Savigny Luxury Index

Market Pulse / No Growth but No Panic


Both the Savigny Luxury index (“SLI”) and the MSCI World Index (“MSCI”) ended up flat this month, with the SLI posting a small gain whilst the MSCI tipped slightly into negative territory. Valuations are stable despite unappealing growth prospects, underpinned by the defensive nature of a number of luxury goods stocks benefitting from strong balance sheets, the absence of pension issues and the prospects of good dividend flows.

Big news

September was remarkably quiet in terms of corporate news, with announcements only by Hermès, Richemont and Tod’s. Hermès announced record-breaking margins for its first half but scrapped providing its usual year-end sales growth target, citing significant uncertainty in the coming months, triggering a sharp stock sell-off. Tod’s disappointed on its first half profit and got hammered, whilst Richemont, which warned of an impending drop in first half operating profit of up to 50 percent, managed to see its share price actually rise, the market having already priced in the downturn and showing signs of appreciation of management efforts to stabilise the situation. In particular, the Swiss-based watch and jewellery giant took matters into its hands by announcing the buy-back of stock from its Hong Kong retailers so as to prevent the emergence of a grey market in its watches.

Nevertheless, the Swiss watch sector continues to be downbeat for the remainder of the year: a study by Deloitte found that 82 percent of the sector’s executives were pessimistic as to its immediate outlook.

Various permutations of “see now buy now” found their way to the catwalk this season. Burberry went full out, having its collection shown at London Fashion Week immediately available in store and on show at its magnificent installation at Makers House. Others adopted a more cautious approach, peppering their Spring/Summer 2017 collection presentations with some Autumn/Winter 2016 items. The jury is still out as to how fashion companies will make their collection presentations more relevant in the digital age.

Brexit really meant Brexit this summer as tourists fled from a continental Europe plagued by security concerns to the cheaper and safer haven of Britain: London alone saw a 36 percent increase in tourist spend in August, resulting in excellent performances at the Bond Street flagships of top luxury brands. Across the channel, France has been suffering from a spate of terrorist attacks and social unrest: tourist spend fell 20 percent in August, the third consecutive month of double-digit contraction.

Corporate activity was subdued this month: Eurazeo placed 6 percent of Moncler, reducing its stake to under 8 percent; Safilo acquired the remaining 24 percent stake in Lenti, an Italian manufacturer of sun lenses; Puig acquired 35 percent of Brazilian beauty brand Granado. On the appointments side, Hugo Boss’s CEO moved to head up Bottega Veneta and Céline’s deputy director became CEO of Loewe.

Going up

  • Both Ferragamo and Swatch’s share prices were boosted by brokers’ upgrades, rising 11 and 9 percent respectively during September.
  • Prada’s share price continued to recover, following indications by the company last month that it was turning the corner. The stock rose 7 percent on the month.
  • Burberry’s share price was lifted 6 percent by the positive reactions to its “see now buy now” collection and by the continued weakness of the pound.

Going down

  • Tod’s share price fell over 12 percent in September following its announcement of a further decrease in core operating profit in the first half.
  • Hermès lost 4 percent of its value this month as the company scrapped its revenue growth target for the year, in spite of record-beating first half results

What to watch

The rather subdued environment in the luxury is easily attributed to the slowdown in China, Hong Kong having fallen off a cliff and travel retail in Europe being in the doldrums due to terrorists attacks. However this does not explain the lack of oomph in US luxury retail, and in particular the sharp decline of department stores. It is not just the impact of online sales as some have advised, as evidenced by the lacklustre growth of the department stores’ own online platforms. The tough international environment should not hide the fact that something else is at play, some fundamental shift in the consumption patterns of the millennials. Luxury goods executives are scratching their heads to win them over. Successfully engaging the millennials with the right combination of brands, products and distribution channels will be key to the long term health of the industry.

Sector valuation