The
binge
on
designer
brands
is
over.
After
three
years
of
record
growth,
luxury
companies
are
feeling
the
pain
as
sales
slow
to
a
more
normal
pace.
On
Friday,
an
earnings
report
from
Cartier
owner
Richemont
offered
up
the
latest
evidence,
and
sent
luxury
stocks
reeling.
“I’d
say
a
soft
landing
is
our
hope,
but
we
will
only
know
that
when
we
look
back
at
it
probably
in
a
years’
time,”
Richemont
Chief
Financial
Officer
Burkhart
Grund
told
investors
during
a
quarterly
earnings
call
on
Friday.
High
interest
rates
around
the
world
means
that
consumers
are
shopping
less,
moderating
annual
revenue
growth
in
the
sector
to
about
9%.
China’s
slower-than-expected
recovery,
as
well
as
foreign
exchange
fluctuations
have
also
pressured
travel-related
purchases
and
eroded
profit
margins.
Amid
this
unfavorable
backdrop,
investors
may
want
to
look
toward
the
defensive
names
in
the
sector
—
those
that
sit
at
the
very
top
of
the
brand
prestige
pyramid.
Nowhere
have
the
struggles
of
the
luxury
sector
been
more
prominent
than
in
the
French
conglomerate
LVMH
Moet
Hennessy
Louis
Vuitton
,
the
group’s
bellwether.
Share
value
jumped
more
than
200%
from
March
2020,
the
start
of
the
pandemic,
to
April
2023,
when
the
company
became
the
first
European
company
to
exceed
$500
billion
in
market
value
after
posting
record
results
in
2021
and
2022.
However,
U.S.-traded
LVMH
shares
are
down
more
than
30%
from
the
July
high,
after
hitting
a
fresh
52-week
low
of
$137.31
in
trading
on
Friday.
The
company
remains
up
2%
year-to-date
after
third-quarter
revenue
growth
slowed
to
a
9%
year-over-year
gain
in
October,
a
sharp
decline
from
17%
annual
pace
in
the
prior
quarter.
LVMUY
YTD
mountain
LVMH
shares
in
2023
Luxury
peers
such
as
Gucci
parent
company
Kering
and
Richemont
also
enjoyed
a
boost
in
the
wake
of
the
pandemic,
bringing
the
sector’s
revenue
growth
rate
from
2019
to
the
first
half
of
2023
to
11%,
or
200
basis
points
above
the
20-year
trend,
said
Bank
of
America
analyst
and
head
of
consumer
discretionary
Ashley
Wallace.
She
added
that
luxury
stocks
are
trading
below
their
historical
averages.
“The
crux
of
the
luxury
investment
case
is
now
whether
we
shall
see
‘gentle’
growth
normalization
through
a
‘soft
landing,’
or
whether
we
will
see
a
dip
and
a
spend[ing]
ricochet
after
years
of
consumers
splurging,”
Bernstein
analyst
Luca
Sola
wrote
in
a
September
note.
While
the
richest
consumers
remain
relatively
insulated
from
a
high
interest
rate
environment
and
an
economic
slowdown,
the
aspirational
consumer
is
more
sensitive
to
these
pressures
and
has
begun
to
weaken.
This
dynamic
tends
to
hurt
the
less-prestigious
luxury
brands
more,
according
to
Rogerio
Fujimori,
an
analyst
at
Stifel.
“What
you
have
is
basically
companies
that
suffer
less
and
suffer
later.
Usually,
every
time
you
have
a
slowdown
period,
it’s
the
more
aspirational
tier-two
brands
that
suffer
first.
So
you
have
to
put
that
in
this
context,”
said
Fujimori.
Nonetheless,
he
noted
that
no
company
is
“fully
immune.”
The
trend
is
already
visible
in
the
U.S.
luxury
market,
which
had
been
one
of
the
strongest
parts
of
the
post-pandemic
rebound,
but
also
is
the
most
cyclical,
according
to
Wallace.
“It’s
important
to
understand
that
this
normalization
is
coming
from
a
point
where
demand
has
been
elevated
versus
history,”
said
Wallace.
“I
don’t
think
that
we
should
be
calling
into
question
the
structural
appeal
of
the
sector.”
Wallace
expects
the
sector
will
“undershoot”
on
year-over-year
growth
for
the
second
half
of
this
year
and
into
2023.
Currency
headwinds
The
relative
strength
of
the
U.S.
dollar
compared
to
other
major
currencies
has
been
a
double-edged
sword
for
the
sector.
During
the
summer
of
2022,
the
gap
between
the
U.S.
dollar
and
the
euro
created
nearly
a
30%
discount
between
EU-sold
and
U.S.-sold
luxury
goods,
and
led
to
a
surge
in
U.S.
travelers
splurging
on
luxury
goods
in
Europe.
The
weak
Japanese
yen
also
put
luxury
goods
prices
in
Japan
on
par
with
Europe,
attracting
Chinese
tourists
to
Japan
for
shopping
sprees.
However,
the
renminbi
has
fallen
to
its
lowest
level
in
16
years
as
concerns
over
China’s
economy
mount,
reducing
Chinese
consumers’
incentives
to
shop
abroad,
according
to
Wallace.
This
is
critical.
China
is
the
biggest
market
for
most
luxury
brands.
Pre-pandemic,
more
than
60%
of
the
luxury
purchases
made
by
Chinese
consumers
were
made
outside
of
mainland
China,
according
to
Stifel’s
Fujimori.
The
number
fell
to
a
range
between
10%
and
15%
during
the
pandemic.
For
LVMH,
Kering
and
Moncler,
the
share
is
hovering
around
30%
year
to
date.
“The
luxury
consumer
tends
to
spend
more
when
they
travel
versus
when
they
are
at
home,”
Fujimori
said.
“Chinese
[consumers]
are
back
to
Southeast
Asia
and
Japan,
but
there’s
still
a
long
way
to
go
in
terms
of
Europe.
And
that
is
probably
something
that’s
continuing
into
next
year.
But
that’s
why
you
need,
of
course,
Chinese
consumer
confidence
—
probably
renminbi
that
is
stable,
because
if
the
renminbi
gets
weaker,
you
have
less
purchasing
power
to
pay
for
your
trip,”
said
Fujimori.
The
companies
do
have
the
advantage
of
pricing
power,
which
allows
them
to
pass
on
currency
moves
over
time
to
protect
profitability
and
hedge,
said
Fujimori.
“But
the
problem
with
currencies
is
[that]
usually
there
is
a
shock
when
you
have
a
very
big
move
because
that
creates
price
gaps
among
regions.
And
the
companies
don’t
increase
prices
straightaway,”
said
Fujimori.
Unfavorable
foreign
currency
movements
also
weigh
on
luxury
company
profits.
Richemont
reported
that
gross
margins
in
its
fiscal
second
quarter
fell
2%
from
the
prior
year
when
using
actual
exchange
rates
—
but
were
actually
up
15%
at
constant
exchange
rates.
Waiting
for
China’s
rebound
Luxury
stocks
may
have
no
choice
but
to
hope
for
tailwinds
around
China’s
reopening.
“There
are
and
have
been
for
quite
a
while
elements
that
in
general
weigh
down
on
the
Chinese
economy
and
especially
on
the
feel-good
factor
on
which
we,
as
an
industry,
depend
on,”
Richemont’s
Grund
said.
The
sector
will
be
especially
sensitive
to
Chinese
consumer
sentiment
next
year
as
consumers
in
other
regions
have
already
slowed
down.
American
consumers
have
already
seen
seven
quarters
of
sequential
acceleration
in
demand,
at
more
than
three
times
the
normalized
growth
rate,
before
hitting
a
peak
in
the
first
quarter
of
2022.
Growth
is
slower,
but
still
positive.
European
consumer
demand
peaked
a
year
later,
said
Wallace,
who
forecasts
luxury
consumption
in
the
region
will
decline
6%
next
year.
Wallace
expects
consumption
in
Japan
to
peak
in
either
the
fourth
quarter
or
the
first
quarter
of
2024.
“Next
year,
the
Chinese
consumer
will
contribute
probably
more
than
70%
of
incremental
revenue.
So
you’re
highly
reliant
on
growth
from
the
Chinese
consumers,”
Wallace
said.
If
the
Chinese
economy
enters
a
stagnation
similar
to
Japan’s
economic
growth
in
the
1990s
and
2000s
—
the
“lost
20
years”
—
then
Fujimori
foresees
risks
ahead.
“After
the
U.S.
and
Europe
reopened
[post-pandemic],
there
was
a
bit
of
‘revenge
spending.’
…
But
in
China,
it
didn’t
happen.
Confidence
is
very
low,
and
youth
unemployment
is
high,”
Fujimori
said.
“Most
of
the
wealth
of
wealthy
Chinese
is
basically
tied
to
the
stock
market
and
property
market,
which
[have]
been
weak.
So
as
you
can
imagine,
[they]
don’t
feel
a
lot
of
confidence
to
make
a
big
purchase.”
Defensive
luxury
picks
Amid
the
period
of
macro
and
consumer
uncertainty,
investors
are
favoring
companies
with
defensive
attributes
that
can
withstand
a
tougher,
slow
growth
world
amid
high
rates.
“The
sector
is
seeing
very
little
top-line
growth
at
all.
As
we
kind
of
enter
into
the
ongoing
normalization
phase
in
terms
of
revenue
growth,
people
should
be
positioned
in
the
most
defensive
way
possible
until
we’ve
paddled
through
this
weakness
of
the
top
line,
and
can
start
looking
at
better
trends
to
come
in
the
second
half
of
next
year,”
said
Wallace.
Analysts
are
bullish
on
Hermes
and
Brunello
Cucinelli
,
which
are
currently
outperforming
in
spite
of
weakening
consumption.
These
companies
are
more
resilient
due
to
their
greater
exposure
to
a
high-net
worth
customer
profile,
which
is
less
cyclical
and
more
resilient
against
macro
headwinds.
HESAY
YTD
mountain
Hermes’
U.S.-listed
shares,
year
to
date.
Hermes
also
benefits
from
being
less
exposed
to
travel
industry,
Citi
analyst
Thomas
Chauvet
said
in
an
October
note.
Hermes
and
Louis
Vuitton
have
been
more
resilient
in
past
recessions,
Fujimori
said.
“I
think
perhaps
because
in
less
favorable
times,
consumers
become
more
selective
and
buy
fewer
units
—
and
the
fewer
purchases
are
concentrated
on
the
stronger
brands,”
he
said.
U.S.-traded
shares
of
Hermes
and
Brunello
Cucinelli
are
up
nearly
29%
and
18%
year
to
date,
respectively.
Shares
of
the
two
companies
also
were
weathering
Friday’s
sell-off
well,
with
Hermes
unchanged,
while
Brunello
Cucinelli
gave
up
about
2%.
That
contrasts
with
LVMH
shares
down
3%
and
Kering
shedding
more
than
2%.
Hermes
also
benefits
from
being
more
measured
in
its
price
hikes
compared
to
brands
such
as
LVMH-owned
Dior
and
Louis
Vuitton,
said
Vontobel
Quality
Growth
Boutique
analyst
Markus
Hansen.
“There
were
some
egregious
pricing
moves
by
certain
companies.
And
that
maybe
is
now
going
to
come
back
and
bite
a
bit,
because
I
think
the
nature
of
the
price
increases
was
maybe
a
bit
too
aggressive,”
said
Hansen.
Bank
of
America’s
Wallace
expects
Hermes
will
play
some
catch-up
in
pricing
in
2024.
“So
there’s
more
still
to
come
from
them,
which
should
be
supporting
their
top
line
growth.
And
this
kind
of
strong
top
line,
supported
by
pricing
and
volumes,
should
help
to
give
them
better
incremental
margins
as
[we]
go
into
next
year,
where
margins
in
the
sector
will
potentially
become
under
more
pressure,”
the
analyst
said.
To
be
sure,
the
U.S.-listed
stock
has
an
average
rating
of
a
hold
from
analysts.
The
average
target
price
on
shares
is
$210.50,
which
suggests
shares
could
rise
about
14%
from
Thursday’s
close,
according
to
FactSet.
Analysts
are
less
optimistic
about
Kering
—
the
parent
company
of
Gucci
and
Bottega
Veneta,
among
others
—
as
several
of
its
brands
are
in
turnaround
mode
under
relatively
new
creative
directors.
It’s
also
more
exposed
to
an
aspirational
customer.
U.S.-traded
shares
of
Kering
have
fallen
17%
in
2023.
Product
categories
are
also
important
when
considering
growth
possibilities
amid
a
slowdown.
Fujimori
underscored
aspirational
categories,
or
items
with
higher
price
points
and
more
discretionary
in
nature,
such
as
watches,
as
being
more
volatile
and
sensitive
to
market
changes
than
perfumes.
Beauty
is
generally
more
recession
resilient,
he
noted.
Underscoring
this
point
is
LVMH-owned
Sephora’s
outperformance
compared
with
the
conglomerate’s
other
segments
in
2023.
Flexing
its
pricing
power
Despite
the
difficult
near-term
environment
for
luxury
companies,
the
analysts
remain
confident
in
the
sector’s
structural
strength
and
longer-term
growth
opportunities.
“That
9%
compound
[revenue]
growth,
if
you
take
a
medium-term
perspective,
is
really
supported
by
the
fact
that
you
have
an
addressable
market
which
has
more
than
doubled
thanks
to
product
extensions
and
cultural
relevance,
which
has
gone
up
significantly,”
said
Wallace.
“Both
of
those
things
together
support
positive
volume
and
price
benefits.”
An
increasing
number
of
high
net-worth
individuals
from
emerging
markets
also
helps
its
structural
long-term
growth
story,
said
Vontobel’s
Hansen.
That,
combined
with
its
supply-driven
model
gives
companies
resilience,
he
said.
“As
wealth
improves
over
time,
you
have
a
product
which
is
selling
to
a
consumer
where
the
numbers
are
growing
but
where
the
supply
of
the
product
itself
is
still
behind
demand.
And
that’s
what
allows
you
this
amazing
pricing
power,”
Hansen
said.
Longer
term,
the
European
luxury
sector
may
once
again
contain
opportunities
for
growth
investors.
LVMH
and
other
European
luxury
brands
have
been
market
leaders
among
European
equities
since
2021
until
the
first
half
of
2023.
The
luxury
industry
also
has
strong
barriers
to
entry,
pricing
power
and
no
meaningful
competition
—
which
remains
unchanged
because
the
long-term
fundamentals
are
unchanged,
Fujimori
stated.
The
brands
are
also
timeless.
This
ensures
that
the
luxury
powerhouses
can
retain
their
market
share
and
prestige
in
the
long-run.
“The
luxury
brands
are
basically
the
same
leading
players
for
many
decades.
That
hasn’t
changed,”
said
Fujimori.
—CNBC’s
Michael
Bloom
contributed
to
this
report.
