Savigny Luxury Index - a look back at the Noughties


Pierre Mallevays | March 10, 2010

The SLI began 2010 pretty much at the same eve as it started 2000. This is a lot more than can be said for the general market index.

Pierre Mallevays, former head of M&A; at LVMH and managing partner of Savigny Partners LLP, a London-based boutique advisory firm, analyses market trajectories and benchmark valuations for the firm’s signature luxury index.

SLI vs. MSCI World Jan 2000 – to date

Note : The Savigny Luxury Index comprises of a basket of luxury goods manufacturers and retailers

The SLI began 2010 pretty much at the same eve as it started 2000. This is a lot more than can be said for the general market index (we have moved to the Morgan Stanley Country Index for the World or MSCI World), which experienced a 43% decline over the same period. The Noughties have been a tumultuous decade during which we have witnessed two substantial market corrections, the worst terrorist act in history as well as both a period of unprecedented consumption and deep recession. All in all not an easy market environment to operate in!

2001 – 2003: we thought it was all over then…

The beginning of the Noughties saw the first big market correction, following the longest stock market bull run in history. The correction began with the bursting of the internet bubble, but took a turn for the worse following the September 11 attacks on the World Trade Center and ensuing global political instability. The threat of SARS added insult to injury causing a further drop in international, tourism, a key driver of luxury goods sales. The SLI tumbled 55% from its peak in August 2000 to a ow for the decade just a few days before the launch of the invasion of Iraq in March 2003. The main issue that emerged in this period was the sector’s dependence on tourist dollars, particularly Japanese, prompting many groups to strengthen their retail footprint in Japan.

2003 – 2007: the golden age of Richistan

The second leg of the Noughties saw a return to the golden age of luxury goods, driven by an improving global economy, favourable exchange rate movements, the emergence of new markets as well as a substantial, increase in the number of high net worth individuals. The SLI shot up 195% from its ow in 2003 to its peak in mid-2007: it rose sharply in 2003 following the invasion of Iraq and end of the SARS scare and again in the second half of 2005 and 2006, backed by strong economic data from emerging luxury markets. This was the era of bring when the word seemed to be composed of haves and have yachts: luxury brands couldn’t produce “exclusive” statement pieces fast enough, and they started a race to open distribution in newly wealthy markets across the globe.

2007- 2009: a house of cards

Signs of trouble emerged in 20006 when the US sub-prime mortgage market began to fatter. Things definitely took a turn for the worse in the second half of the year and the term “credit crunch” became a household name. By mid 2007 there were rising concerns that the global economy was going to take a turn for the worse and that stock markets were overheating. The SLI peaked during this period and the multiples of its constituents became hard to justify on the basis of their fundamentals.

Nevertheless, few foretold the severity of the impending financial crisis. The first really big tumble took place in the run-up to the crucial. Christmas trading period, reflecting uncertainty as to the sectors resilience, causing the SLI to fall 31% between October 2007 and January 2008. What followed was a period of increasing volatility, marked by sharp upturns and even steeper falls as the world went into financial meltdown. The SLI fell off a cliff in two stages: first to fall in the first half of 2008 were stocks exposed to affordable luxury and/or with a weak presence in emerging markets, resulting in a drop of 23% in the SLI from May to July; in the autumn virtually no stock was spared as the true scale of the financial crisis came to light and the SLI tumbled a further 42% between September and November.

All suffered, but the watch sector in particular was exposed for its quasi exclusive reliance on wholesale distribution channels, which led to apocalyptic inventory destocking during the downturn. The overall response of the luxury goods industry to this downturn was swift and decisive: costs were controlled, capex was cut across the board and conglomerates focused on their strongest brands.

2009: the year the SLI earned its stripes

2008 Christmas trading was a bloodbath for retailers but a shopper’s paradise for consumers willing to part with their precious dollars. Heavy discounting was the name of the game as all players tried to shift excess inventory. The rest of the year felt generally miserable, with the only good news coming from China where growth resumed after a hesitant first quarter. On the stockmarket front, both the SLI and the general market index benefitted from market perception that corporates had taken the appropriate cost-cutting measures. The upward trend of the SLI accelerated in the second half as a result of the restart of the Chinese growth tractor and the general feeling that the bottom of the crisis was behind, resulting in a gain of 21% for the year.

Outlook: measured optimism

2010 will be an interesting year for the luxury goods sector. Consumer sentiment has shifted away from ostentatious consumption. “Value” has been redefined, benefitting both accessibly-priced business models and those focusing on expensive, timeless classics. The nimble and light-footed survived, while industry leaders reinforced their positions and gained market share.

The good news is that the sector as a whole will continue to grow and is likely to outperform the global economy on a long term basis. But a new world order remains to be found. Traditional luxury markets have been turned upside down, with new geographies taking over. Traditional. distribution models have been mortally wounded, with department stores taking a direct hit. Creative strength, differentiation, customer relationship will be key. Finding the right distribution strategy will be essential. Watch this space…

Sector Valuation

A tighter range of multiples

Two things happened to sector valuations during 2009.

Unsurprisingly, valuation multiples went up substantially, rising 48% for the SLI as a whore to an average of 12.6x EBITDA as at January 2010. This compares to a peak of 15.0x in mid-2007.

Note: analysis above excludes Ports Design, which was included in the SLI as of October 2009

Secondly, the range of multiples narrowed quite significantly. Most individual, stocks are now trading in a tight range, between 11x and 12x, in contrast to a year ago, when multiples ranged from 4x to 8×. The reason for this narrowing of the range of EBITDA multiples is not obvious. With some notable exceptions (Hermes, Bulgari), it seems that the market is still looking for the took to determine the appropriate value of each individual, stock, and is applying a “default” valuation multiple of 11-12x for the sector as a whole. Surety this should enable the savvy, well-informed investor to take advantage of this cloud effect and pick the winners of the pack. You read it first here!

Pierre Mallevays, Managing Partner of Savigny Partners

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