Market Pulse | Burberry Causes a Downpour

Savigny Luxury Index September 2012 | Source: Savigny Partners

LONDON, United Kingdom — The Savigny Luxury Index (SLI) lost 6.9 percent in September, underperforming a flat-ish MSCI World Index (MSCI) by nearly seven percentage points.  Burberry’s profit warning sent the sector into turmoil mid-month and no amount of good news from the likes of Prada and Michael Kors could lift investors’ spirits.

Big news

  • Burberry announced a substantial slowdown in sales growth, with same store sales growth dropping to nothing in the ten weeks to 8 September, and warned that its full year profit will come at the lower end of expectations.  The company did not say where the slowdown was, causing concern that it may be in all of its key markets.
  • Swatch came out with a muted view for the year, confirming its sales target of CHF8 billion but highlighting that it would have to work very hard to achieve it.
  • On the flipside, Prada, Luxottica and Michael Kors all came out with positive news.  Prada posted another set of exceptional results, with its first half EBITDA growing by almost fifty percent, with Greater China being its fastest growth market.  Both Michael Kors and Luxottica hinted that their interim and full-year results will be higher than expected.
  • In a surprising move, Richemont announced the acquisition of US luxury fashion and golf brand Peter Millar.  Zegna, Marzotto and Loro Piana clubbed together to buy a controlling stake in Pettinature Di Verrone, a combing mill.

Going up

  • Brunello Cuccinelli is the only stock in the SLI family to have risen this month, adding nearly two percent.  This does not look justified by its near-term growth prospects, which stand below our sample (see table below).

Going down

  • Burberry lost more than a quarter of its market value following its profit warning and now trades at a discount to the sector.
  • Mulberry’s share price continued its descent, losing a further 16 percent this month.  Nevertheless the company’s EBITDA multiple is still at a 30 percent premium to the SLI average.

What to watch

  • There is some uncertainty as to whether Burberry’s profit warning highlights issues about the sector’s outlook or whether it is company-specific.  Burberry does have a greater reliance on apparel sales then most of its luxury peers.  Also, its programme of buying back licensees, which bought in turnover and profits, is now mostly behind it. Forthcoming quarterly sales announcements by LVMH and Dior (both in mid-October), and PPR (at the end of October) should help shed some light on this.
  • The Chinese government’s well-publicised crackdown on corruption will undoubtedly have an impact on the market for conspicuous luxury gift items.  Sales of expensive wines and complicated watches are reported to have taken a nosedive.
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.