Luxury: a new environment
The luxury goods sector’s rally after the 2008–09 downturn came to an end in 2014. At that time, luxury stocks declined by 11% on average which was followed by a 15% decline on average the year after. The sector eventually came to a respite in 2016 (10% average return). So far, 2017 bodes well with share prices up 15% on average.
For 2017 anticipations for the personal luxury goods market are for 2–4% growth (at constant currencies or EUR 254–259 bn), according to business consultancy Bain & Cie estimates. Europe is expected to grow 7–9%, barring terror attacks that would diminish tourism flows. Similarly, growth in Mainland China is anticipated around 6–8%. Chinese consumers are buying more locally thanks to price differentials decline. This trend stands in contrast with the rest of Asia which should suffer a 2–4% decline. Finally, the Americas and Japan should be stable at best, while the Rest of the World’s growth could be around 0–2%. Looking further ahead, 2017–20 growth is expected around 3–4% on average per year, unless new growth engines emerge.
Going into the second-quarter reporting season, the sector is valued at around FY17E 29x and FY18E 25x price earnings. In our view, strong organic growth momentum is required to support these high multiples. While second-quarter results should be strong, we believe only significant and high-quality beat will shift share prices higher. Additionally, luxury companies’ projections were more prudent for the remainder of the year. In this context, we believe it may be time to turn more selective on the sector.
To stay in the game, luxury brands will have to maintain heavy investments in their brands and image. However, ways of reaching out to and connecting with customers are fast changing. People who are already doing a major part of their purchases online and whose preferences are influenced by online communities instead of celebrities will be tomorrow’s luxury client target.
Online penetration in luxury goods is only around 7% today, well below the 12% for the general apparel & footwear segment. Although most of the luxury brands have an online strategy, until now their approach has been rather reactive. However momentum for further expansion is gaining traction. Richemont’s online luxury retailer Net-A-Porter already teamed up with Yoox in 2015. There are also rumours that Alibaba has shown interest in a co-operation with the online fashion retailer. Beginning of June, LVMH launched its luxury ecommerce platform 24 Sèvres.
Competition in the luxury landscape is still increasing with online revolution lowering entry barriers. However, the development of a fully-fledged online channel may prove too costly for smaller brands. Larger cash-rich groups are looking for investment opportunities in a diversification effort or to complement their offer. In 2016 LVMH sold Donna Karan to acquire a majority stake in German premium luggage company Rimowa. In an effort to simplify the complex corporate structure between Groupe Arnault, Christian Dior and LVMH, the family holding launched an offer to buy Christian Dior’s remaining shares. Subsequently Dior Couture will be sold to LVMH. On the other side of the Atlantic, handbag maker Coach is in the process of buying its smaller rival Kate Spade.
Overall, we maintain a preference for strong established brands that have a solid balance sheet and for which we see future growth opportunities. In this context, we believe LVMH, Kering, Burberry and Richemont are best positioned.
Kristof De Graeve
Data & recommendations as of 03 July, 2017 close
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