Luxury after Lockdown
Ian Hunter
Ian Hunter

As we look forward to a gradual reopening of the economy in Ireland, across the Irish Sea it is clear to see what the removal of restrictions is having on the pent-up demand for in-store shopping. The sight of queues outside shops during March translated into strong growth with UK retail sales up 7.2% for the month, well ahead of market expectations of 3.5%. This pent-up demand has already been demonstrated in specific countries such as China and the luxury goods sector in particular.

LVMH is a company that covers a wide range of luxury goods from high end drinks and fashion, to watches, jewellery and perfumes. In mid-April, the company issued a strong quarterly trading update reporting 30% like for like revenue growth, well ahead of market expectations estimated at 19.1%. Growth was strong across all divisions bar one. Fashion & Leather Goods grew revenue 52%, Wines & Spirits was up 36% and Watches & Jewellery sales increased 35%. Perfumes & Cosmetics didn’t disappoint either, recording 18% revenue growth. The only division to report a decline was Selective Retailing (-5%) reflecting its exposure to the travel market in general and its DFS airport business in particular.

To strip out the pandemic impact, management compared Q121 against Q119, which also did not disappoint. Overall, the Group grew revenue by 8% between the two periods, led by Fashion & Leather (+37%) and Wines & Spirits (+17%). Watches & Jewellery demonstrated subdued growth (1%) with only Perfumes and Cosmetics (-4%) and Selective Retailing (-30%) the laggards. With the exception of Selective Retailing, all divisions contributed to the good Q121 performance. Fashion & Leather Goods has had an excellent start to the year, achieving record revenue. The United States and Asia enjoyed strong growth, while Europe is still affected by store closures across several countries and the suspension of tourism. That said, LVMH believes that it is well-equipped to build upon the hoped-for recovery in 2021 and regain growth momentum.

LVMH was not the only company in the luxury goods sector to shine in the last quarter. Most recently, Hermes reported first quarter revenue growth of 44%, which far exceeded market estimates. The company noted a strong boost from the recovering Chinese market and well as good trading in the Americas region. Hermes reported 74% growth in Asia, with China characterised as “highly dynamic”. In the Americas revenue was up 23%. The laggard, as has been the case across many industries, was Europe, where sales were down 4%. Between LVMH and Hermes results releases, fellow luxury goods conglomerate Kering also reported strong revenue growth over the same period, well ahead of market expectations. The Group overall posted 26% like for like growth in revenue versus 17% expected. Within the Group, Gucci revenue was up 20%, Yves St Laurent 19% and Bottega Veneta up 20%. As with Hermes, Kering reported “outstanding momentum” in Asia Pacific, which was up 83%, while North America was also up a strong 46%. The fourth main luxury goods company Richemont (Jaeger-LeCoultre, Montblanc, Piaget, Van Cleef & Arpels among many others) is due to report FY21 results towards the end of May.

Having taken a hit in the March 2020 market sell-off, the luxury goods sector made a relatively quick and strong share price recovery. The sector is up 63% over the past 12 months and is trading at a 33% premium to pre-pandemic levels. The biggest recovery has been in Hermes and LVMH, both trading at c.50% above pre-pandemic levels, while Richemont is up 23%. Kering is the laggard, only up 8% on pre-pandemic levels. What we are witnessing in England now as queues form to get into general retail outlets, has already played out in economies that are further down the process of coming out of lockdown. This is particularly evident in South-East Asian countries in general and China in particular, with unfortunately the exception more recently of India. It is also evident that pent-up demand goes across all sectors. Luxury goods have fared well through the first three months of 2021. The presumption has to be that this surge will pass through all levels of retail, making for at least a good rebound in commercial activity for businesses which have survived the lockdowns once restrictions are eased.

Sources: Q121 reports from LVMH, Hermes, Kering, Richemont and government reports.

 

Warning: Past performance is not a reliable guide to future performance.

 

Warning: The value of your investment may go down as well as up.

 

Ian Hunter is a Research Analyst at Cantor Fitzgerald Ireland.

Contact details for each individual team member can be accessed here on our website should you wish to speak with a Portfolio Manager or Account Executive.

Cantor Fitzgerald Ireland Ltd. is regulated by the Central Bank of Ireland is a Member Firm of Euronext Dublin and the London Stock Exchange.