With the US luxury market still to recover and Chinese consumers yet to travel to Europe in meaningful numbers, investors face a repeat of last year’s boom and bust. — Bloomberg
FORGET animal print, the gyrations in luxury valuations have been the wildest look of the past year.
Ever since LVMH founder and chief executive officer Bernard Arnault reassured investors in January that the industry wasn’t experiencing a severe slump but rather a gradual deceleration, stocks have rebounded.
But with the US luxury market still to recover and Chinese consumers yet to travel to Europe in meaningful numbers, investors face a repeat of last year’s boom and bust – when share prices surged on expectations of Chinese demand, only to fall back sharply when this failed to materialise.
After China reopened from Covid restrictions in early 2023, the hope was that the nation’s shoppers would pick up the bling baton from the Americans who had driven extraordinary levels of growth since mid-2020.
As a proxy for the sector, LVMH became Europe’s most valuable company last April as investors bought into a C-shaped recovery.
But rather than demand accelerating in China, consumers remained cautious. At the same time, the collapse of Silicon Valley Bank, job cuts across the tech industry and continued interest-rate hikes saw many young, aspirational Americans cut back on luxury purchases.
As these circumstances took a toll on sales of Gucci bags and Cartier watches, and the bling behemoths reported slowing sales last autumn, shares slumped.
LVMH stock fell to �647.4 (US$702) in mid-January, before its annual earnings, from �902 last April.
But since Arnault said on Jan 25 that 8% to 10% sales growth for its fashion and leather goods division was just fine, LVMH has recovered most of those gains. That looks too far, too fast.
As I noted last year, luxury’s long-term prospects are still bright.
Despite the current malaise among Chinese consumers, the country’s large middle-class population will see it remain the most important luxury territory. Other parts of Asia, India, Africa and the Middle East offer opportunities for the top-end groups too.
Meanwhile, over the past four years, a more diverse range of American buyers has discovered European luxury.
For many, the likes of Louis Vuitton moved from the realm of super-elite to part of their regular shopping repertoire.
This cultural relevance won’t disappear, and it explains why Prada SpA and Gucci-owner Kering SA have recently snapped up properties on New York’s Fifth Avenue.
However, right now those positives look some ways off. A worsening property slump, manufacturing contraction, patchy consumption and weak consumer confidence are keeping Chinese demand in check. Although Chinese outbound travel to Europe is gradually increasing, it’s likely to be later this year or 2025 before large-scale tourism resumes.
Investors are looking for the US luxury market to turn positive, aided by slowing inflation, the prospect of interest-rate cuts, roaring stock markets and a sharp recovery in bitcoin – indeed the latter was one of the factors that drove appetite for Rolex watches in 2021.
But US consumers’ spending on luxury items weakened in January, according to Citigroup Inc, which tracks the outlay at home and abroad through its 15 million active credit-card accounts.
This could reflect the typical post-holiday hangover, or it could be indicative of something more serious.
Meanwhile, the months leading up to the US election later this year could see the wealthy put their purchases on hold.
And for all luxury goods groups, the Olympics in Paris are another unknown.
While tourists are more likely to take home a Louis Vuitton pochette than a plastic Eiffel tower, particularly as LVMH will dominate advertising at the games, some travellers may stay away from the crowded capital.
Investors seem to be underestimating these risks, particularly as first-quarter sales will compare with the period a year ago when China reopened – the original driver of exuberance.
Of course, valuations alone don’t tell the whole story. Shares in Hermes International SCA have risen about 25% between Jan 25 and Monday’s close, and hit a record high last week.
Consequently, they trade on a forward price-to-earnings ratio of over 50 times, more than twice the sector average.
But the group can effectively dictate demand for its iconic Kelly and Birkin bags.
It has long wait lists for the items, which means that when times are tough, it can simply work through its backlog of customers, making it much more resilient.
Conversely, Kering is up about 15% over the same period and trades on about a 30% discount to peers. Investors are looking to Gucci for the next turnaround story. But this will take time.
The company cautioned recently that the Italian house’s sales growth would be moderate this year, while its operating profit would decline by a mid-single-digit percentage.
Similarly, Britain’s Burberry Group Plc is one of the few companies in the sector not to see a jump in shares, as its makeover under star designer Daniel Lee is yet to bear fruit.
The biggest names have enjoyed a remarkable run.
But unless consumers in China and the United States start to regain their appetite for bling soon, investors who have bought into the sector’s quick outfit change could find themselves out of fashion. — Bloomberg
Andrea Felsted is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
