Luxury end proves slump-resistant

Just in case you’ve had the impression that the rich are feeling the same pain as the rest of us, JAMES THOMSON lifts the curtain on the high-end luxury goods market, and reveals determinedly downturn-denying profits.

By James Thomson

Just in case you’ve had the impression that the rich are feeling the same pain as the rest of us, we lift the curtain on the high-end luxury goods market, and reveal some determinedly downturn-denying profits.

Here at Rich Secrets we’ve been telling you for months how tough a year the rich are having.

Their share portfolios have been smashed by falling markets, the taxman is on their tails, and their spouses have lost that loving feeling.

Given all this hardship, you’d think the world’s wealthy entrepreneurs would have put their wallets away, right? Wrong.

Earlier this week, French luxury goods giant LVMH Moet Hennessy Louis Vuitton (which also owns the watch brand Tag Heuer, the perfumes brand Dior, the champagne brands Don Perignon and Veuve Cliquot and the fashion brand Marc Jacobs), posted a 6.8% rise in first half profit to €891 million, or $1.475 billion.

LMVH is one of a number of luxury goods companies to surprise analysts and investors with strong results in recent weeks.

Hermes International posted a 12.8% rise in first-half sales, lifted by demand for its trademark silks, handbags and perfumes in Asia, Europe and the Americas.

Switzerland’s Compagnie Financiere Richemont, which owns the Cartier and Dunhill brands, posted a 13% rise in sales to €1.43 billion ($2.4 billion) in the three months to 30 June.

PPR SA, the world’s third-largest luxury-goods company, said second-quarter sales rose 4.4% on demand for Gucci, Yves Saint Laurent and Bottega Veneta.

British fashion house Burberry smashed market expectations with a 26% rise in revenue, helped by strong accessories sales and early receipts from its autumn/winter ranges.

Closer to home, luxury car sales soared 23% in June, with sales of Mercedes Benz and BMW particularly strong. While this increase was mainly due to buyers trying to beat the rise in luxury car tax rise on 1 July, it does prove that there are plenty of Australians with money for nice things.

So how is it that these luxury brands are doing so well?

For a start, it should be noted that the super-rich spend regardless of the economic climate. While most of the luxury goods companies have diversified in the last decade by creating lower-priced brands or product lines, it is these mass-market ranges that are being hurt most by the downturn. The super rich have plenty of money, but the comfortably wealthy have shut their purses.

Second, luxury brands can enjoy what analysts call the “flight to quality” in troubled economic times. Instead of buying several pairs of $300 shoes, the high-powered Wall Street banker might save her bonus money and buy one $700 pair of high-quality stilettos that she will see as a sort of investment piece in her wardrobe. “In the current environment, we will see consumers showing a flight to quality, where the best-in-class brands outperform disproportionately the least-differentiated players,” Goldman Sachs said in a recent client note.

Third, luxury brands have plenty of pricing power. Put the price of a $100 watch up to $150 and customers will turn away. Put the price of a $10,000 watch up to $12,500 and the super-rich client won’t even blink. That means luxury brands will be able to pass on the impact of higher input costs and exchange rate movements far quicker than their low-end counterparts.

Finally, luxury brands have been extremely quick to capitalise on the world’s economic hotspots – China, India and Russia. Giving the soaring numbers of super rich in this area – the total number of Asian billionaires on Forbes’ billionaire list jumped by a third to 211 this year, with India (53 billionaires) and China (42) leading the way – it’s no surprise that many of the luxury companies are betting this region will provide much of their growth in the next three to five years.

Despite the apparent resilience of the luxury companies, it seems investors aren’t so sure that these companies can keep ahead of the downturn. While LVMH shares have jumped 5% in the last few days following the company’s strong result, the stock is down around 15% since the start of the year.

More broadly, the Dow Jones Luxury index – which includes a range of global luxury companies such as LVMH, Porsche, BMW, Compagnie Financiere Richemont and Christian Dior – has fallen a total of 17.1% since the start of the year.

BNP Paribas’ World Luxury Index (which covers a similar group of companies but adds other such as golf company Callaway, upmarket electronics maker Bang & Olufsen and casino group Starwood Hotels & Resorts) is down 20.2%.

Considering the Nikkei 225 is down 8.9% since the start of the year, the FTSE 100 is down 15.3%, the Dow Jones Industrial Index is down 11.2% and the All Ordinaries is down 21.5%, the performance of the luxury companies is hardly spectacular.

Then again, the recent strong sales results might indicate the sell off has been overdone. You might be able to pick up a luxury brand bargain after all.

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