Luxury Sector Report

Future of Luxury Sector Equities

Source: GBSB Global

Introduction

Luxury stocks have performed spectacularly in the past 2 decades. Companies like LVMH and Hermes have outperformed the market. These stocks tend to be popular among quality seeking investors for various reasons:

·       Pricing power

·       Growing High Net Worth customer base in China

·       Superior product quality

·       High Return on Invested Capital (ROIC)

For the past year, the luxury sector has been experiencing a slowdown. Firms like Burberry and Kering have been hit strongly by the decrease in spending from Chinese and aspirational customers while LVMH and Hermes are facing the prospect of customers downtrading to lower priced items like accessories and perfumes with fashion and leather goods seeing less purchases.  LVMH is down 12.79% YTD while Kering is down 30.7% YTD with both falling earlier this week after the Bank of Japan increased rates. The current period has raised questions on whether this slowdown is a sign that fundamentals are deteriorating.

In this report, we will analyse the earnings of the following firms: LVMH, Burberry, Kering, Hermes, Hugo Boss, Richemont, and Prada. LVMH, Kering, Hermes, Prada and Hugo Boss reported their Half Year earnings while Richemont and Burberry reported their Q1 earnings for their fiscal year. After analysing their results, we will present our outlook on the wider sector.  

Earnings Results

Burberry

Burberry announced they had appointed Josh Shulman as CEO during the earnings call with Jonathan Ackeroyd leaving with immediate effect. Analysts spent much of the call discussing the future of the company and touched comparatively less on the financial performance of the company. Asia Pacific was significantly hit with China down 21% and Japan up 6% which was lower than peers. Japan’s growth mainly came from tourists from Asia (ex-China) and China with locals remaining ‘soft’ according to the Chairman. Americas performed in line with the region with majority of purchases coming from locals. EMEA fell 16% with tourist accounting for just over 50% of revenues but declining by 7-10% YoY. Outlook for 2025 was bleak with wholesale revenues expected to decline by 25% in H1 and 30% for the full year. Its weak wholesale outlook suggests that its existing brand position is further declining despite being a favourite among outlets and discounters.

Josh Shulman’s experience is in affordable luxury rather than high end luxury which was a big talking point during the call. Additionally, there were questions on whether this appointment meant the end for Burberry’s brand elevation strategy which the Chairman reiterated it wasn’t. ‘Rebalancing’ was often used by the company which means opening more entry points to retain brand inclusivity while increasing prices on higher end items to build a broad audience for the brand. Daneil Lee’s position as Creative Director seems to be intact and there are no plans to get rid of him. Lastly, active discounting inventory will continue for the next 2-3 seasons as the company suffers from excess inventory on a lot of the lower priced items. Current positioning of the brand seems to be uncertain, reflecting its weak position in the stock market.