Market Pulse | Clouds on the Horizon?

Savigny Luxury Index May 2012 | Source: Savigny Partners

LONDON, United Kingdom — The Savigny Luxury Index (“SLI”) slid 5.2 percent in May, underperforming the benchmark MSCI World Index (“MSCI”) by almost 2 percentage points.  Strong results mixed with an increasingly glum outlook for Europe and indications of a slowdown in China resulted in some profit taking as investors exited the sector.  All the stocks in our index ended the month negatively.

Big news

  • Although the sector delivered impressive results yet again this month, there were many indications that 2012 is going to be tough, especially in Europe.  The euphoria surrounding Richemont’s exceptional results for its year ended March 2012 (sales up 29 percent, EBIT up 51 percent and a bulging bank account) was brief; strong year-end announcements by Burberry and Ralph Lauren and first quarter sales growth around the 20 percent mark for Ferragamo, Brunello Cucinelli and Hermès were not sufficient to offset fears of a meltdown in Europe and slowdown in China.
  • There have been mixed signals over the outlook for the Swiss watch sector.  Swatch confirmed its aim to break through CHF8 billion in sales this year; however Swiss watch export growth shrank to 9 percent in April (vs. an average of 16 percent for the previous four months) and fears over a slowdown in the segment’s key Chinese market poured cold water over its short term prospects.
  • This month we welcome Brunello Cucinelli to the SLI.  Founded in 1978 as a manufacturer of cashmere knitwear, the company has expanded its product offering to women’s and men’s luxury ready-to-wear and accessories.  Womenswear still accounts for the bulk of the business, at 69 percent of sales (including women’s accessories).  Accessories are a growing category, accounting for 12 percent of sales (both men’s and women’s).  The brand is distributed through 59 stores (of which 39 franchised) and around a thousand multi-brand doors (of which a third have dedicated corners for the brand).  Own retail has been growing fast albeit from a low base – in 2011, own retail accounted for 22 percent of total sales (+60 percent vs. 2010).  The company generates roughly 30 percent of its turnover respectively in Italy, the rest of Europe and North America.  Greater China only represents 4 percent of total sales.  The stock made an impressive market debut, launching at a 34 percent premium to its IPO price, climbing a further 18 percent in its first two days of trading.  However, the stock eased off shortly thereafter and its performance since has been somewhat flat.  At a historic 18.5X EBITDA multiple it is priced at a premium to our sector average.

Going up

  • Ferragamo was the least hurt by the sell-off of luxury stocks with a decrease of 1 percent.  The stock price was upheld by strong first quarter results and the company’s above-average exposure to the Chinese market.

Going down

  • Tiffany’s share price tumbled by 19 percent for the month.  Its share price fell off a cliff after it announced a revised 2012 sales outlook down three points to around 7 percent.
  • Ralph Lauren took a beating due to the company’s high exposure to the US and European markets, both of which are struggling.
  • Ports shares resumed trading only to fall by 34 percent as the chairman announced his resignation.

What to watch

  • The situation in Europe is causing jitters to the SLI.  A number of sector participants have warned this month that 2012 will be challenging in Europe to say the least.

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.