Could luxury brands still shine for investors?

11th September 2012

The boom in luxury goods sales, partly attributed to Chinese shoppers, is flagging. Burberry's shares fell 18% on news that in the 10 weeks to September 8, like-for-like sales growth slumped to zero.

Yet Burberry has spent much of the year bucking the gloomy trend in the wider retail sector mostly because of its exposure to China – which, according to the Press Association, means if anything's changed it could very well be on the Sino-side of the company's global operations.

Meanwhile, bargain brands like Primark continue to defy recession and enjoyed a strong summer, reports the Telegraph.

But is this the whole story?

After all, France's Hermes recently raised its 2012 forecasts , and reported "no change" in the strength of Chinese demand, reports the FT's Beyond Brics blog (paywall). So while this is clearly a testing time for luxury goods makers, some are faring better than others.

Angela Ahrendts, Chief Executive Officer for Burberry, commented: "As we stated in July, the external environment is becoming more challenging.  In this context, second quarter retail sales growth has slowed against historically high comparatives.  

"Given this background, we are tightly managing discretionary costs and taking appropriate actions to protect short term profitability, while continuing to execute on our proven five key strategies."

L'Oréal, the cosmetics group, last month reported slower growth in Asia in the second quarter compared with the first three months of the year.  Meanwhile, the Swiss-based jeweller Richemont, and Hugo Boss have also reported signs of slower Asian demand recently.

Analysts quoted by Bloomberg said the deceleration in revenue growth was a global phenomenon driven by lower traffic.

Yet despite this news, experts remain of the view that the strategy, luxury positioning and management team of companies such as Burberry should lead to long-term sector outperformance.

Tim Stevenson, the Henderson Global Investors European fund manager, says: "The idea of luxury goods is deep rooted in European culture; be it Swiss watches, where the first watchmakers guild in the world was formed in 1601, Italian fashion that is thought to have started with the renaissance of the 14th century, or the trench coat that has its origins in the more recent history of the British military and monarchy.

"Today Europe boasts brands such as Cartier, Baume & Mercier, Louis Vuitton, Moet, Christian Dior, Hennessey, Burberry, Swatch, Mont Blanc and Hermes. In fact Europe is home to eight of the top ten luxury brands in the world (2012 BrandZTM Top 10 most valuable luxury brands)."

So although there are high costs involved with maintaining these brand and producing high quality goods, consider the prices charged – they more than make up for this.

Stevenson adds: "The lure of strong brands is extraordinary, and this has been at work in the western world for decades and more recently in Asia.

"Although this is the long term trend, there will be fluctuations – and as always, the market will from time to time become euphoric about the growth prospects and move way too far ahead, pushing valuations to unsustainably high levels."

So what are the risks for luxury companies?

They tend to spend a great deal on M&A activity for one, buying other luxury brands at high valuations, and not necessarily because this makes economic sense.

Another risk is Brand Quality, as companies can charge high prices because of how people view the brand. Some companies such as Burberry and Gucci are particularly prone to suffering from this.

The key for investors is to choose carefully, and be selective – keep an eye on the news but don't see it as the only message out there.

 

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The Financialist

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