- Luxury has benefited from global growth, with French brands
outperforming Italian.
- Volume recovery could stimulate pricing power.
- Kering, LVMH and Moncler outperforming
The past two years has seen a pick-up in luxury goods, as the
global economy continues to expand. Chinese sales are trending
upwards and growth has rebounded in Japan and Europe. Valuations
are also attractive: the sector is on a price/earnings (PE) ratio
of about 23 times - although excluding Hermès, whose high PE of
40.531 distorts the picture, the PE is 20-21. This compares with a
historic range of 18-20 times.
Best-in-class
Within the luxury goods sector there have been winners and
losers. Jewellery has outperformed watches and, by and large,
French brands have outperformed Italian, with some exceptions.
The outstanding performer of the past year was Kering, headed by
Francois-Henri Pinault. Its success is largely down to the new CEO
for Gucci, Marco Bizzari, and a new creative director, Alessandro
Michele. The team have rebranded the company and launched new
products, resulting in impressive sales growth.
LVMH, with best-in-class management and 70 brands, has continued
to perform well. The CEO, Bernard Arnault, and CFO, Jean-Jacques
Guiony, have pushed the group to expand through successful,
performance-enhancing acquisitions to produce consistent
performance, even when cynics have said those acquisitions were
over-expensive.
The performance of the sector shows this area of retail has seen
volume recovery. Volume precedes price - so if economic stability
continues and geopolitical events do not derail the trend we should
see some pricing power returning. For example, how much would
someone pay for a handbag? Press reports recently show a
second-hand handbag sold for $380,000 at Christies in Hong Kong. So
perhaps pricing power is already here.
Key risks
There are three key risks to future growth in the sector. First
is China. In 2012 when President Xi Jinping banned extravagant
gift-giving during business transactions, watch sales suffered - in
some areas this so-called 'gifting' accounted for around 30% of the
market. Since the ban the market has normalised, but is unlikely to
return to previous highs. A repeat of this in China would have
similarly damaging effects. However, given that the government in
China is more consumer-focused, this seems unlikely.
Second, there is a shift towards experience over ownership. The
travel sector is a particular beneficiary, a trend that could
threaten luxury goods sales. However, travel is more at risk from
geo-political destabilisation or health scares.
Third, fashions change. The fear for luxury goods manufacturers
is that the consumer no longer favours a brand's products.
Thankfully, such shifts are well signposted and the fashion cycle
is reasonably long.
M&As
Kering, LVMH and others have shown that aggregating brands in
one business gives scale, boosting sales and profitability. So we
expect some of the minnows to sell out - and a consolidating
industry is healthy and ripe for successful investment.
Going forward
We have seen some firms expanding into lucrative areas of
fashion, such as Moncler entering knitwear, and this is a trend
worth watching. New management bringing new ideas may also benefit
some companies. For example, Moncler's 'Genius' collection,
unveiled at the Milan Fashion Week, eschews the industry-standard
twice-yearly release rhythm by rolling out collections once a
month.
We believe jewellery will continue to outperform watches, and
see promising signs of innovation in this area. Pandora, famed for
its silver charms and bracelets, is poised to bring out its new
'Shine' collection of gold-plated jewellery, which might attract
new buyers as well as existing customers.
Finally, we are also seeing soft luxury goods - high-end apparel
and leather goods - enjoying strong and continuing momentum.
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