sales through its full-price stores in North America (218) and Japan (122) as well as 85 factory-store outlets. Indirect sales channels include wholesale distribution ($424.4m) in traditional department stores ranging from Nordstrom to Macys. Coach sells c$1.36bn worth of handbags per annum accounting for 67% of group sales. We estimate Coach USA accounts for the majority ($1bn) and sells directly ($0.75bn) and indirectly via wholesale and business to business ($0.24bn). Coach is recognised as one of the leading accessories brands in the United States with a diverse consumer base, holding a market share of 25% in their c. $7bn segment of the $11bn total North America handbag market. Coach also operates in 78 stores in 18 countries outside of the United States and Japan. The core consumer focus is currently the North American and Japanese markets. Their plans to drive growth in Hong Kong are becoming visible as 10 new stores will be opening in Hong Kong over the next three years. Coach aim to have their first stand-alone store in Londons Heathrow Terminal 5, due to open March 2008. Coachs Japanese market produces c.$400m of sales or 20% of the total revenues in 2006 growing at a double-digit rate. The brand continues to increase its direct-store portfolio and plans for 100 or more new stores over the next three years. In addition, Coach continues to develop ranges for all occasions, yet never forgets its heritage of classic American style. They aim to maximise productivity by offering a varied number of products pitched at broad price ranges providing accessible luxury to a wider sector of the market. PJC expects sales of $2.6bn, up 27.8%, by June 2007 and an expansion of EBIT margins by 260 bps to 37.7%.
July 2007
T H E T R E N D S U R V E Y A N D H O W I T W OR K S
In this survey we looked in greater detail at 73 different brands and rated them on how well they have interpreted the key accessory themes we have identified for summer 2007. We have assessed each handbag brand against our trend summary list of 17 themes compiled from our catwalk research, trend websites, and designers input. The brands were then all scored on a scale of 1-4 of where 4 means excellent and 1 equals a limited interpretation of handbag trends, see list below. 4= Excellent representation of the trend 3= Good trend interpretation/ relative to customer base 2= Trend visible but not strongly developed 1= A limited representation of the trend X= Trend not developed at all Looks Achieved How Well The Key Themes Of The Season Have Been Developed Key Looks Of The 2007 Season
The Looks achieved score used in this handbag survey is a critical measure for higher fashion brands as it judges how well a key style of the season has been illustrated within the brand. For high fashion premium accessories brands it is critical that they score highly in this area to achieve higher levels of full-price sales throughout the season and therefore reducing the risk of markdown sales. Exhibit 9 below explains the key handbag trends of the season that were used as the basis of the trend survey. We marked the looks achieved score out of 68 with the spread of scores achieved ranging from 19% to 78%.
Exhibit 9
17 KEY HANDBAG TRENDS 2007

Trend Designer Example Oversized bags YSL, Louis Vuitton Clutch bags Fendi, Miu Miu, Roberto Cavalli Duffle style bags with ruching details Marc Jacobs, YSL Exotic skins real or mock Zigliani, Jimmy Choo, Osprey Metalic leathers Mulberry, Louis Vuitton, Marc Jacobs Wicker bags Coach, Anna Sui Shopper style bags Fendi, YSL, Bottega Veneta Printed fabric bags Orla Kiely, Coach, Mulberry, Burberry Quilted leather / woven details Marc Jacobs, Chloe Decoration- laser cuts, studs etc Gucci, Osprey London Details- Charms, tassels, bows bucklesChloe, Luella Practical functions Mandarina Duck, Kipling Handle details- unusual shapes etc Miu Miu, Orla Kiely Colour blocking trims Celine, Gucci, Miu Miu Bright bold colours Fendi, Bottega Veneta White leather/ PU Mulberry,Burberry, Anya Hindmarch, Lamarthe Chain details Marc Jacobs, Alexander McQueen On the High Street at Topshop, Mango, Zara, Next Dororthy Perkins, Topshop, Debenahms Topshop, Primark, Dororthy Perkins Liz Claiborne, Jane Shilton Zara Mango, Accessorize Accessorize, M&S Dorothy Perkins, Zara, Mango Accessorize, M&S, Next Zara, Mango, Next Radley, Guess, Tula Radley, Accesorize Modalu, Topshop, Zara and Mango Zara, Mango, Accessorize M&S, Zara, Next Cos, Dorothy Perkins, New Look Zara, Mango, Accesorize Zara, Jane Shilton
Summary of High Street Winners
Monsoon/Accessorize, Zara, Mango and Next were the best performing brands achieving over 69% of the key handbag themes listed in our summary chart. The list of rising stars is shown in Exhibit 9. This outcome might seem surprising as Monsoon has reported negative LFL sales in the UK and Ireland and given a profit warning in March, but it would seem that most of the current issues are related to supply chain and IT problems not the product.
July 2007
Summary of Premium Brand Winners
Coccinelle, Marc by Marc Jacobs, Longchamp, Lamarthe and Brics were the best of the premium brands achieving over 54% of the key handbag themes listed in our summary chart. These are all brands that have better ranges costing up to 500 while those over that level have been excluded from this survey.
July 2007
S U M M A R Y O F R E SU L T S
The information gathered from our handbag trend survey is illustrated below in Exhibit 10. This chart shows how well accessories brands have interpreted the 17 key handbag trends we identified for summer 2007. In terms of classifying the winners and losers we have used the Boston Consulting Group terminology of rising stars and dogs as a collective term for the best and worst performers in our survey.
Exhibit 10
HIGH STREET HANDBAG BRANDS LEVEL OF FASHION ABILITY RANKED BY TOTAL LOOKS ACHIEVED SCORE
High Street Handbag Brands Monsoon/ Accessorize Zara Next Mango Dorothy Perkins Topshop River Island Excellent Fashion Ability Jane Shilton "Rising Stars" Fiorelli H&M Oasis Olli and Nic New Look Radley Guess Primark M&S Wallis Warehouse Average Fashion Ability French Connection Ri2k Cos Debenhams own brand Liz Claiborne Ted Baker GAP Principles Miss Selfridge Tula Matalan John Lewis own brand Poor Fashion Ability Hidesign "Dogs" Modalu Asda Esprit Abercrombie and Fitch Tesco Looks achieved (Max score 68 ) 53 48 47 47 45 44 32 40 40 40 39 38 38 37 36 36 35 35 34 34 32 32 30 29 27 27 25 25 23 23 22 21 21 20 16 14 13 % Looks achieved 78 71 69 69 66 65 62 59 59 59 57 56 56 54 53 53 51 51 50 50 47 47 44 43 39 39 37 37 34 34 32 31 31 29 24 21 19
These scores aim to distinguish the Rising Stars from the Dogs from amongst our selected brands. We believe the scores should be a good indicator of future sales growth within the selected fashion brands and illustrate the degree to which they have captured key handbag trends of the season. The higher fashion High Street brands that have failed to incorporate enough on-trend fashion in their handbag collections are Principles, Miss Selfridge, Tula, and Modalu. The brands that show real promise for their level of design and catwalk-inspired looks are Monsoon/Accessorize, Next, Zara, Mango, DPs, Topshop, River Island, Jane Shilton, Fiorelli, and H&M.
July 2007
Exhibit 11
PREMIUM HANDBAG BRANDS LEVEL OF FASHION ABILITY RANKED BY TOTAL LOOKS ACHIEVED SCORE
Premium Handbag Brands Coach- (Our comparison brand in the survey) Coccinelle Lamarthe Marc by Marc Jacobs Brics Longchamp Excellent Fashion Ability Orla Kiely "Rising Stars" Furla Ghibli Mandarina Duck Nuovedive Fontanelli Claudio Ferrici Kipling Dents Roccobarocco Osprey London Average Fashion Ability Braccialini Maschera Francesco Biasia Catherina Lucchi Facondini Lorella Pagano Billionaire LAPA Nicoli Ripani Paolo Bianchi Pratesi Poor Fashion Ability Krizia "Dogs" Mazzini Gianfranco Ferre Charlotte Reid Tony Perotti Robe di Firenze Chiarugi Looks achieved (Max score 68 ) 46 43 41 39 38 37 37 36 35 35 34 33 33 33 33 32 31 31 31 30 29 27 27 25 24 23 21 19 17 17 16 14 13 13 11 11 % Looks achieved 68 63 60 57 56 54 54 53 51 51 50 49 49 49 49 47 46 46 46 44 43 40 40 37 35 34 31 28 25 25 24 21 19 19 16 16
Exhibit 11 illustrates the level of fashion ability amongst the more affordable premium handbag brands. In the premium brand sector the brands that show strengths in their 2007 collections are Coach, Coccinelle, Lamarthe, Marc by Marc Jacobs, Brics, Longchamp, Orla Kiely, Furla, Ghibla, Mandarina Duck, and Nuovedive. The premium brands that fell short on incorporating the key themes of the season and scored extremely low results were Charlotte Reid, Tony Perotti, Robe di Firenze, and Chiarugi.
July 2007
P R I C E D I F F E R E N C E S I N T H E HA N D BA G M A R K E T
Exhibit 12 illustrates the results of our handbag pricing survey for 73 brands. The High Street and premium brands have been assessed against our benchmark brand Coach. The better price product we selected from Coach was valued at 199. We felt this illustrated an average price point within Coachs spring /summer collection. Thirteen brands were priced higher and 59 at a discount to Coach. All brands in the survey were then compared to this price point and the results are illustrated below. Exhibit 11 also shows that 59 of the brands in the survey are priced below Coach (our comparison brand) which is not surprising given 50%of the brands in this survey are found on the UK High Street or department stores whose average prices range from 40-80 per handbag. Liz Claiborne, a well known accessories brand, supplied surprisingly low price points, 72% cheaper than Coach. This highlights the companys dilemma as to which end of a polarising market the Liz Claiborne brand can best exploit. COS (Collection Of Style) the new H&M store on Londons Regent Street provided considerably high price points taking into account their mid-market High Street position, only 40% cheaper than Coach. Marc by Marc Jacobs the diffusion line achieved extremely low price points for a designer range, only 1% more expensive than Coach. This price positioning should provide Marc Jacobs scope to broaden its customer base or charge higher prices for new season ranges.
Exhibit 12
% Price Difference compared to Coach

-100% -80% -60% -40% -20% 20% 40% 60% 80% 0%
4 2% 41 % 21% 20% 13% 12% 6% 1% 0%
Marc by Marc Jacobs impressively only 1% more expensive than Coach
- 3 3% - 37 % - 40 % - 50 % - 50 % - 52% - 55 % - 55 % - 55% - 5 6% - 57% - 57% - 6 0% - 6 7% - 6 7% - 70% - 70% - 7 0% - 7 2% - 75 % - 75 % - 75 % - 77% - 77% - 77% - 80 % - 80 % - 80 % - 80 % - 87 % - 91 % - 92 % - 95% - 9 6% - 96 % - 98 %
O sp r ey L on d on La m a rt he G h ib li Lo n g ch amp F ur la C ath e r in a Luc c F ra n hi ce s c o B ia s ia B r ac cia li n i O rl a Mar c K iely by M a rc Ja c o bs C oac h Mana ri n a D - 6 % uc k - 7 % Br ic s - 9% N ic o li C o - 12% c cine ll e M az z -1 in i 5a P%o lo lB ia nch - 18% la C u i d io F er r ic - 20% i C h ia ru g i - 21 % R o c co b a ro c co M o da lu
COS G ues s R a dle y T ed B ak e Lo r e r lla Pa g an o R i2 k D e nts G ia n fr a n c o Fe rr e H id e sign T u la z oo n T o ps h op J ane S hil to n O li a nd N ic R iv e r Is la nd Za ra L iz C la ib or n e J oh n L e w is Kip li n g M& S F re n ch C on ne cti o n N ex t Mons oon O as is Mang o G AP F ior e lli D ebe n h am s N ew Lo o k H &M T e sc o M a ta la n As d a Pim a rk

6 3% 51%
July 2007

Source: Piper Jaffray Coach
PRICE DIFFERENCES IN THE HANDBAG MARKET WITHIN OUR CHOSEN BRANDS
Brands
COS High Street brand only 40% cheaper than Coach the premium brand Liz Claiborne 72% cheaper than Coach
July 2007
P R I C E A C C E S S I B I L IT Y
Within the highly fragmented handbag market, the breadth of pricing varies dramatically across the brands. Exhibit 13 illustrates the deviation of current pricing strategies by segment as well as across the brands. The point worth making is that the strategic advantage of the accessibility through pricing and range of some High Street orientated brands like Coach, Furla, and Longchamp is underestimating the long term global growth potential of these brands. Exhibit 13 illustrates the levels of pricing accessibility amongst our chosen brands (taken across good, better, best prices). This data was collated from the brands official websites and High Street and department store visits. More specifically, Exhibit 13 shows premium leather goods brands, such as Osprey London, are available to a wide audience of consumers as they offer products ranging from mass-market High-Street-pitched price points to luxury-priced accessories.
Exhibit 13
July 2007
PRICE ACCESSIBILTY- HIGH STREET TO PREMIUM HANDBAG BRANDS PRICING STRUCTURES
Brands

Low Accessibility within High Street Brands -Small proce variations in their ranges. A general increase in Price Accessibility as selling prices increase. Creating "Accessible Luxury" for many levels of consumers.
Primark Asda Matalan Tesco H&M New Look Wallis Warehouse Dorothy Perkins Fiorelli GAP Esprit Debenhams Ow n Brand Abercrombie and Fitch French Connection Principles Next Oasis Monsoon Kipling M&S Miss Selfridge John Lew is Mango Lorella Pagano Guess Hidesign Tula Zara River Island Topshop Ri2k Liz Claibourne Ted Baker Oli and Nic Facondini Mania Dents Modala Maschera Julia Cocco Radley Krizia COS Mazzini Tony Perotti Jane Shilton Braccialini Nuovedive Paolol bianchi Nicoli Manarina Duck Claudio Ferrici Robe di firenze Ripani Roccobarocco Billionaire Pratesti Bric's Coccinelle L.A.P.A Francesco Biasia Marc by Marc Jacobs Catherina Lucchi Orla Kiely Fontanelli Chiarugi Longchamp Furla Osprey London Renato Angi Coach Lamarthe
0.00
100.00
200.00
300.00
Value in
400.00
500.00
July 2007
Exhibit 14 illustrates the top 20 brands within our survey that show strength in their good, better, best price structures. Within our chosen brands Lamarthe, Coach, Osprey London, Orla Kiely, Fontanelli, Renato Angi, and Furla offer the most inclusive price ranges of handbags. They stretch from affordable luxury to premium priced leather goods.
Exhibit 14
TOP 20 KEY BRANDS PROVIDING ACCESSIBLE LUXURY WITHIN OUR SURVEY

All 20 brands provide strong levels of price accessibility w ith prices points ranging from 37.00 to 500.
Coccinelle Ripani Francesco Braccialini Longchamp Brics Marc by Marc zoon Roccobarocco Jane Shilton Billionaire Caterina Lucchi Chiarugi Furla Renato Angi Orla Kiely Fontanelli Lamarthe Osprey London Coach
Brands
Key player on the High Street Jane Shilton w ho provides affordable fashion priced around 40 w ith also handbags reaching price points up to 200. Highest level of Accessibility
0.00
100.00
200.00
300.00
400.00
500.00
Price Accessibility in
Many premium brands are currently offering lower-priced capsule collections as well as their main ranges and Limited Edition pieces to attract different consumers and increase their brand awareness. For example, Osprey London has introduced a diffusion line called O.S.P into John Lewis which aims to capture a wider range of consumers with prices starting from as little as 55. This gives all levels of consumers the scope to buy into a premium brand creating accessible luxury without the designer price tag.
July 2007
A F F O R D A BL E FA S HI O N - A R E V I E W O F H I G H S T R E E T H A N D BA G B RA N DS
Handbag Fashion ability Related To Price On The High Street
Exhibit 15 shows how we have segmented the High Street handbag market into the four growth/share categories in use in the BCG matrix. These categories illustrate whether the brands have positioned themselves correctly for their market or where they show risk with a low level of on-trend product but higher pricing. This exhibit also shows our selected High Street handbag brands level of fashion ability correlated to their commercial levels of pricing. These results were taken from the Piper Jaffray handbag pricing and trend survey 2007. We feel this chart illustrates the strengths (Rising Stars) and weaknesses (Dogs) that High Street accessory brands have in this competitive market.
Exhibit 15
PICKING THE RISING STARS FROM THE HIGH STREET

80
Accessorize
High Fashion Ability

Zara Next Topshop
Rising Stars
Cash Cows
70 Coach
Fiorelli
Jane Shilton Ollie &Nic Guess and Radley Ted Baker
60
Primark
M&S French Connection Liz Claiborne Gap

50
Lower Price
Debenhams own brand
Higher Price
40
John Lewis own brand Asda
Hidesign
Modalu
30
Problem Child
-110
Tesco
20
Monsoon/ Accessorize Zara Next Mango Coach Dorothy Perkins Topshop River Island Jane Shilton Fiorelli H&M Oasis Olli and Nic New Look Guess Radley Primark M&S Wallis Warehouse Ri2k Cos Debenhams ow n brand Liz Claiborne Ted Baker French Connection GAP Principles Miss Selfridge Tula Matalan John Lew is Hidesign Asda Esprit Modalu Abercrombie and Fitch Tesco
Dogs
Low Fashion Ability
10 -90 -70 -50 -30 -10 10
July 2007
Rising StarsHigh Fashion Ability with Low Price Points
Monsoon/Accessorize, Zara, Mango, Next, Dorothy Perkins, River Island, Jane Shilton, Ollie and Nic, M&S, Warehouse, Wallis, Primark, NewLook, H&M, Oasis, Topshop, French Connection, and Fiorelli all provided high levels of handbag fashion ability and achieved substantial price advantages to Coach in the range of 67%-98%. Out of all of the brands in this handbag survey, Monsoon/Accessorize supplied the most key looks of the season. They not only achieved the highest level of fashion ability but with prices 77% cheaper than our comparison Coach. We feel this illustrates their strong pricing position within the High Street market and their ability to follow catwalk trends and create affordable accessories for the average consumer. This must be reassuring and disappointing to management as their product looks well positioned yet their IT systems and distribution have let them down. Zara and Mango, like in our other Piper Jaffray surveys, have performed well regarding their offer of affordable and on-trend handbags this season. They presented a high level of fashionable accessories scoring 71% and 69% respectively in the looks achieved score. We believe, with their prices 70%-77% cheaper than Coach, they have positioned themselves correctly within the High Street handbag market.
Next came as a huge surprise to be a rising star.
Next came as a huge surprise to be a Rising Star as in our previous Piper Jaffray trend survey their level of fashion ability resulted in a bottom-ranking position. Next and Dorothy Perkins provided an extensive offer of handbags in real leathers, PU materials, and printed fabrics. We feel their wide choice of products enabled these brands to reach a higher fashion ability score 69% and 66% respectively. Although their level of on-trend fashion was high within the survey, we feel the quality and construction of their products was not as superior as Inditexs Zara and Mango at the same price points. In our opinion, Nexts in-house design team has produced an impressive accessories range for the 2007 spring/summer season. We feel this may be an indicator of promising changes to come in the near future as Next tries to move up the fashion ability scale towards its main high street rivals. Topshop, French Connection, Ollie and Nic, and Jane Shilton also produced a large selection of stylish on-trend handbags that scored well in our survey. Exhibit 14 illustrates the slightly higher prices of Topshop, Ollie and Nic, and Jane Shilton which are pitched closer towards the more expensive High Street brands (65-70 for a better priced bag). Considering the mid-market position of Jane Shilton and Topshop we feel these two brands may need to be more aware of their current competitors prices (e.g., Mango, Zara) to ensure they do not reach price points too high for their level of fashion ability. Although Jane Shilton and Topshop appear slightly high priced for their market position, we feel the price points French Connection and Ollie and Nic provide are correct for the quality and fashion ability of their product. M&S, Wallis, and Warehouse presented a strong level of on-trend designs scoring 51% in their level of fashion ability. This appears a lot lower than the other brands in the Rising Star category, but as their level of on-trend fashion decreases their price points also fall. In our opinion, this indicates that these brands understand their midmarket position and recognise that their key customers are not prepared to pay high prices for High Street accessories. These brands have to be aware of the lower-priced competitors, such as Primark, who are increasingly improving their fashion ability yet still achieving extreme value price points.
Topshop and Jane Shilton are pricing above their level of fashion ability
M&S, Wallis, and Warehouse are well positioned on price for their key customer
July 2007
H&M, New Look, and Primark fall into the fashionable yet low price sector of the market. The level of fashion ability within their handbag ranges is extremely high and their prices are considerably lower than our other selected High Street brands 97-98%cheaper than Coach. The trend inspired colours, shapes and patterns were strong elements within these brands, but quality and durability, was not one of their strengths. But with prices starting at 4 we feel they provide very good disposable fashion which we believe is key to maintaining volume growth on the High Street today. Cash CowsGood Fashion Ability with Premium Price Points
Radley, Ri2K, Ted Baker, Guess, and COS all fall into the higher priced sector of the market, see Exhibit 13, which shows this group is visibly more expensive than other brands within the survey and only 40% cheaper than Coach the premium brand. We believe Radley, Ri2K, Ted Baker, Guess, and COS need to increase the number of trends in their collections in order for them to reach a higher level of fashion ability that matches the premium pitched High Street price points they supply. All five brands followed the basic key themes of the season, yet we felt they had not achieved all aspects of summer 2007 that would enable them to rank higher in the survey. Ted Baker and COS provided some strong key looks within their handbag ranges that stood out from the other brands in the Cash Cow sector, but lacked a complete range. We feel if their handbag ranges were developed further to provide more choice to the consumer, their high price tags would then be in line with the level of fashion ability. Overall, Radley, Ri2K and Guess considering their high level of pricing for the High Street, did not provide enough variety in their design styles or materials that would enable them to achieve higher fashion ability score in our survey.
Problem ChildLow Fashion Ability with Low Price Points
Debenhams own brand (Collection), Liz Claiborne, John Lewis own brand, French Connection, Gap, Abercrombie and Fitch, Principles, Miss Selfridge, Esprit, Asda, Tesco, and Matalan provided low levels of fashion ability with mixed price points ranging from 72% to 96% cheaper than Coach. The result of 72% cheaper than Coach for Liz Claibourne was an unexpected score as we believe the quality of leather is of a much higher standard compared to Debenhams. We feel Liz Claiborne could afford to pitch higher prices if the trend offer was to improve. We believe Jane Shilton is a good position for Liz Claiborne to aim for as their price points are pitched higher and the level is fashion is strong for this High Street sector.
Debenhams lacked colour intensity and played safe, missing out on broadening its customer base
This season we feel Debenhams own brand Collection played safe with trends and kept their accessories extremely classic. We feel this is ideal for an older customer but if they want to attract a more varied customer base, we believe more attention should be made towards seasonal colour trends and fabrication. In our opinion Liz Claiborne and Debenhams Collection lacked the colour intensity influenced from the catwalks to inspire the trend-seeking younger customer this season. Miss Selfridge, Principles, French Connection, Matalan, John Lewis own brand, Esprit, Asda, Gap, Abercrombie and Fitch, and Tesco all provided a limited selection of handbag accessories with low levels of fashion-inspired ideas. These brands overall
July 2007
presented poor examples of on-trend accessories which, in our opinion, could have been improved to relate to the level of trend-led clothing in their mainline ranges. Asda performed well in the Piper Jaffray Spring Fashion Trend Survey, so came as a surprise to score 29% in their level of handbag fashion ability. Asda, Principles, and Abercrombie and Fitch succeeded in designing strong mainline clothing ranges, yet we feel they need to develop their strengths in their accessories business. This we feel is a missed opportunity for these companies. Although the brands in this section achieved low fashion ability scores, we believe their price points are pitched correctly for their average customer base. You can see from Exhibit 15 that the supermarket retailers Asda and Tesco are pitched in similar positions, 95%-96% cheaper than our comparison brand Coach. We feel this is the best place for these brands to be considering the low level of fashion ability they provide. We feel they should be more aware of the competition from some of the lower-priced fashion brands such as Primark, whose difference in price might be small yet their level of fashion ability could put the supermarket accessory ranges at risk. This could be another factor in the lower growth rates in clothing in edge-of-town superstores. John Lewis (own brand) was another brand whose score was a surprise in this category with a low 32% for their level of fashion ability. We believe their older/traditional target customer has contributed to the lower level of fashion in their accessories range. If John Lewis wants to expand their customer base, we believe they will need to develop more trend-inspired colours, shapes, and details to their collections to encourage a wider customer base and spend.
Dogs Low Fashion Ability with High Price Points
Modalu, Tula, and Hidesign are high on price compared to other handbag brands on the High Street yet their level of on-trend product is also low. Modalu came out with the highest pitched price points in this category and only 37% cheaper than our premium comparison brand Coach. With Modalus higher price points and traditional styles, we feel the brand should consider developing more trendinspired themes to their collections to compete with other brands on the High Street. We believe consumers will revert to more fashionable brands on the High Street where the products are more on-trend and a better price. This also applies for brands like Hidesign and Tula. These brands do, however, have the price advantage of being 57% - 51% cheaper than our comparison brand Coach. But their accessory ranges this season are uninspiring and over priced for the level of fashion ability they supply.
Conclusion
Monsoon/Accessorize and Zara stand out as the strongest brands in terms of fashion ability and price points that are competitive compared to other brands on the High Street. Topshop, Jane Shilton, and Ollie and Nic provided innovative yet commercial levels of fashion ability and also supply accessible price points for their market position. The areas of concern lie in brands such as Modalu, Tula, and Hidesign where their price points are pitched beyond their level of fashion ability.
July 2007
P R I C E A N D F A S H IO N A B IL I T Y W I T H IN P R E M I U M ACCESSORY BRANDS
Exhibit 16 shows how premium brands lie within the BCG matrix of rising stars to dogs. This exhibit illustrates how brands have either positioned themselves correctly for their market or where they show risk with their level of on-trend product but lack of a correct retail pricing strategy. The chart below also shows the premium handbag brands level of fashion ability correlated to their premium level of pricing. These results were taken from the Piper Jaffray handbag pricing and trend survey 2007 and show the strengths (Rising Stars) and weaknesses (Dogs) that premium accessory brands have in this competitive market.
Exhibit 16
RISING STARS WITHIN THE PREMIUM HANDBAG MARKET

80
Rising Stars
High Fashion Ability
70
Cash Cows
Lamarthe
Coach
Coccinelle
60
Bric's Mandarina Duck 50
Marc by Marc Jacobs Orla Kiely Osprey London
Kipling
Lower price
40
Braccialini
Higher Price
LAPA
30
Pratesi Gianfranco Ferre
20
Problem Child
-100 -80 -60 -40 -20
10
Low Fashion Ability

0 0 20 40
Dogs
60 80
Coach Lamarthe Bric's Longchamp Orla Kiely Coccinelle Furla Ghibli Mandarina Duck Marc by Marc Jacobs Nuovedive Fontanelli Claudio Ferrici Rocco barocco Osprey London Braccialini Maschera Francesco Biasia Caterina Lucchi Facondini LAPA Lorella Pagano Billionaire Nicoli Ripani Paolo Bianchi Pratesi Krizia Mazzini Gianfranco Ferre Charlotte Reid Tony Perotti Chiarugi Dents Kipling
A surprising outcome from our research of premium accessory brands was the low level of on-trend fashion compared to the High Street brands. This came as a surprise as in our previous Piper Jaffray pricing survey we noticed an increase with higher prices
July 2007
related to higher fashion. We feel that this trend is not as apparent in handbags as many of the premium brands have classic functional styles and do not choose to follow fashion trends in such detail. We do, however, believe it is extremely important for premium brands to follow current fashion trends in some of their ranges, whether it is fabrication, colour, or shape in order to attract a wide range of consumers and compete against the fast fashion retailers on the High Street. Rising Stars High Fashion Ability with Low Price Points
Roccobarocco, Maschera, Claudio Ferrici, Dents, Coccinelle (a quoted subsidiary owned by Mariella Burani), Nuovedive, Mandarina Duck, Kipling (owned by VF Corp), and Brics all provide a high level of fashion at considerably low price points for a premium brand. All brands in this category have a strategic advantage to our comparison brand Coach, with high levels of fashion ability and low pricing for this premium sector of the market. Brands such as Kipling stand out as they have a stronger price advantage over others in this category. Kipling focuses mainly on fabric-made goods which hold lower prices, but they are also developing their leather ranges with higher price points, which we feel could be very successful within this brand. We feel the level of fashion Kipling provides makes it appealing for such an accessibly priced casual wear brand. Prices are closer to the High Street at 75% cheaper than Coach, placing Kipling in a very key position within the handbag market this season. Both Kipling and Dents have room to expand their pricing structure and achieve higher price points to be more in line with the other brands in this category. Dents prices were 55% cheaper than Coach with above-average levels of trend-driven product, scoring 49% in our survey. But the brand that stood out in this section for the level of on-trend design with prices 12% cheaper than our comparison Coach was Coccinelle. Using their own signature designs they have created a very on-trend collection that incorporates 60% of the key accessory trends for 2007. We believe Coccinelles current pricing position for the level of fashion ability should drive sales higher as they have created true accessible luxury for the average consumer at affordable prices. We also believe that the Italian brand Brics spring/summer collection proved to be convincing, by showing a varied collection of styles and fabrications 7% cheaper than Coach. The mixture of contemporary and classic designs enabled them to achieve 56% of this seasons accessory trends and show their other premium competitors how the market should be approached.
Cash Cows Good Fashion Ability with Premium Price Points
Lamarthe, Longchamp, and Ghibli all achieved good levels of fashion ability but with price premiums reaching 60% more than Coach. All these brands provide high-end luxurious accessories with unique details made to the highest quality. For the high price points these brands provide we almost expected them to score 90%or more in the key looks of the season. But this is not the case. We feel these brands do not need to design high fashion it bags, as their classic shapes with seasonal on-trend details continue to attract the consumers to their brand. Osprey London is high on price compared to the premium brand Coach with an average fashion ability score of 46%. However, while we believe Osprey has some really key design pieces in the 2007 collection, their current position in Exhibit 16 shows slight risk. We feel they need to be more adventurous with colour and pattern
July 2007
and increase their fashion ability score to be more in line with other brands such as Lamarthe in this category. Marc by Marc Jacobs, Orla Kiely, Braccialini, Fontanelli, Furla, Francesco Biasia, and Caterina Lucchi all fall into the sweet spot within the market where their high prices reflect the quality and style of the product. Orla Kiely, Furla and Marc by Marc Jacobs show brand strength on their level of fashion ability scoring 54%-57%, with prices reaching only 6%-21% more than Coach. We feel they are positioned correctly for price as the quality of their merchandise is of a high standard, and in the case of some ranges, leaves head room for higher pricing as the brands are almost in line with our premium comparison brand Coach. Problem Child Low Fashion Ability with Low Price Points
Lorella Pagano,bnaire, and Facondini provide commercial levels of fashion ability at relatively low prices- 32%-57% cheaper than Coach. We feel the risk with these brands lies with the competition of High Street names such as Liz Claiborne who hold stronger levels of on-trend styles at competitive price points. Paolo Bianchi, Mazzini, Krizia, Charlotte Reid, Tony Perotti, Gianfranco Ferre, Chiarugi and Ripani also fall into this category. They all achieved low levels of fashion ability with lower price points similar to those found on the High Street. These brands fall into a more classic designed category. We found it difficult to interpret these brands fashion ability as many of these products have been designed for a functional purpose, using exquisite leathers and expensive forms of manufacturing. Therefore we feel these products are still sought after by a more traditional consumer for different reasons such as travelling and work wear (e.g., carry bags for laptops). We do however feel that in order to keep ahead of the ever-changing trends of the market, these brands should follow seasonal trends to some extent to give their brand the best chance of surviving in this competitive industry. The Italian brand Chiarugi achieved the lowest scores as illustrated in Exhibit 16. Their level of fashion ability is extremely low, accounting for only 16% of this seasons handbag accessory trends. Although their level of fashion-inspired themes was poor in this survey, the construction of the accessories is of a very high quality for their level of pricing at 21% below that of Coach. On this basis, we do feel if Chiarugi wants to appeal to a larger market they should consider introducing more trend-led designs in order to compete with other on-trend premium brands in the market.
Dogs Low Fashion Ability with High Price Points
L.A.P.A. and Pratesi fall into this category achieving low fashion ability scores with retail prices up to 57% more expensive than Coach. These two brands show elements of risk due to their limited selection of on-trend looks accompanied by premium price points within their spring/summer ranges. Some High Street brands such as Hidesign and Modalu achieved lower levels of ontrend product as they are appealing to the more classic/traditional sector of the market. We feel that this is also true for L.A.P.A. and Pratesi, where their classic style holds appeal to only a limited sector of the handbag market therefore reducing their level of accessibility and ability to drive sales.
July 2007
Conclusion
Overall, we judge that the key growth potential brands in our survey of the premium handbag market are Marc by Marc Jacobs, Orla Kiely, Fontanelli, Furla, Francesco Biasia, and Caterina Lucchi. We feel they have justified their superior price points via their strong levels of fashion ability from their interpretations of key 2007 trends. We also feel Roccoborocco, Maschera, Claudio Ferrici, Dents, Coccinelle, Nuovedive, Mandarina Duck, Kipling, and Brics have strong pricing positions within this market along with fashion ability that provides affordable and accessible luxury to a wider customer base. We feel accessibility is the most important factor for any accessory brand if it aims to become a successful domestic and global asset. If a brand creates multiple price points within its ranges it will then be available to a larger customer demographic and increase its overall sales creating a virtuous circle of growth.
July 2007
T K M A X X A C C E S S O R I E S - C OM P E T I T I ON F O R T H E HIGH STREET
TK Maxx is part of the TJX Companies, Inc. a world leader in off-price retailing, which is selling department-store brands at significantly lower prices through timely large stock purchases and tight inventory control. There are eight brands under TJK Companies, Inc. operating the same business strategy of low price retailing; TJ Maxx, Marshalls, Winners, Home Goods, A.J. Wright, Home Sense, and Bobs Stores. TJX Companies, Inc. net sales were $17.4bn, up 9.1%, in 2007 FYE generating a pre-central costs profit of $1.4bn, up 20% see Exhibit 17.
Exhibit 17
TJX INC. COMPANY HIGHLIGHTS
Source: TJX Companies Inc.
TJ Maxx was founded in 1976 with its first stores in Worcester and Auburn Massachusetts and now operates 821 stores in 48 states. TJ Maxxs operations generate $15.5bn sales in the United States and Canada with over 2,250 stores covering 53m square feet. The brand launched in the UK in 1994 and opened its first off-price store in Bristol. To date, TK Maxx is now present in 203 stores in the UK and eight in Ireland with an average trading space of c.22,000 square feet generating $1.8bn (1bn) of sales, see Exhibit 18. The plan is to expand at the rate of 15 stores per annum. TK Maxx is the only major low-price retailer in Europe offering big brand names at great value. Their aim is to provide numerous famous labels and brands under one roof up to 60% less than the High Street. Exhibit 15 shows the progress in sales and profits of the UK operations since 1998 with compound total sterling sales growth of 27% and EBIT margins expected to be 6%or more this year. This type of competition goes some way to explaining why mid-market department stores like Debenhams are underperforming in sales and profits.
July 2007
Exhibit 18
SALES AND PROFITS GROWTH- 1998-2007E

Calendar years $m 1998 1999 $/ 1.65 1.617 Total stores 31 39 Sales m 135 185 Sales $m 222 299 $ growth (%) 34 growth (%) 37 Ebit -2 6 Ebit margins (%) -1.0 2.2 Source: Company accounts, Piper Jaffray 2000 1.515 54 257 389 30 39 11 2.8 2001 1.44 74 361 521 34 41 13 2.5 2002 1.503 101 479 720 38 33 43 6.0 2003 1.635 123 607 992 38 27 61 6.1 2004 1.832 147 712 1304 31 17 70 5.4 2005 1.819 170 834 1517 16 17 69 4.6 2006 1.843 197 1012 1865 23 21 109 5.9 2007E 1.95 210 1128 2200 18 12 133 6.1
We visited various TK Maxx stores across London (Croydon, Sutton, and Clapham) to find out the range of handbag brands they provide and the level of pricing compared to the High Street. The coverage of brands in TK Maxx was extensive across all product areas, with handbag accessories taking up c.30% of the selling space within the stores. TK Maxx store space varies from large to extra-large stores with square footage starting from 15,000 square feet going up to 40,000 square feet. On average, we have calculated that TK Maxx sells c.16,000-25,000 handbags a week in the UK or 78-123 per store per week, which gives us an idea of how profitable this area of the business is. This compares to large department stores like Debenhams who occupy many primary pitches and sell on average c.17,000 bags a week or 128 per store per week. We estimate Debenhams generates c.65m in sales from handbags or c.3% of department store sales, compared to TK Maxx at c.48m or 5% of sales, yet TK Maxx is a less developed brand in the UK. TK Maxx provides an assortment of handbag brands from well known British brands such as Ri2K and Jane Shilton to American labels such as XOXO and Coach. These brands are pitched at very different price points compared to other retailers on the High Street, yet we were surprised by the levels of pricing architecture within the store. See Exhibit 19.
July 2007
Exhibit 19 illustrates the pricing structure for handbags within TK Maxx. We feel their range of pricing could stretch further across the mid-price point areas. This would open more opportunities for different qualities / brands of handbags and increase the price accessibility for the consumer. We also believe they could reach higher-pitched prices amongst the designer leather handbag brands, as we feel they may not be achieving the best margins possible with the higher-priced brands.
Exhibit 19
HANDBAG PRICE POINTS WITHIN TK MAXX

120.00
Tk Maxx highest handbag price point is low

100.00 99
Gap in Tk Maxx price points

80.00 69.99 Prices in
60.00
40.00 29.99
34.99
20.00 6.99 0.00

1 2
9.99
12.99
14.99
Handbag price points
We struggled to find any brands priced over 99 in our store visits as we suspect the quantities offered by vendors become more limited above 100. We felt this pricing strategy was good for building the customer base especially with tightening consumer budgets. However, we believe TK Maxx could achieve slightly higher price points, resulting in a stronger margin considering the variety/quality of product they are currently selling. For example, the renowned Italian brand Coccinelle was displayed in TK Maxx at 39.99 for a small-sized tote bag. The price stated on Fozeri.com (a discounted luxury goods site) was 79.00. Therefore TK Maxx is currently selling their product 50% cheaper than the already discounted price on the internet at Fozieri.com. We think that this is excellent value for branded leather goods especially when products have been selected from the current 2007 ranges.
July 2007
Exhibit 20 illustrates the price differences between TK Maxx and the British High Street. You can see with some brands such as Nicoli (the Rome-based fashion brand) that the discount price is over 60% cheaper than the price found in department stores across the UK.
Exhibit 20
TK MAXX PRICE COMPARED TO THE HIGH STREET

200 180 160 140 Price in 120 100 80 60 40 20 0
TK Maxx High Street / own website price
ts e
Handbag Brands
We carried out the handbag trend survey for TK Maxx where they scored 66% in the looks achieved score. We felt this was an impressive result for a discount retailer. TK Maxx has the advantage of gathering many designers and labels together which has enhanced their level of fashion ability in this survey. But we still believe that the TK Maxx buying team has sourced a strong on-trend collection of accessories this season that holds a unique competitive edge in price as well as fashion ability against all brands and retailers on the High Street. With more advertising and brand awareness TK Maxx could capture a lot more of the department store traffic in the UK.
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July 2007
TOP BRANDS
Monsoon Accessorize
Accessorize (Market cap 705m) has developed a distinctive identity using an experienced design team with strong influences from sources in the Far East. They are a multi-channel retailer with home and clothing ranges for men, women, and children sold across two brands within the company- Monsoon and Accessorize. Annual turnover 52 weeks to 26 May 2006 was 485.4m and PBT was 57.9m, down 2%. Management expects full year PBT to be 48m mainly as a result of distribution and IT systems issues. Zara is part of one of the largest fashion groups worldwide. Inditex (Market cap 28bn) holds seven other retail brands from Paul and Bear, the childrens brand, to Massimo Dutti, the adult premium lifestyle brand. Zara offer the latest trends that are brought quickly to the consumer in stylish designed environments. They aim to create a special atmosphere that will enable the customer to thoroughly enjoy the shopping experience. Zara is present in 64 countries with a network of 1031 stores situated in all major cites around the world. Inditex reported sales of 8.196bn, up 21.6%, and EBIT of 1.35bn (16.5% margin) for the year to 31 January 2007
Inditex- Zara
Jane Shilton
Jane Shilton (Private) has been established for 63 years and now trades all over the world in domestic markets as well as export markets from Europe to the Far East. They are a multi-channel brand who specialise in handbags but also feature shoe and small leather goods collections. This brand consists of six signature stores with over 150 stockists in the UK. In FY06 turnover was 14.8m, up 5%. Mainly wholesale. Vanity Fair Corp (Market Cap $10.5bn) owns 10 brands across the active lifestyle clothing and accessories sector ranging from Vans to North Face, Nautica, and of course Kipling. Kipling name themselves the best womens casual bag brand in the world Kipling is a global lifestyle brand selling functional/fashion casual wear bags sold in 50 countries across Europe, USA, and the Far East. They are attracting a set of younger new customers as the brand increases its fashion ability and market penetration in the United States and Asia. Kipling has 124 stand alone stores and aim to open a further 50 stores by the end of 2007 as well as launch an E-commerce offer. In 2006 Kipling achieved a growth rate of 21% vs. 2005. They aim to grow by a further 18% in 2007 helped by an increase in new lines driving volumes. VF Corp generated sales of $6,216m in 2006, up 10%, across all 10 brands.
VF Corp (Kipling)
Finduck Group Mandarina Duck
July 2007
The holding company Finduck Group (Private) operates under the Mandarina Duck brand with the Lamarthe brand now independent and separately quoted (20.8m Market Cap, sales of 18.5m this year). Mandarina Ducks utility-designed products initially made from synthetic fabrications but now producing a range of leather accessories and luggage. Multi-channel brand consisting of two sub brands: Ys Mandarina and M line. Present in 1,100 multi-brand shops throughout Europe of which 70 are department stores and 160 are stand-alone Mandarina Duck stores. Retail sales over 100m. Global brand, operating in Asia, Europe and Russia. Expansion plans to progress into the U.S. market.
Mariella Burani Fashion Group Braccialini and Coccinelle
MBFG (Market Cap 787m) designs and distributes luxury leather accessories, apparel, and jewellery worldwide with sales of 581m in FY06. MBFG is a multi-branded company consisting of five leather goods brands accompanied by five apparel brands, three jewellery brands, and four software/IT brands used in fashion MBFG also holds the licensing to brands such as Miss Sixty, D&G, Missoni, and Vivienne Westwood. MBFG has 30 years experience in the Italian textile industry Antichi Pellettieri (separately quoted) leather goods subsidiary generated 249.6m in 2006. The leather goods division generated 42.9% of group revenues in 2006. Braccialini consists of 90 concession stores with 16 boutiques worldwide. Coccinelle are present in 1,350 multi-brand sales outlets worldwide with 14 signature stores situated in world-fashion capitals.
Brics
The 50+-year-old private Italian brand Brics aims to be modern, practical, and aware of fashion trends yet keeping in mind the tradition and practicality of where the brand began. They aim to spread the brand identity that symbolises style and manufacturing technology further in the United States and Asia through agreements with Tumi, Kipling, and The Sak. They consist of over 150 stores, outlets, and boutiques worldwide mainly focusing in the European regions with sales estimated at 500m.
July 2007
CONCLUSION
In conclusion we see several trends and key factors emerging in the handbag/accessories market in Europe. 1. The market size and growth rate for accessories and specifically handbags is, in our view, substantially greater than previously estimated and growing faster than most main-line clothes brands. The fragmented nature of the accessories market, which is mainly privately owned, makes this segment highly attractive to consolidation from larger quoted and private U.S., Asian, and European companies. We view the opportunity to acquire and develop a small 300m turnover business, with mainly European distribution, into global brands as a highly attractive outcome. This could be achieved through extending the brands distribution and range into premium and diffusion lines and by licensing or developing options into associated categories that compliment existing ranges. There are strong connections within the leather goods market between shoes, handbags, and other leather goods which provides plenty of profit potential to be captured from joint marketing, distribution, and design. Ownership of direct-to-consumer channels and the Internet look set to accelerate as domestic brands take control and aim to leverage themselves into global icon brands with less dependence on inconsistent relationships with buyers from department stores and independents. We believe there is room in the global accessories market for several more Coachto Luxottica-size businesses with $2bn - $7bn or more in sales. The brands which we identify as rising stars could look attractive to larger corporate ownership which can develop broader ranges and pricing structures to capture a wider consumer base with greater economies of scale. This is not simple, as it needs to be achieved while preserving the unique qualities, heritage, and attributes of the individual brands. However, in our view the value creation is 10bn per annum as western and new developing market consumers (Russia, China, and India) seek to be associated with premium, high-fashion brands.
2.
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July 2007
NOTES
July 2007
Important Research Disclosures

Distribution of Ratings/IB Services Piper Jaffray
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [OP] HOLD [MP] SELL [UP]
352 249 20
56.68 40.10 3.22
104 27 0
29.55 10.84 0.00
Note: Distribution of Ratings/IB Services shows the number of companies in each rating category from which Piper Jaffray and its affiliates received compensation for investment banking services within the past 12 months. NASD and NYSE rules require disclosure of which ratings most closely correspond with "buy," "hold," and "sell" recommendations. Accordingly, Outperform corresponds most closely with buy, Market Perform with hold, and Underperform with sell. Outperform, Market Perform and Underperform, however, are not the equivalent of buy, hold or sell, but instead represent indications of relative performance. See Rating Definitions below. An investor's decision to buy or sell a security must depend on individual circumstances.
Important Research Disclosures

Analyst Certification Mike J. Dennis, Sr Research Analyst
The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Affiliate Disclosures: This report has been prepared by Piper Jaffray & Co. or its affiliate Piper Jaffray Ltd., both of which are subsidiaries of Piper Jaffray Companies (collectively Piper Jaffray). Piper Jaffray & Co. is regulated by the NYSE, NASD and the United States Securities and Exchange Commission, and its headquarters is located at 800 Nicollet Mall, Minneapolis, MN 55402. Piper Jaffray Ltd. is registered in England, no. 3846990, and its registered office is 7 Pilgrim St., London, EC4V 6LB. Piper Jaffray Ltd. is authorised and regulated by the UK Financial Services Authority, entered on the FSA's register, no. 191657 and is a member of the London Stock Exchange, and its headquarters is located at One South Place, London, EC2M 2RB. Disclosures in this section and in the Other Important Information section referencing Piper Jaffray include all affiliated entities unless otherwise specified. Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues. Complete disclosure information, price charts and ratings distributions on companies covered by Piper Jaffray Equity Research can be found on the Piper Jaffray website: http://piperjaffray.com/researchdisclosures or by writing to Piper Jaffray, Equity Research Department, 800 Nicollet Mall, Minneapolis, MN 55402
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July 2007
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I N V E S T M E N T

THE UK HANDBAG MARKET 2007

2 | The UK Handbag Market 2007

Piper Jaffray Investment Research

Piper Jaffray Investment Research

The UK Handbag Market 2007 | 3

PREMIUM HANDBAG BRAND PRICES COMPARED TO COACH

% Price Difference Compared to Coach

High End Premium Handbag Brands

Source: Piper Jaffray

4 | The UK Handbag Market 2007

Piper Jaffray Investment Research

HOW WE SELECTED BETTER PRICED PRODUCTS

BETTER PRICE POINTS

Source: Piper Jaffray

DISTINGUISHING HANDBAG STYLES

Source: Piper Jaffray

Piper Jaffray Investment Research

The UK Handbag Market 2007 | 5

6 | The UK Handbag Market 2007

Piper Jaffray Investment Research

SIZING UP THE UK MARKET OPPORTUNITY

UK FREQUENCY OF PURCHASE PER ANNUM

6.91 5.89 5.12 3.58

1.79 1.28 0.51 0.51

Piper Jaffray Investment Research

The UK Handbag Market 2007 | 7

Source: Piper Jaffray

Applying Different Market Assumptions

ASSUMPTIONS FOR UK HANDBAG MARKET SIZE

Source: Piper Jaffray

8 | The UK Handbag Market 2007

Piper Jaffray Investment Research

Piper Jaffray Investment Research

The UK Handbag Market 2007 | 9

SALES PARTICIPATION ACROSS UK HIGH STREET BRANDS

Source: Piper Jaffray

10 | The UK Handbag Market 2007

Piper Jaffray Investment Research

Source: Piper Jaffray, Consensus estimates

Piper Jaffray Investment Research

The UK Handbag Market 2007 | 11

12 | The UK Handbag Market 2007

Piper Jaffray Investment Research

17 KEY HANDBAG TRENDS 2007

Source: Piper Jaffray

Summary of High Street Winners

Piper Jaffray Investment Research

The UK Handbag Market 2007 | 13

Summary of Premium Brand Winners

14 | The UK Handbag Market 2007

Piper Jaffray Investment Research

Source: Piper Jaffray

Piper Jaffray Investment Research

The UK Handbag Market 2007 | 15

Source: Piper Jaffray

16 | The UK Handbag Market 2007

Piper Jaffray Investment Research

Piper Jaffray Investment Research

The UK Handbag Market 2007 | 17

% Price Difference compared to Coach

4 2% 41 % 21% 20% 13% 12% 6% 1% 0%