Savigny Luxury Index

February 2015

 

Steady up

The Savigny Luxury Index (“SLI”) continued to rise and gained almost seven percent over the month.  It outperformed the MSCI World Index (“MSCI”) by one percentage point, boosted by LVMH’s strong results, a dawning faith in the ability of the Eurozone to reach a deal on Greece and an increasingly strong US luxury market.

 

Big news

  • Better than expected fourth quarter results from LVMH triggered a rally in the luxury goods sector at the beginning of the month.  LVMH shares jumped more than 14 percent in February thanks to the reinvigoration of its core Louis Vuitton brand.  Hermès also announced sector-leading results, with its turnover exceeding the Eur4 billion mark.  Nevertheless the company trimmed its growth outlook for 2015 to 8 percent, down from the 10 percent per annum it had been forecasting for the last two years, owing to both the brand’s scale and production constraints.  This is in spite of the opening of two further leather goods production facilities in France.
  • Prada reported a dip in annual sales as market conditions in Asia deteriorated in the second half of the year.  Its shares have lost a third of their value over the past 12 months: the group had previously concentrated on extending its directly owned retail network, which has left it flat-footed in the face of rapid shifts in consumer tastes – not only in China but in Europe and the US too.  The company has now significantly stepped down its store expansion programme, a move welcomed by investors.
  • Spending by Russian tourists abroad has plunged 51 percent in January after falling 44 percent in December because of the rouble’s freefall and the ratcheting up of international sanctions against Russia, according to figures released by tax-refund company Global Blue.  Brands with higher-end positioning were particularly hit.  Luxury watchmaker Ulysse Nardin, recently bought by Kering, was forced to put its staff on partial unemployment as a result of lower demand from Russia.
  • Two deals worthy of note: Guggenheim, a US-based asset management and investment firm, acquired American fashion brand BCBG Max Azria and L Capital, the private equity arm of LVMH, acquired French contemporary fashion brand Ba&Sh.

Going up

  • Swatch has recovered this month after being hit hard by the surge in the Swiss franc and falling way short of market expectations in announcing 2014 profits.  A promising start to 2015 has resulted in upbeat forecasts for the year, pushing the stock up almost 18 percentf.  According to its CEO, the group won’t be affected too badly by the appreciation of the Swiss franc against the euro because the exchange rates with the dollar and the renminbi are more important.
  • Estée Lauder’s share price leapt more than 17 percent as it reported a better-than-expected rise in revenue in its second quarter, helped by higher demand for its skin care and makeup products during the holiday season.
  • Coach’s share price has benefitted from its acquisition of US footwear brand Stuart Weitzman, which is seen as a good fit for the group.  The stock was up more than 17 percent.

Going down

  • Ralph Lauren’s share price slumped almost 18 percent after it cut its full-year revenue growth forecast for the second time in less than four months, blaming a strong dollar and weak demand.
  • Michael Kors suffered a beating owing to lacklustre forecasts for the current quarter, despite strong third quarter results.  Investors are becoming increasingly concerned with the ubiquity of its products and the increased amount of promotional activity by the brand.  The stock lost almost 5 percent on the month.

What to watch

The internet is playing an increasingly important role in luxury goods group strategies.  Some companies, such as Burberry, are ahead of the curve, with live streaming of fashion shows and the ability to purchase products online direct from the runway.  Smaller brands are also increasingly adept at managing their social networks, allowing them to have a louder voice.  Ecommerce is beginning to stick as a viable distribution model and an increasing number of emerging brands are turning to it as their main channel of distribution, eschewing wholesale accounts such as department stores and multi-brand boutiques unless they can positively contribute to the brand image.

Sector Valuation