Savigny Luxury Index

July 2014


A Chilly Summer  

The Savigny Luxury Index (“SLI”) fell a further 3.8 percent this month.  The outlook for the luxury goods sector darkened as disappointing results from industry leader LVMH showed how the strong euro and political protests in Hong Kong were curbing spending and hitting profits.  In contrast, the MSCI World Index (“MSCI”) gained 2.1 percent over the month driven by positive economic data.

Big news

  • LVMH’s second quarter results revealed a marked drop in business in Hong Kong, where pro-democracy protests have deterred Chinese tourists, as well as a fall in demand for its core brand Louis Vuitton in China and a worse than expected slump in Japan.  The news poured cold water over investor sentiment, particularly after expectations of an upturn in demand from Chinese buyers had been raised in the spring.
  • Swatch also reported weak results with a drop in its first-half profits for the first time in five years due to a strong Swiss franc, costs linked to the Sochi Olympics and a factory fire.  The Swiss watch and jewellery group warned that the outlook in Hong Kong was uncertain.  Hong Kong is the world’s biggest export market for Swiss swatches and is where many luxury brands earn between ten and twenty percent of their global revenue (16 percent for Richemont and about 12 percent for Swatch).  Swatch CEO Nick Hayek is especially concerned that Hong Kong retailers will curb their orders as this uncertainty may persist for some time.
  • Other results announcements were mixed.  Hermès’ second quarter sales have declined in Japan following the artificial bubble prompted by the VAT hike.  Burberry and Luxottica’s results were more upbeat with Burberry still enjoying double-digit growth in China, although it warned that profits would be hit by the strong sterling.  A new licence signed with Chanel and generally good results despite the strength of the euro boosted Luxottica’s share price.  Kering also posted better than expected results helped by strong growth at Yves Saint Laurent and Bottega Veneta.

Going up

  • One of the few companies spared this month is Brunello Cucinelli.  Its share price increased by over three percent, fuelled by double-digit growth in first-half sales, thanks to a solid performance in the US and in Greater China.

Going down

  • Many SLI components have registered sharp falls but the most severe was Tod’s.  Analysts are expecting a further deterioration in its second quarter results firstly because of its high exposure to Italy, which is struggling to emerge from recession, and secondly because of its heavy reliance on footwear, which counts for three quarters of its revenue and tends to offer lower margins than other leather goods categories.
  • Michael Kors’ share price fell by more than seven percent as several brokers cut price targets, citing a litany of issues including increased use of sales promotions and high inventory levels.  The company has seen a sharp reversal in sentiment over the past few months as investors are concerned that the rapid growth it recorded since listing in 2011 cannot be sustained.

What to watch

Weaker demand in China has made it very difficult to raise prices to offset adverse foreign-exchange movements.  Luxury groups will have to find other avenues for growth.

Sector Valuation