The world of high fashion and luxury goods can look fickle and bizarre to outsiders. Are people really going to pay €3,500 for a Louis Vuitton handbag that appears to be a small-leather-and-metal trunk? How long will this fall’s trend of fur on women’s shoes and boots last? Do sales get a boost if veteran Vogue contributing editor André Leon Talley, the Don Cherry of commentators at Paris runway shows, hails a designer as “the only person who could make a chemise look new again”?
For the investor, however, the brands that cater to the 1%, and those seeking to join it, can offer impressive financial strength and a solid play on continued long-term global economic expansion. Basically, as people just about anywhere get a lot wealthier, they tend to gravitate toward a core of venerable European luxury brands. And most of those brands are held within big-cap publicly traded companies (see chart).
LVMH Moët Hennessy Louis Vuitton SE controls about 60 names, including the luggage, champagne and cognac labels in its acronym, as well as Dior and Givenchy in fashion and perfumes, and Bulgari and De Beers in watches and jewellery. Kering’s brands include Alexander McQueen, Gucci and sporting goods maker Puma.
Rogerio Fujimori, who heads a team of four analysts who track luxury goods stocks at RBC Capital Markets in London, says “the sector was a niche 20 years ago,” but, in Europe at least, they are now core holdings even for individual investors. Apart from size, the biggest luxury houses offer several fundamental advantages over conventional retailers. One is vertical integration—“the brands tend to control the manufacturing and own the stores,” he says.
Another is exposure to China. The country already makes up 30% of the luxury market, and although economic growth there has slowed recently, the wealthiest Chinese are now travelling more, and fuelling sales in Japan and Europe. “Travel is linked to luxury consumption,” says Fujimori. “It’s part of the experience.”
Even 1% sectors are cyclical, however. That’s why investors should look at a company’s mix of hard luxury goods (watches and jewellery) and soft ones (fashion and leather). “Watches and jewellery would be a little more cyclical than, say, shoes, because it’s a more discretionary, higher-ticket item,” says Fujimori.
As for individual companies, Fujimori is optimistic about LVMH. It has the wine and spirit holdings that other luxury providers lack, and it “is gaining market share across most of the businesses in which it competes,” he says. But he also likes Richemont, because of its marquee brands in watches and jewellery. “There is a structural shift from non-branded jewellery to brands like Cartier, and Richemont is the market leader,” he says.
What about designers themselves and the buzz around high style? A hot collection can certainly give a company a shot in the arm, but even the creative process is now increasingly corporate. “ When we’re talking about brands with a billion in sales, we are talking about a team of people,” says Fujimori.
Analyzing luxury stocks can also be quite conventional. Fujimori has degrees in engineering and finance, and although he does visit boutiques around the world, he also pores over metrics such as same-store sales, operating income and cash flow. Profits are sexy.
