Market Pulse | China Sneezes, but Confidence Returns

Savigny Luxury Index February 2012 | Source: Savigny Partners

LONDON, United Kingdom — The Savigny Luxury Index (“SLI”) outperformed with a gain of 6.9 percent for the month versus 2.6 percent for the benchmark MSCI World Index (“MSCI”).  Confidence in the sector returned towards the end of the month, with many of the bigger luxury stocks posting gains after having been flat for most of February.

Big news

  • Earlier in the month, China’s announcement that industrial output was slowing had sent the SLI down over 3 percent.
  • The string of exceptional 2011 results announcements by the big players did little to raise the pulse of the SLI.  Much of the results had been priced into the stocks already and professional investors took their profit: Hermès, PPR and Swatch all suffered share price drops in the aftermath of their announcements but have since clawed back lost ground.

Going up

  • Michael Kors posted a record 38 percent gain on the month, underpinned by the announcement of strong Q3 results, in particular, strong growth in Europe and a massive store expansion plan for China.
  • Hong-Kong listed Prada led the Italian brands with an impressive 16 percent rise for the month.
  • Ralph Lauren’s share price jumped 9 percent following its strong Q3 results announcement, contributing to a 13 percent rise for the month.

Going down

  • Ports and Safilo market valuations continue to lose ground, down 7.8 and 8.5 percent, respectively.

What to watch

Two newcomers to the SLI, Michael Kors and Mulberry, have valuation metrics which, whilst grounded in higher than average growth prospects, are not obviously sustainable in our view.

  • Michael Kors: Listed on 15 December 2011, Michael Kors started off as a high end sportswear brand thirty years ago and has evolved into a luxury lifestyle brand comprising a main line (Michael Kors) and a diffusion line (MICHAEL Michael Kors). Its turnover has almost quadrupled over the last four years to just under $800 million, driven principally by own retail expansion. The brand now has over two hundred stores and plans to more than double its store count in North America, as well as open a hundred stores each in Europe, China and Japan. The brand still generates the vast majority of its revenue from North America but is seeing phenomenal growth in its export markets. Listed at a market value of $3.8 billion, the company has already traded up to a market value in excess of $8 billion.
  • Mulberry: British leather goods and clothing brand Mulberry has gone from strength to strength in the last few years, its turnover almost tripling to £122 million over four years. The brand is still predominantly UK-based but is making substantial inroads in overseas markets, which now account for 41 percent of turnover. Growth in Asia in particular has been spectacular and is likely to continue thanks to some strong partnerships with local players, notably with Club 21 (which is owned by Mulberry’s principal shareholder). Distribution is mainly through its own DOS network (49 stores) and through franchised mono-brand stores (43 stores). The company’s recent market performance has been stellar, its share price increasing elevenfold since the beginning of 2010 (albeit with a very limited free float of 15 percent).

Sector Valuation

Pierre Mallevays is a contributing editor at The Business of Fashion and founder and managing partner of Savigny Partners, a corporate advisory firm focusing on the retail and luxury goods industry.