Pierre Mallevays, former head of M&A; at LVMH and managing partner of Savigny Partners LLP, analyses market trajectories and benchmark valuations for the firm’s signature luxury index.
We are not sure the world is really a better place, but on the face of it the luxury sector never had it better, with a one-two punch of pre-emptive cost-cutting across the board immediately followed by the resumption of growth in the US and Europe with Asia (and China in particular) continuing to play cheerleader. The SLI has gone through the roof and mid-cap activity in the sector is strong and getting stronger.
The SLI has had a stellar 2010, smashing through the 2007 ceiling and finishing 32% above its then all-time historical high. A good start in the first half, with gains of 22%, evolved into a year-long rally with the SLI gaining an overall 60% since January 2010. Underpinning this outperformance of 33% vs. the MSCI has been a heady combination of strong top line growth across the sector, continued benefits of cost control measures introduced during the crisis and a fair amount of bid speculation.
Customers are back in the shops
Luxury groups were almost as surprised at the quick turnaround of fortunes as they were with the rapid downturn in 2008/9. Whilst Asia has always remained robust and is now the principal engine of growth for many groups, Europe and especially America are faring well. Consumption of high ticket items in the developed markets is being fuelled by a surge in corporate profits, bonuses and growth in business travel, all of which benefit the higher echelons of society. Nevertheless, the recent economic crisis has resulted in a profound shift in global dynamics. China is now the second largest luxury goods market in the world and new luxury hubs are opening up in South East Asia.
Department stores are back in business
Having battened down the hatches in 2009, department stores (especially in the US) went on a shopping spree in the first half of 2010 to replenish depleted shelves. Wholesale orders have continued to come in during the second half, relegating concerns that the surge in income from this channel at the beginning of the year was a one-off.
Luxury groups are looking to buy prized assets
Bid speculation has returned to the sector with a vengeance this year. In the case of Hermès, there was no smoke without fire, with LVMH disclosing a 17.1% stake in the legendary saddlemaker on 25 October. Burberry has also been the subject of bid speculation, initially associated to PPR and more recently to a consortium of Chinese investors as well as Richemont. This has contributed to the meteoric rise of the company’s share price from 175p in November 2008 to £11.50 in early December.
The developed market recovery is a one-legged race
Bankers are getting bonuses and businessmen are flocking to airport lounges again; however in most of the developed world unemployment is rising and inflation combined with further public sector cuts are going to put even more pressure on people’s wallets. The situation is worsened by the scarcity of available credit and a glum property market, raising the question as to how sustainable this one-legged recovery is.
Currencies may be an issue
One of the strongest recovery stories in 2010 has been the Swiss watch sector. This recovery may get hurt if the current surge of the Swiss Franc continues. Swatch for instance generates 50% of its sales in Dollars and estimates that a 1 centime appreciation of the Swiss Franc to the Dollar rate wipes CHF28m off group sales. More of concern is the fragility of the Euro. Whilst a weak Euro may benefit European luxury goods players in the short term, the currency has received some real knocks this year, initially from Greece and most recently from Ireland. With its credibility almost at stake, 2011 may prove to be a rocky ride for the adolescent currency.
2010 will undoubtedly have been an exceptional growth year for the luxury goods industry. Luxury players have held back from pronouncing themselves for 2011 until recently: the overall view is that 2011 will be a good year, but not as strong as 2010.
This seems to be echoed by recent stock market valuations, with the share price of leading component companies of the SLI having eased off in January. Some analysts we spoke to talked of profit-taking by professional investors in light of uncertainty over the pace of continued growth in China.
This excerpt has been taken from Savigny Partners’ latest newsletter which can be downloaded from this link.