Originally part of Marzotta Group (MZTI.MI), an Italian textile company. In 2005, after 10 years building the Hugo Boss and Valentino brands, the company partially spun off the fashion group - existing shareholders got 1 share of Valentino (V.MI) stock for every original Marzotta share - to give Valentino more control over its business. Early indications suggest it’s working. The price on July 1, 2005 when shares began trading was €20.12; yesterday’s close was €32.19, a 64 percent return in less than two years. There’s more to come.

Putting aside the great brands the company sells, I’m especially keen about the European business environment in the next two to three years. Today,  European innovation seems to occur more frequently than in the United States. Designers from over the pond, thought to be an elitist group, have taken on an entrepreneurial spirit once the exclusive domain of Americans and are doing a great job. Valentino is a classic example.

It was a good year for Valentino in 2006. Overall sales (€1.93 billion) were up 13.6 percent and profits, a more subdued 5.2 percent. Hugo Boss, whose sales account for 76 percent of total revenue saw them increase by 14.2 percent and Valentino, a much smaller, yet important piece of the pie, was up 14.5 percent. Of all the different categories, women’s collections experienced a 36 percent increase in sales and the rest were almost as impressive. Sales across Europe were up mid-double digits with 2007 showing room for improvement into the low 20’s. An article in Bloomberg this morning wrote that European retail sales in April were the highest in 10 months as good weather and rising employment put people in the mood for shopping. I believe that this situation will continue for most of 2007 and into 2008. High gas prices in Europe have become commonplace. Its citizens have long ago come to grips with this reality. I believe there is little concern, in Europe any way, about a dramatic slowdown in consumer spending.

Some things to consider when looking at Valentino shares:

• The current price to sales ratio is 1.2. Recently, we wrote about Liz Claiborne (LIZ), a similarly sized company in terms of market capitalization. It’s price to sales ratio is 0.93. Ralph Lauren (RL), with approximately $1 billion more in revenue, has a price to sales ratio of 2.23. They’re growing at about the same speed so either Ralph is grossly over-priced or Valentino is a stock ready to take off even further than it already has in 2006.

• The company looks to double sales of the Valentino brand, currently €250 million, by 2011. It has said in the past that it wants to increase the level of brand awareness of the designer label.

• In March, the company announced a worldwide agreement with Timex to produce high-end watches under the Valentino label. Given I own Movado (MOV) stock, I believe wholeheartedly in the luxury watch market. It’s a sensible brand extension, not to mention Hugo Boss is also in the jewellery biz.

• I don’t take much stock in analysts but for those that do, here is an interesting blurb about Valentino from the UBS Luxury Market report they did for clients in January: “We predict a double-figure increase in profit between 2006 and 2008”. One of the reasons for this is the group’s increased brand penetration and its geographical expansion of retail and wholesale operations. Meanwhile we are awaiting greater visibility on the medium and long-term strategy.”

I’m not much of a fashion plate but I do know quality when I see it. I have a Hugo Boss blazer that’s easily 10 years old and it still looks great. If you look under the hood I think you’ll like what you see.

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