Is Luxury Still Worth it?
James Buckley
Senior Equity Research Analyst

Whilst downgrades to economic forecasts abound, with the IMF being amongst the latest to cut their forecast for global growth next year to 2.7% from the 2.9% seen in July and the 3.8% expected back in January, one area of the global economy is proving remarkably resilient to date, namely luxury goods. A recent forecast from Bain & Co is for the $360bn sector to grow sales by between 3% and 8% in 2023. Indeed, if China were to lift Covid restrictions then growth could be at the top end of this range, or higher.

A prime example is LVMH, whose brands include Louis Vuitton, Tiffany, Fendi and Moet. The French luxury giant released Q3 sales figures in October, which saw group organic revenues increase 19% to 19.8bn euros over Q3 2021. All five divisions reported strong organic growth over the prior year period, with the core Fashion & Leather and Wine & Spirits divisions recording increases of 22% and 14% respectively, LVMH highlighted strong sales in Europe; US and Japan, as the strength of the US $ encourages US overseas tourism and spending. China saw some pick-up in Q3 sales over H1 as lockdown restrictions eased.

These strong forecast beating sales figures once again highlight the strength of LVMH’s franchise across the luxury goods spectrum. In a brief outlook statement, LVMH commented they were “confident in the continuation of current growth” albeit against “an uncertain geopolitical and economic backdrop”.

The long-awaited IPO of Porsche took place when the shares began trading on 28th September, (ticker P911), at a listing price of 82.50 euros, valuing Porsche at 75bn euros. Only 25% of the Porsche share capital was sold by parent, VW, being split equally between the non-voting Preference shares, which are the subject of the IPO and Ordinary voting shares which were bought by the Porsche controlling family at a 7% premium to the IPO price. The relatively limited issuance of Preference shares led to strong demand, especially as almost 40% of the offering had already been placed with four large institutions.

Despite turbulent market conditions, Porsche shares have been trading above their listing price, overtaking the market value of other auto manufacturing groups including VW. This comes despite Porsche only selling around 300K cars a year, compared to some 10m for VW. Porsche will be hoping their listing emulates the success of Ferrari, which was separated from Fiat in 2015 and now has a stock market value of 35bn euros, despite selling only 15K cars annually. VW owns other luxury marques including Lamborghini and Bentley, attracting speculation these may also be spun-off in the next couple of years.

Apple’s latest product launch event on 7th September featured their iPhone 14, new AirPods earbuds and a revamped Apple Watch. The latest version of the iPhone, which accounts for over half of total Apple sales, features only incremental upgrades as expected but the selling price has been left unchanged, starting at $799 for the basic model and rising to $1099 for the Pro Max. By only including the new A16 chip processor in its higher-end models, Apple is hoping to continue its successful recent strategy of upselling customers to pricier models. This increases average selling prices and boosts profit margins at what is already one of the world’s most profitable companies. Judging by the significantly longer waiting times for the premium priced iPhones consumers seem to be willing to pay up to receive the higher-spec iPhone Pro and Pro Max models.

Whilst the IMF may have warned of “stormy waters” and “financial turmoil” ahead when downgrading the economic growth forecasts for 93% of countries in their recent outlook, some sectors of the economy appear more immune than others to these threats. The power of established brands, which often have high residual value, to appeal to affluent consumers, a trend referred to as “luxonomics” has been demonstrated by the above companies. Whilst providers of high-ticket consumer desirables are apparently well placed to navigate the gathering storm, this may yet be put to the test if falls in asset values widen and deepen to include hitherto largely unscathed areas like housing, prompting consumers to ask themselves, how much do they really need that new purchase? “Luxury is not a proxy for the general economy” commented the LVMH CFO post their Q3 results, investors will be hoping he, and Bain & Co, are right and consumers spurge on luxury presents this Christmas and in 2023.

James Buckley is a Senior Equity Research Analyst with 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.

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

 

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