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March 1, 2013 Moleskine SpA Italy: Branded Consumer Goods: Luxury Goods “A book yet to be written” Growing strongly (Re)launched in 1996, Moleskine’...
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March 1, 2013

Moleskine SpA Italy: Branded Consumer Goods: Luxury Goods

“A book yet to be written” Growing strongly (Re)launched in 1996, Moleskine’s notebooks have grown with the digital age. The company created and dominates its own market. Appealing to professionals, students and artists alike, it is an accessible luxury for the mobile consumer or worker of the 21st century. Using a Moleskine notebook makes a statement in the same way as one’s brand of laptop, smartphone, pen or watch does.

Company strategy/profile Moleskine is a fast growing, branded luxury accessory company specializing in premium notebooks and other products for the mobile age. Its artistic heritage and award winning design have made it popular across continents and different groups of consumers. Recent and future developments such as Evernote linked notebooks are designed to position the company to help customers bridge the digital-analog continuum.

Special Report THIS DOCUMENT MAY NOT BE DISTRIBUTED IN THE UNITED STATES, CANADA, OR JAPAN. THIS DOCUMENT HAS BEEN FURNISHED TO YOU SOLELY FOR YOUR INFORMATION AND MAY NOT BE REPRODUCED OR REDISTRIBUTED TO ANY OTHER PERSON.

Capital light Although the group supplies the majority of its products on consignment, it employs a capital light model, supplying its products to third-party owned retailers. Accordingly, we believe the company can generate significant cash even while growing strongly.

Key risks A Moleskine is a discretionary purchase by the consumer and thus is vulnerable to changing consumer tastes or, potentially, economic weakness.

Financials: 27% forecast earnings growth and 28% return on capital We estimate that Moleskine can see average top line growth of 22% pa to 2015 driven by further penetration of existing markets, entering new markets and the development of new products. We forecast the operating profit margin to expand gradually from 38.8% in 2012 to 39.3% in 2015 as a changing distribution mix allows a greater proportion of retail sales value to be captured by the company. We estimate that earnings can grow by an average compound rate of 27% pa to 2015 and that the capital light business model will allow it to have a 28% average return on capital in this time period. William Hutchings +44(20)7051-3017 | [email protected] Goldman Sachs International Charles Burrows +44(20)7774-6504 | [email protected] Goldman Sachs International Lucinda O’Connor +44(20)7502-9353 | [email protected] Goldman Sachs International

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by nonUS affiliates are not registered/qualified as research analysts with FINRA in the U.S.

THIS DOCUMENT MAY NOT BE DISTRIBUTED IN THE UNITED STATES, CANADA OR JAPAN. The Goldman Sachs Group, Inc.

Global Investment Research

March 1, 2013

Moleskine SpA

This document has been prepared by its authors independently of Moleskine S.p.A. (the "Company"), Appunti S.à r.l. (“Appunti”) and Pentavest S.à r.l (“Pentavest” and together with Appunti, the Selling Shareholders”). Goldman Sachs International has no authority whatsoever to give any information or make any representation or warranty on behalf of the Company, any Selling Shareholder, Goldman Sachs International, UBS Limited, Mediobanca – Banca di Credito Finanziario S.p.A., BNP Paribas and any advisors to the Company or Selling Shareholders or any other person in connection therewith. In particular, the opinions, estimates and projections expressed in it are entirely those of the authors hereof and are not given as an agent of the Company, any Selling Shareholder, Goldman Sachs International, UBS Limited, Mediobanca – Banca di Credito Finanziario S.p.A., BNP Paribas and any advisors to the Company or Selling Shareholders or any other person or in its capacity as a manager or underwriter of any offering. Goldman Sachs International and/or one or more of its affiliates is or may be acting as an underwriter in an offering of securities of the Company. This document does not constitute or form part of any offer, solicitation or invitation to subscribe or purchase any securities nor shall it or any part of it form the basis of or be relied upon in connection with any contract or commitment whatsoever. Any decision to purchase or subscribe for securities in any offering must be made solely on the basis of the information contained in the prospectus or other offering circular issued by the Company in connection with such offering. This document is based upon information that we consider reliable, but Goldman Sachs International has not independently verified the contents hereof. The opinions, estimates, and projections expressed in it are as of the date hereof and are subject to change without notice. No representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or reasonableness of the information, opinions and projections contained in this document, and none of the Company, any Selling Shareholder, Goldman Sachs International, UBS Limited, Mediobanca – Banca di Credito Finanziario S.p.A., BNP Paribas and any advisors to the Company or Selling Shareholders or any other person nor any other person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. THIS DOCUMENT IS BEING SUPPLIED TO YOU SOLELY FOR YOUR INFORMATION AND MAY NOT BE REPRODUCED, REDISTRIBUTED OR PASSED ON, DIRECTLY OR INDIRECTLY, TO ANY OTHER PERSON OR PUBLISHED, IN WHOLE OR IN PART, FOR ANY PURPOSE. NEITHER THIS DOCUMENT NOR ANY COPY OF IT MAY BE TAKEN OR TRANSMITTED INTO THE UNITED STATES (OR TO U.S. PERSONS), CANADA OR JAPAN OR DISTRIBUTED, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES OR CANADA, OR DISTRIBUTED OR REDISTRIBUTED IN JAPAN OR TO ANY RESIDENT THEREOF. THE DISTRIBUTION OF THIS DOCUMENT IN OTHER JURISDICTIONS MAY BE RESTRICTED BY LAW, AND PERSONS INTO WHOSE POSSESSION THIS DOCUMENT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS. BY ACCEPTING THIS REPORT YOU AGREE TO BE BOUND BY THE FOREGOING INSTRUCTIONS. IN COMPLIANCE WITH ARTICLE 4(1)(a)OF THE COMMISSION DIRECTIVE 2003/125/EC, IT IS NOTED THAT THIS DOCUMENT WAS DELIVERED TO MOLESKINE SPA (THE "COMPANY") PRIOR TO PUBLICATION FOR THE LIMITED PURPOSE OF REVIEW OF FACTUAL INFORMATION. THE CONCLUSIONS OF THIS DOCUMENT HAVE BEEN AMENDED FOLLOWING THIS COMMUNICATION. In the United Kingdom this document is for distribution only to (i) persons who have professional experience in matters relating to investments falling within article 19(5) of the UK Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (ii) high net worth entities falling within article 49(2)(a) to (d) of the Order and other persons to whom it may lawfully be communicated (all such persons together being referred to as “relevant persons”). In the United Kingdom, this document is directed only at Relevant Persons, and other persons should not act or rely on this document or any of its contents. In EEA Member States (other than the United Kingdom and Italy to which specific restrictions apply) that have implemented Directive 2003/71/EC (together with any applicable implementing measures in any such EEA Member State, the "Prospectus Directive") this document is for distribution only to qualified investors in that Member State within the meaning of Article 2(1)(e) of the Prospectus Directive and otherwise in accordance with the relevant laws and regulations of that Member State. THIS DOCUMENT MAY NOT BE DISTRIBUTED IN THE UNITED STATES, CANADA OR JAPAN. Goldman Sachs Global Investment Research

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THIS DOCUMENT IS ISSUED BY GOLDMAN SACHS INTERNATIONAL ON A CONFIDENTIAL BASIS FOR YOUR EXCLUSIVE INFORMATION AND CONVENIENCE AND SHOULD NOT BE REPRODUCED AND/OR REDISTRIBUTED, AND/OR PASSED ON, IN WHOLE OR IN PART, TO ANY OTHER PERSON.THIS DOCUMENT IS FOR DISTRIBUTION IN ITALY ONLY TO QUALIFIED INVESTORS WITHIN THE MEANING OF ARTICLE 34 TER, 1, LETTER B), OF CONSOB REGULATION NO. 11971 OF 1999, AS AMENDED AND OF ARTICLE 26, 1, LETTER D), OF CONSOB REGULATION NO. 16190 OF 2007 AS AMENDED. THIS DOCUMENT IS NOT ADDRESSED TO ANY MEMBER OF THE GENERAL PUBLIC IN ITALY. IN NO CIRCUMSTANCES SHOULD THIS DOCUMENT CIRCULATE AMONG, OR BE DISTRIBUTED IN ITALY TO, INDIVIDUALS OR ENTITIES FALLING OUTSIDE THE DEFINITION OF QUALIFIED INVESTORS AS PREVIOUSLY SPECIFIED NOR BE INTENDED FOR DISTRIBUTION CHANNELS. THIS DOCUMENT HAS BEEN PREPARED BY AN ENTITY WHICH MAY HAVE A SPECIFIC OWN INTEREST IN RESPECT OF MOLESKINE S.P.A., ITS SHARES OR THE TRANSACTIONS TAKEN INTO CONSIDERATION HEREBY. IN PARTICULAR THIS ENTITY IS ACTING AS JOINT GLOBAL COORDINATOR AND JOINT BOOKRUNNER IN THE CONTEXT OF THE OFFERING.

Table of contents Overview

4

Market potential is significant, if distribution is right

6

Paper products in the digital age

16

Market position: Making a statement

18

Profile

21

Valuation methodology

23

Risks

27

Financials: Low capital growth model supports elevated returns

28

The prices in the body of this report are based on the market close of February 28, 2013.

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Overview Moleskine dominates a category that it has been instrumental in creating. In this respect it is like brands such as Apple in tablet computers, Nespresso in capsule coffee and Pandora in charm bracelets or specific lifestyle retail concepts such as the Body Shop and Muji. Its iconic notebooks and associated products form part of the digital-analog continuum and are part of the make-up of many mobile workers. The possession and use of a Moleskine makes a statement in the same way as writing with a fountain pen or possessing a particular brand of smartphone. We believe that further improvements in its distribution in existing markets, expansion into Asia, especially in China, as well as the development of new products will enable the group to continue the rapid growth of the last few years. This growth has been accompanied by 39%-40% EBIT margins in the last three years. Furthermore, a combination of high margins and a capital-light wholesale distribution model means that the company is very cash generative. We estimate that excluding the intangible capital base, Moleskine generates an 93% return on capital (CROCI) or 95% return on capital employed and 43% return on assets While Moleskine’s brand image partly reflects the creative heritage of artists sketching ideas for their great paintings, we believe it is no mere coincidence that the growth of the business and development of the brand has coincided with the development of a mobile world. While the internet enabled Moleskine to go viral as a concept, it was the increasingly nomadic professional, equipped with phone and laptop, which comprises much of its core customer base. This worker may be office based, but often visiting clients, or could be largely on the road, logging on in airports and hotspots. Within the briefcase or laptop bag there is often a Moleskine notebook. While some people will only use their tablets, others will have ordinary pads of paper, the nomadic worker is often interested in his or her image and the notebook produced is as important as the pen used or the brand of laptop. Exhibit 1: Europe the main market

Exhibit 2: B2C wholesale the main product channel

2012 sales by geography

2012 sales by channel and product category

Australia 2%

B2C Online, 4.2%

B2C Retail, 1.2%

RoE 22% B2B, 16.3%

Americas 36%

UK 10%

B2C Wholesale, 78.3%

Germany 10%

Italy 11%

Source: Moleskine.

Asia 9%

Source: Moleskine.

Moleskine’s sales to consumers (B2C) totaled 84% of sales in 2012. Exhibit 2 illustrates how this is split by channel. THIS DOCUMENT MAY NOT BE DISTRIBUTED IN THE UNITED STATES, CANADA OR JAPAN. Goldman Sachs Global Investment Research

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Artistic heritage but digital future Moleskine is a branded accessory company, specializing in products for the mobile age. While its product range is expanding, the core remains the premium paper products such as notebooks and planers/diaries. Brought back to life in 1995 by Modo & Modo under the brand name Moleskine, the legendary notebook builds on its artistic heritage – it has received design awards – as well as being an indispensible accessory for many modern workers and travellers. Although it is based in Italy, it is truly international. In 2012 Italy represented only 11% of sales.

Growing strongly We believe that products such as Moleskine’s are largely impulse purchases, and distribution is key to sales growth. As such a key component of the group’s growth strategy is the upgrading of many of its retailer displays and the gradual development of direct to consumer sales through directly operated stores (DoS) or e-commerce. Growth has many platforms: •

New paper products;



Expansion into complementary products;



New geographies;



Deepening penetration of existing geographies, e.g. selling through Apple stores and online; and



Development of new channels such as retail and e-commerce.

B2B (business to business) Another area of significant potential growth is B2B, where Moleskine products are bought by companies to provide as gifts or to advertise themselves at conferences etc. Historically the B2B business has been largely reactive and relied on a small number of clients. Nonetheless it has grown from 13% of sales in 2009 to 16% in 2012, a revenue increase of 140%. Going forward Moleskine is becoming proactive, for example targeting the 20,000 promotional goods agencies in the US through a dedicated sales force.

Risks As with any small company that is growing rapidly, there is always an execution risk, especially when moving into new geographies such as China. In particular for a company that has relied primarily on viral marketing, it may have to significantly increase advertising spend if it is to continue its rapid growth. Other risks related to demand include changing consumer tastes, lower than expected uptake in new markets and increased competition. From a brand development perspective, risks relate to supply chain (including the quality and cost of supply), the ability to premiumise the product offer or to extend the brand into complimentary categories.

Financials We estimate Moleskine will have 22% pa average top line growth to 2015, driven by further penetration of existing markets, entering new markets, the development of new products in paper and complimentary products. We forecast the operating profit margin to expand gradually from 38.8% in 2012 to 39.3% in 2015 as the changing distribution mix allows the company to capture a greater proportion of retail sales value. We estimate earnings can grow 27% pa to 2015 and that the capital light business model can generate a 28% return on capital over the next three years. We note that growth in 2013 will be second half loaded. THIS DOCUMENT MAY NOT BE DISTRIBUTED IN THE UNITED STATES, CANADA OR JAPAN. Goldman Sachs Global Investment Research

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Market potential is significant, if distribution is right The market for premium notebooks or “books yet to be written” was effectively created by Moleskine in 1996. As such any analysis of the size or potential growth of the market is more than usually challenging. Hence we have looked at the size of the company’s target market in terms of number of consumers as well as the development of other unique brands. If we look at adjacent markets such as those for portable communication devices, fine writing implements and watches, these are multi-billion dollar markets. For example in 2012 there were 200mn laptops and tablets sold worldwide. In the same period Moleskine sold 14.2mn paper products, notebooks planners etc. Similarly the global market for promotional and advertising (>€22 bn according to Société BIC and PPAI) is another area where Moleskine has, in our view, only just scratched the surface. Two other markets where Moleskine can continue to grow are the stationery market and the gifting market.

Potential customers in 100mn Moleskine developed with the rise of the internet. Not only did this drive viral marketing, it expanded what ‘creative’ means. Tech entrepreneurs to the nomadic, digitally connected worker have joined the traditional artist as customers. While the company sees a super creative core transmitting ideas to creative professionals and then into a broader demographic, in our view it probably started in all three groups. Moleskine today defines its market as the set of the global population with the following characteristics: •

Aged 18-55;



male and female;



medium-high degree of education;



urban resident and/or worker;



heavy online user; and



conscious or unconscious creative aspiration.

To these we would add brand consciousness and mobile, either in leisure or through work. Moleskine diaries and planners are used in an office environment, but anecdotally the notebooks are usually found in laptop bags, handbags or wherever else they are carried by the mobile worker.

Moleskine identifies over 200mn potential customers Moleskine has attempted to calculate the scale of its target market and estimates that today it has 228mn potential customers globally (Exhibit 3) growing to 320mn by 2020. This represents some 20%-25% of the global adult population. With 47mn of today’s potential customers in Asia-Pacific where the brand is only beginning (ex-Japan), we estimate that in 2012 the company was realistically only addressing 170-180mn of this target market (emerging market penetration today is generally limited). We note that management’s estimates of the addressable market for Moleskine products compare favourably to our analysis of the global addressable market for luxury or premium branded consumer products. In our report of November 29, 2012, Europe: Branded Consumer Goods: Luxury Goods: The Life of Luxury: Cohort, category and cycle analysis points to multi-year expansion, we identified the addressable market of consumers with an income of greater than $30k to be 680mn globally. We forecast this group of global consumers to grow to 1.26bn by 2025, a growth of 4.5% pa. THIS DOCUMENT MAY NOT BE DISTRIBUTED IN THE UNITED STATES, CANADA OR JAPAN. Goldman Sachs Global Investment Research

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If we assume that the group has perhaps 10mn customers (it sold 14.2mn paper products in 2012), this represents penetration of under 6%. If we assume that it has only 5mn (though committed) customers who buy on average three products each, then penetration is under 3%. Exhibit 3: Western Europe has highest target market Moleskine’s target market by geography (in millions) – based on people living in urban areas, aged between 18-55, with medium and above level of education and income greater than $40,000 at purchasing power parity) 250 47

47

200 7 103

4

150

114

100

64

3

50 67

0 North America

Latam

W Europe

E Europe

MEA

Asia Pacific

Total

Source: Moleskine estimates based on Ales research (2012) and Euromonitor data.

The target market analysis also highlights that the largest potential market today is in Western Europe where the brand already has its highest profile and the majority of sales. It also highlights the scope for growth if the group can successfully penetrate new markets, especially China. The potential of China is illustrated by Exhibit 5, which shows sales of tablet computers in 2012. Even though Greater China sales are well behind those of North America or even Western Europe, they were still over 15mn. Of these 40% were of ‘premium’ tablets. In the other two regions shown, sales of ‘premium’ tablets accounted for over 50% of the market by units. For these consumers, brand, image and performance are important.

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Exhibit 5: Tablet sales measured in tens of millions

Estimate of number of customers in major markets (2012)

Tablet sales in 2012 in selected regions

000s

Exhibit 4: Penetration in major markets

1200

60

1000

50

800

40

600

30

400

20

200

10

0 USA

Germany

UK

Italy

0

Japan

North America

Source: Moleskine.

W Europe

Greater China

Source: Gartner.

A number of growth drivers As outlined in the Overview, we believe that Moleskine has a number of growth opportunities over the next few years. These primarily involve: •

Increased penetration of existing markets, including development of new channels;



Development of new geographies;



Introduction of new products; and



Growth of B2B.

With the exception of B2B, the key to all of them is effective distribution and so we now look at this issue in more detail in our examination of the first three growth drivers. Exhibit 6: High level of brand awareness in Western world (From consumer surveys at stated dates, note China is seven metropolitan areas only) 80% 70%

67%

67%

64%

60%

62% 56%

53%

50%

44%

42%

40% 25%

30% 20%

17%

15%

14%

13%

18%

7%

10%

N/A N/A

6/2007

12/2010

China metropolitan

Japan

USA

Germany

UK

Italy

0%

7/2012

Source: Moleskine based on Lorien Consulting and Ales Research.

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Moleskine SpA

Distribution key to increased penetration Market research carried out by Moleskine has shown a high level of brand awareness in Western Europe and North America (Exhibit 6). However, despite having over 22,000 doors, 30% of those interviewed who knew of the Moleskine brand, but had not purchased a product, said it was because they did not have easy access to a point of sale. This highlights the importance of distribution to a successful brand. In this regard a key element of Moleskine’s strategy for EMEA and North America over the next few years is to improve penetration and visibility of its product in its major markets. This strategy has four major platforms: •

Raising profile of products in stores – e.g. through upgrading to branded wall/corner displays and potentially ateliers (shop in shops) in major sites;



Selected new channel partners – e.g. Apple, Staples and Fedex stores in the US;



Selected directly operated retail store openings; and



Expansion of e-commerce.

Raising product profile In some stores Moleskine products will only appear on a shelf with other books or stationery and there is no branding other than on the product itself. In others there are dedicated displays or islands with a small brand sign. However, Moleskine has found that when a retailer offers a dedicated wall display with prominent Moleskine branding, sales increase. As such it is working with its distributors and major retailers to upgrade displays where possible. The ultimate is an atelier (or shop-in-shop) which works in department stores and allows a showcasing of the whole product range including the Writing Travelling & Reading (WTR) products. Exhibit 7: Very few doors have upgraded displays so far Doors and Displays by type and geography (end 2012)

Displays by type and Geography EMEA Americas APAC Total Total doors by Geography EMEA Americas APAC Total

Displays 8,659 4,409 2,043 15,111

Walls/Islands 345 58 50 453

Ateliers 67 8 14 89

Doors 12,509 8,474 2,591 23,574

Source: Company data.

As shown in Exhibit 7, very few doors have so far been updated. Indeed out of c.23,600 doors at the end of 2012, only 453 had walls and 89 ateliers. Moleskine reports that its own directly operated stores are able to generate higher sales density for more prominent displays and that it has a lot of interest in upgrades and is recruiting more staff to enable the fitting out of ateliers. It expects that by 2H2013 it will have the capacity to install 60-80 ateliers per annum.

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Moleskine SpA

New channel partners in existing markets As part of the strategy to increase penetration in existing markets, Moleskine is increasing its footprint with selected partners. So for example in the US, 2013 will see Moleskine products continue to be sold through selected Apple, Staples stores and enter Fedex stores. In total these outlets will add around 1,000 new doors and, more importantly, introduce the products to differing customer groups. All three new ‘retailers’ are currently selling in selected stores and could roll-out through all stores if successful. Furthermore in the US, Moleskine is considering distributing through coffee shops and other non-traditional channels. The Apple contract is remarkable in that it is rare for non-Apple products to be sold via Apple stores – it incorporates a bundled pen and Evernote notebook. In our view this will boost the awareness of Moleskine products among brand aware tech savvy customers – a core part of its target market. In Europe there is less opportunity for more points of sale, but the company believes that there are opportunities to improve the quality of space, e.g. a ‘Moleskine corner’ within a store. The ultimate development here is the directly operated branded store. The development of the five own-branded stores in Italy in 2012 is helping persuade existing outlets to change their displays. Indeed in the digital age, Moleskine believes its products help book stores – its main outlets – to diversify. Exhibit 8: Europe the largest region

Exhibit 9: Bookstores main retail outlet

Sales by geography (2012)

B2C detailed sales by channel (2012 data)

Australia 2% Other 27%

RoE 22%

Bookstores 40%

Americas 36%

Own on-line 5%

UK 10%

Germany 10%

Italy 11%

Source: Moleskine.

Asia 9%

Third-party online 10% Stationery/office 10%

Dept. stores 8%

Source: Moleskine.

In Asia more stores, especially own branded ones in malls and airports is seen as being more in tune with the local market. In particular in China, bookstores are largely state owned and are not seen as suitable retail outlets for Moleskine products. However, distribution in Asia, outside Japan, is in its infancy and thus other options may be considered.

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Exhibit 10: Variety of key retailers Illustrative key retailers

EMEA

Americas

APAC

Waterstone’s

Barnes & Noble

Loft

Fnac

Target

Tokyu Hands

Feltrinelli

Amazon

Thalia

Staples

Paperchase

Indigo

Galeria Kaufhauf

Dick Blick

Karstadt

Utrecht Art Supply

Source: Moleskine.

The largest single retailer is Barnes & Noble in the US, which represented 7% of group sales in 2012. Amazon was the second largest representing 3%. However, beyond these two, the importance of individual retailers declines markedly with the top 50 representing only 49% of sales (Exhibit 11). Exhibit 11: Outside top three retailers very diversified Concentration of retailers in terms of share of total sales (2012) 100%

90%

80%

70%

Rest Top 300

60%

50%

40%

Top 250 Top 200 Top 150 Top 100 Top 50

30%

Top 3

20%

10%

0%

Source: Moleskine.

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Moleskine SpA

Retail While a wholesale distribution model has many advantages, in particular in terms of the capital required for growth, a common drawback is that the whole of the product range does not always get the same attention. Retailers and wholesalers will focus on the faster moving items. This was illustrated in 2012 where WTR products, although representing only 7% of total group revenues, comprised 40% of sales in Moleskine’s own stores. Therefore in order to promote the whole range of products, Moleskine intends to expand its directly operated store (DoS) offering, from nine at the end of 2012 to nearly 100 by the end of 2015. However, the strategy will vary slightly in different geographies to allow for differences in local market dynamics. At the end of 2012, it had opened nine stores, five in Italy and four in China. •

In EMEA, and potentially in places such as Hong Kong and Singapore, the focus will be on travel retail (e.g. railway stations, airports). These are often locations where impulse purchases are made and (at least at airports) branded stores are common. The first stores opened in Italy were in Rome airport and Rome, Turin, Naples and Milan railway stations. In 2013, plans are already underway to open stores at Milan’s Linate airport as well as airports in Zurich and at London Heathrow.



In China the plan is to open further stores within shopping malls. Today it has four stores in Shanghai shopping malls and a further three are planned for the same city in 2013. With Shanghai likely to end up with at least eight stores, we expect a roll-out to other cities to lead to Moleskine having at least 30 stores in China within the next five years.



Finally in the US, Moleskine plans to roll out a ‘street’ format in locations adjacent to educational, design and cultural centres. In our view this will help viral marketing by seeking promotion from the ‘potential trendsetting’ class. Two test openings are planned in 2013.



Moleskine indicates that the cost to build out a DoS is around €1,000 per sqm. The typical size is 30-40 sqm. Payback in Europe so far has been around three months. In China it has been six months: although operating costs are lower in China, so are revenues per store to date. In China a retail model is necessary to build a brand as Moleskine has not found a suitable wholesale channel. Bookstores are owned by the Chinese government and books are heavily subsidised.

In terms of the economics, the capex for a directly operated store is €25,000-35,000 per store. There is also some incremental working capital in terms of inventory, but Moleskine also gets paid quicker. The average size of a DoS 30-40sqm earning €10,000-15,000 per sqm per annum, yields a revenue of €300,000-600,000 per store per year, (less currently in China).

E-commerce Potentially the most exciting development in our view is continued development of and roll-out of the e-commerce capability to many more countries in 2013. In 2012 direct ecommerce accounted for 4.2% of sales and we believe this could be 12.6% by 2015. Ecommerce allows Moleskine not only to display all of the company’s products, but provides end-customer data to assist future marketing. It is also the most profitable channel as it allows retail gross margins without retail cost overheads. In 2013 Moleskine plans to launch e-commerce capabilities in China, Taiwan, Indonesia, Hong Kong, Macao, Australia, New Zealand, Brazil, Portugal and Switzerland.

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Increased product range Independent of the channel, another way of boosting sales is to increase the product range. Even within paper in the last three years, 15%-17% of revenues have been accounted for by new products. Some of these are limited additions (e.g. a Star Wars themed notebook), but others include coloured versions of the previously just black covered books. In 2012, 93% of revenues were accounted for by paper products and we expect this percentage to have only declined slightly (to 90%) by 2015. Paper products include the eponymous notebooks – in different sizes, styles (graph, lined, plain paper) and colours – dairies and planners, cahiers, greeting cards and binders, albums etc. Not only does each year see the release of limited edition themed products, but the introduction of coloured notebooks has increased demand among female customers. Growth in WTR products together with a wider distribution of these items, as well as the development of more digital products, accounts for the slight decline in paper’s share. Indeed 2012 was the first full year of WTR sales and they accounted for 7% of sales (9% in the final quarter). Overall the group targets around 250 new SKUs (stock keeping units) per annum. Currently the WTR product range includes pens, pencils, bags, laptop covers, luggage tags and reading glasses.

Evernote Android app could be significant in 2013 In our view the most significant new product for Moleskine in 2013 may not be its own, but rather through the launch of the Android-enabled Evernote App. By enabling the camera on an Android phone to work with Moleskine’s Evernote notebook, this would open the market for this product to more than Apple customers and make it more worthwhile to develop in app purchase products, e.g. templates. Staying on the digital-analog continuum, we expect new services, such as print on demand Moleskine photobooks, to be launched in 2013.

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Moleskine SpA

B2B, significant growth potential Moleskine has found that the revenues of this business are, unsurprisingly, correlated with the number of clients. Around 75% of clients in any one year were also clients in the previous 12-month period. Hence the focus here is to increase the number of clients. The main end industries are financials, telecoms, hospitality and travel. At the end of 2012, Moleskine had a total of 308 clients in the US, 600 in Europe and 68 in Asia-Pacific. All areas exhibited growth in 2012. Until 2010, Moleskine’s B2B business was a reactive one. Customers came to Moleskine and asked for notebooks branded with their logo or with other modifications. In 2011 Moleskine started to proactively market its products to companies. Indeed, in our view, Moleskine notebooks make ideal corporate promotional items. They are likely to be carried around by the recipients, last a long time and look professional. Exhibit 12: US largest promotional products market Estimated distributor market size for advertising and promotional products by geography (2011)

Exhibit 13: Many products used for promotional advertising US promotional product sales by product category (2010) Desk/business accessories 6%

Oceania 2% Canada 7% Latin America 13%

Wearables 30% Other 34%

USA 57%

Europe 21%

Writing instruments 9% Drinkware Calendars 7% 7%

Source: Société BIC and PPAI.

Bags 7%

Source: PPAI.

Promotional products are a form of advertising According to Promotional Products Association International (PPAI), sales of promotional products in the US totaled $17.7 bn in 2011 (the last full year of data available). PPAI surveys quoted by Société BIC have highlighted the effectiveness of promotional advertising over other forms. BIC in its 9M2012 results indicated the global advertising and promotional market to be worth over €22.5 bn to the distributor level. Although the analysis of the market by geography (Exhibit 12) excludes China, with gifts an inherent part of Chinese culture, we believe that this market could be substantial, although with a local flavour. In our view this is particularly relevant for products that will remind the recipient of the provider at each (multiple) use. As such a notebook competes with pens, paperweights etc. Its advantage is that it has a long life and if carried to meetings can advertise the giver to a third-party audience. While attendees at a conference may be delighted to receive an iPad each, it does little to promote the hosting company. Alternatively golf balls may only be used once and then the logo is visible only to rabbits and worms.

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Moleskine SpA

Moleskine strategy is to be more proactive Although stationery including notebooks is a very small part of the total promotional products market, even 10% of the US market would be $1.8 bn, which compares favourably to Moleskine’s total B2B sales in 2012 of $17 mn. In order to win a higher share of this market, Moleskine has a two pronged strategy, which in both cases involves being more proactive in terms of marketing its products to potential customers. It now has 20 sales staff dedicated to the B2B business with Asia served out of Hong Kong. In some countries Moleskine has found it useful to sell via distributors. This not only allows it to potentially reach a wider client base of smaller and medium-sized companies, it also enables local customization, which can be important when turnaround times are short. For example there are 20,000 promotional agencies in the US, the largest of which is Staples (according to Société BIC’s analyst presentation) whose store network has begun to stock Moleskine products in 2013. In 2012, 80% of Moleskine’s sales in the US were via distributors.

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March 1, 2013

Moleskine SpA

Paper products in the digital age While for some people laptops and tablets may have replaced paper and pen, for many they are complementary. Indeed we believe the success of Moleskine is partly due to the increased mobility of workers and people in the digital age. Ideas, be they for products, sketches or notes, do not always come when we are in the office or at home. Hence a notebook is a common accessory. Furthermore Moleskine products make a statement about the owner in the same way that a particular tablet and/or laptop does. Hence Moleskine is a branded lifestyle/accessory brand competing for a share of the consumer’s wallet with other products such as books, luxury pens and other discretionary purchases. The branded/luxury category is significant and also linked to the idea of making a statement through creative expression. Within the writing/drawing market Newell Rubbermaid, manufacturer of Parker pens and other writing instruments, highlights that the fine writing market is worth $1.9 bn pa, 19% of the $18.5 bn total writing products market. The everyday writing market is worth $8.1 bn and it indicates that its sales of ‘writing and creative expression products’ (writing materials) is c.3.5x its fine writing revenues. Société BIC in its 9M2012 presentation indicated that even in India the paper and notebooks market was twice the size of the writing instruments market. In our view this suggests that Moleskine is competing for a share of wallet in an multi-billion dollar global market.

Are tablet computers competitors or complementary? In the modern digital age, for some people the ever growing capabilities of tablet computers pose significant competition to Moleskine’s traditional notebooks and other paper products. However, for many they are complementary, as witnessed the strong growth of the company over the last few years. The ability to sketch ideas or jot notes quickly on paper still appeals. The success of writing brands such as Waterman, Parker and Montblanc all bear witness that pen and paper are alive and well in the digital age. Indeed rather than either/or, the recording and accessing of information can be seen as a digital-analog continuum. Products like the Evernote Moleskine notebook clearly straddle this continuum, allowing analog to digital conversion. The inchoate photo-books product provides the reverse as resolution is still higher in printed form than on a screen. Furthermore the extension of Moleskine’s product range into laptop bags and tablet shells shows how the business is linked to the digital age. While electronic sketch capabilities are improving all the time and can be shared easily, a notebook obviously has the advantages of not requiring a wi-fi connection or electrical supply to view.

Fountain pen sales are also rising It is not just Moleskine notebooks that are seeing a rise in sales. An article entitled “why fountain pen sales are rising?” on the BBC website on May 22, 2012, highlighted how sales of fountain pens have been rising in recent years. “[For many], a fat Montblanc or a silver-plated Parker is a treasured item. Prominently displayed, they are associated with long, sinuous lines of cursive script. Sales figures are on the up. Parker, which has manufactured fountain pens since 1888, claims a worldwide "resurgence" in the past five years, and rival Lamy says turnover increased by more than 5% in 2011.

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March 1, 2013

Moleskine SpA

Online retailer Amazon says sales so far this year [2012] have doubled compared with the same period in 2011. They are four times higher than 2010. Stationery giant Ryman has seen a 10% increase in fountain pen sales over the last six weeks compared with the same period last year. But the rush to fountain pens is not part of a wider handwriting boom. Sales of ballpoint pens are stable. Instead the fountain pen is a classic story of how an object's status is affected by waves of new technology…The way people think about them has changed and is still changing. They are becoming an accessory rather than a working tool…Somehow, the fountain pen became a luxury item and found a niche. If a president signs a treaty, they don't do it with a Bic Cristal. If you give a loved one a pen, your thoughts might be more fountain than ballpoint. It is the stuff of graduation presents and good luck on your first day at work. The fountain pen has had to deal with both the ballpoint menace and the general threat to handwriting from the rise of email and other electronic messaging types. Sharon Hughes, a buyer for John Lewis, says people relish returning to solid, traditional objects to make sense of a difficult and complex world. "They are an old-fashioned thing but people like the personal touch. It is nice for things to be handwritten and not having everything via email," she says. According to Eva Pauli, from German manufacturer Lamy, the digitisation of everyday life has led to a change in writing by hand. "Writing is becoming more and more exclusive and personal. This will probably be the reason that some people speak of a comeback of the fountain pen", she says. Doctors, lawyers and teachers have long used them to bestow an extra layer of respectability to official documents. "We have seen a resurgence of popularity in the last 10 to 15 years. Who knows whether this is because people expect a greater range of pens, or whether it's from nostalgia – we have seen greater production of vintage-style pens, for example." In the world of business too, a good fountain pen can be seen as declaration of intent. … Nick Hewer, Lord Sugar's adviser in the BBC series The Apprentice, in an interview with the Daily Express (13/6/2011) said: "I'm not one for ostentatious treaty-signing type pens, but I do think in business making an effort with the little things sends out a signal that you are serious about what you are doing."

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March 1, 2013

Moleskine SpA

Market position: Making a statement As mentioned above, in many ways Moleskine’s products are unique (there is no other company positioned in direct competition), in other ways though it competes with alternative lifestyle brands for a share of consumers’ purchasers. Buying a Moleskine notebook, to look smart when sketching or making notes when out and about, makes a statement in a similar way to owning a particular bag or electronic device. People use a Moleskine rather than a generic pad of paper in the same way as they use a Montblanc, Parker or other premium pen rather than a cheap ballpoint pen. It looks more professional and smarter. Another excellent example of a category that has successfully navigated the competition away from technological progression and the digital age to create a strong niche business is Swiss Watches in the global watch industry. The industry saw significant pressure from digital and quartz based watch movements in the 1970s and the advent of mobile phones and portable electronic devices could arguably have seen the wrist watch industry come under pressure. However the consumer has in fact responded by increasing the participation in the mechanical watch industry growing through the price architecture as consumers demand brands with a message of quality and historical association. Moleskine sees itself as a brand that encompasses a family of nomadic objects. These include the classic notebook as well as diaries, pens as well as bags, tablet cases and reading accessories. The artistic heritage of the product is maintained through a promotion and circulation of various designs and sketches among the ‘Moleskine community’. It has also featured in films such as The Devil Wears Prada and Mamma Mia. As such the Moleskine brand is defined not purely by the performance characteristics of the product, but like many lifestyle brands, it has an extra intangible element. Themes – or so-called ‘passion journals’ – add an element of collectability and differentiation to the product. The current Passion Journals are: Home Life, Chocolate, Beer, Restaurant and Art. Star Wars and Lego branded notebooks add another avenue to the collectability as well as originality. There are other premium notebooks in competition but these are positioned more as stationery than as a “book yet to be written” and do not have the artistic heritage or brand image of Moleskine. For example a search on Waterstones.com in the UK showed that the top 50 stationery sellers on waterstones.com are all Moleskine products.

Quality important Moleskine notebooks are typically bound in coated paper cardboard, with an elastic band to hold the notebook closed, a sewn spine that allows it to lie flat when opened, ivorycoloured paper, rounded corners, a ribbon bookmark, and an expandable pocket inside the rear cover, packed in a paper banderole. Pages take ink from all pens and the sturdy cover takes substantial handling. This combination received a design award, with Phaidon Design Classics mentioning the Moleskine notebook as one of 1,000 classic design objects. The brand image means that the quality of products is very important. Although the paper products are made in China and (increasingly) Vietnam, Moleskine supervises the process and sources the raw materials. The WTR products are predominantly made in Europe.

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Moleskine SpA

Distribution also important in building and maintaining brand As discussed above, many purchases of Moleskine products are made on impulse. Therefore distribution is important and helps the company become better known. This reinforces the brand, encouraging more retailers to stock the product and so on. In our view this is an important barrier to entry. In this respect, management of the distribution chain is important. Although Moleskine maintains direct relationships with its largest 50 retailers (accounting for 49% of B2C sales), the actual supply of the retailers is carried out by third-party distributors who have exclusive territories or channels. The majority of products are shipped to the distributors on consignment although in some countries (Asia and half of Europe), the distributor owns the stock. As well as shipping logistics, the distributor bears the credit risk of the retailers. Distributors have a targeted value of purchases and minimum purchases, wholesale price and delivery terms/frequency set out in contract. Distributors typically have two-year contracts and Moleskine continually monitors their performance. In recent years a number have been changed. •

2008 US;



2009 Japan;



2010 France and Spain;



2012 Australia, Korea and consolidated in Germany.

For a bookstore owner – the largest category of outlets – Moleskine products provide some diversification. With retail prices around 2.7x-3x the price Moleskine charges its distributor, there is a healthy mark-up for both distributor and retailer. Moleskine only suggests retail prices with the retailers able to charge what they like.

Retailers get significant additional revenue Dividing Moleskine’s consumer revenues by the number of doors at the end of 2012 implies average revenues of €8,000 each. However, Moleskine estimates that a typical retailer with a display/wall or atelier earns €10,000-15,000/sqm of revenue per year from its products. This is useful additional revenue for any store.

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Moleskine SpA

Marketing – largely viral Moleskine positioned itself from the start as a blank book or a “book yet to be written”. It was priced relative to books and has a hard cover. With the paper products priced around €15, they are still priced like a hardback book and accessible to all. Many companies that seek to establish a brand have to spend a fortune on advertising. Moleskine has been lucky in that its customers have been its biggest promoters. Developing at the same time as the digital age blogs and other digital media have promoted the product. For example the group has 20,000 followers on Twitter. Paradoxically marketing spend is increasing as e-commerce grows due to around one-third of sales leads coming from this medium via paid search (more in some countries). Others come via Moleskine’s own site or direct to its store. Nonetheless Moleskine does spend money on promoting the brand and products through events, highlighting the artistic heritage. For example it has travelling exhibitions and interactive events at various stores (including third-party retailers). Despite this, 50% of customers discover brand through going into a store. Therefore Ateliers and Wall displays help promote the brand in-store and a wider range of products, especially WTR. Furthermore, while B2B is an important product in its own right, it is also a way to reach new customers with no marketing expense. Indeed many people will own a Moleskine without realising it, having been given it as a corporate product to take notes at a conference or meeting.

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Moleskine SpA

Profile Although it boasts of its artistic heritage going back to Hemingway and Van Gogh, the modern Moleskine only dates back to 1996 and in that way is very much a product of the digital age. Inspired by Chatwin (see ‘History’ below) the new Moleskine was seen not as a notebook, but as a “book yet to be written”, which is why they were initially priced at the price of a book. Fortunately 1996 was just at the time the internet was developing and the product benefitted from substantial viral marketing, being mentioned in blogs and online. Many entrepreneurs designers etc. wished to have somewhere to jot down ideas and the Moleskine became the notebook of choice among the creative class. Moleskine’s product range includes notebooks, planners, diaries, sketchbooks and albums. Since 2011 the range includes other objects connected to the cultural activities of reading, travelling and writing, such as: bags, reading glasses, pen, pencils, cases for digital devices, booklights and reading stands. While based in Italy, it is already truly international. Italy today represents 5% of sales through the consumer channel, but also accounts for nearly one-third of the business to business channel and thus represented 11% of overall sales

History – artistic heritage Notebooks with features similar to the present Moleskine notebooks were a popular standard in 19th and 20th century Europe, handmade by small French bookbinders who supplied the stationery shops of Paris. They were called ‘moleskines’, a reference to their black oilcloth binding. In France, these notebooks are known as carnets moleskines: 'moleskine', in this case, being its black oilcloth binding. As documented by many art collections and museums, in the late 19th to early 20th centuries, these notebooks became a prominent creative tool for avant-garde artists who enjoyed drawing and writing outdoors; putting down impressions on paper; painting from life in the streets and cafés; and capturing extemporary scenes, ideas and emotions. Among artists who used similar black notebooks were Oscar Wilde, Vincent van Gogh, Pablo Picasso, Ernest Hemingway and Henri Matisse. The present Moleskine notebook is specifically fashioned after Bruce Chatwin's descriptions of the notebooks he used in his travels. The name "Moleskine" comes from the name that Bruce Chatwin uses in The Songlines (1986). Chatwin tells the story of his original supplier of notebooks, a Paris stationer who in 1986 informed him that the last notebook manufacturer, a small family run firm in Tours, had discontinued production that year, after the death of the owner. "Le vrai moleskine n’est plus" ("The real moleskine is no more") are the words Chatwin puts in the mouth of the owner of the stationery shop in Rue de l’Ancienne Comédie. In 1995 a small company based in Milan named Modo & Modo SpA decided to bring this notebook back to life, establishing the Moleskine trademark and starting production of Moleskine notebooks with 5,000 pieces (2006). The founder Francesco Franceschi had the idea that as people were travelling more, the notebook would be ideal for recording good restaurants, making notes or sketches etc. when mobile. In 1999, Modo & Modo SpA started distributing outside Europe, notably in the US. In 2004, Moleskine notebooks were launched in Japan.

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Moleskine SpA

In the digital age In 2011, Moleskine production extended to new categories with the new Writing, Travelling & Reading Collections, launched at the Milan Design Week 2011. Most of the objects in these new collections are designed by Italian industrial designer Giulio Iachetti. They include bags, computer cases, reading glasses, pens and pencils, booklights and reading stands. In late 2011, Moleskine company follows up the book, The Hand of the Architect, with an iPad app presenting all the sketches, drawings, and biographies of the 110 featured architects.

Management In 2006 private equity firm Syntegra Capital acquired a 75% stake for $76 mn. It brought in new senior management to take the group to the next stage in its development. The CEO, Arrigo Berni started his career with P&G, and joined group in 2006, when he evaluated the opportunity with current majority shareholder Syntegra Capital. The CFO, Alessandro Strati, started his career with Black & Decker, then spent some time with Newell Rubbermaid (owner of Parker Pens and other writing brands). He joined the group in 2008. The Director of Brand Equity and Communication, Maria Sebregondi, and Director in charge of Sales and Marketing, Fabio Rosciglione, have both been with the business since 1995. Finally in 2011 the group recruited a Director of Digital, Peter Jensen, who had previously been in a similar role at Lego. Also in early 2011 Index Partners acquired 15% of the group. Today the other holdings are Syntegra (68%) and management, including ‘Founder’ Francesco Franceschi, own the remaining 17%. We expect a €2 m charge in 2013 relating to a crystalisation of a management incentive plan and a new incentive plan to be put in place after this for future years.

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Moleskine SpA

Valuation methodology In valuing Moleskine we would compare it both against branded retail and consumer goods companies, as well as high growth European midcap names under our coverage. Moleskine’s growth and returns compare favourably against both peer groups. To judge how investors value similar financial characteristics we have run a screen of GS EMEA coverage (1,280 stocks). We have screened for high-growth (CAGR of sales 2012-15E >10%, net income CAGR 2012-15E >20%), where market cap >€500 mn and