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For Luxury, Hope Springs Eternal

Investors in the sector are looking beyond a troublesome second quarter to greener pastures in the second half of 2020.
A closed Hermès shop after Paris went into lockdown in March | Source: Stephane Cardinale - Corbis/Corbis via Getty Images
By
  • Pierre Mallevays
BoF PROFESSIONAL

LONDON, United Kingdom — For the most part, first-quarter results were better than feared, with sales declines ranging from the high single digits (Hermès) to the mid-to-high teens (LVMH, Kering, Moncler), with a couple of outliers on each side (Brunello Cucinelli at minus 3 percent and Gucci at minus 22 percent). Companies pointed to a strong recovery in mainland China, albeit boosted by ongoing travel restrictions, but warned that the full impact of coronavirus will be felt in the second quarter.

However, the slow reopening of production sites in Europe (especially Italy) gives credibility to the prospect of a rebound in the second half. This is indeed good news as supply chain dynamics dictate that, for year-end holiday sales to happen, production orders need to be placed around now. Hopes were further fanned with talk of reopening non-essential retail stores in the US, sending share prices soaring.

Corporate activity was relatively subdued this month, with two deals being announced in the luxury resale segment: France-based Vestiaire Collective secured investment from its existing investors as well as Vaultier7, Korelya Capital, Cuir Invest and Fidelity International. UK-based Luxury Promise raised its first institutional round of capital from UK-US investment firm Beringea. Reports have also leaked of a potential buyout of UK-based makeup brand Charlotte Tilbury, citing interest from strategic players such as L'Oréal and Estée Lauder.

The Savigny Luxury Index (“SLI”) ended April 2 percent up, while the MSCI recovered lost ground against the SLI by gaining 11 percent this month. Both indices have been fuelled by prospects of life beyond lockdown, as evidenced by the recovery in China.

SLI versus MSCI

SLI Graph April 2020

Going Up

  • US stocks, such as Capri Holdings (up 41 percent), Tapestry (up 15 percent), Estée Lauder (up 11 percent) and Ralph Lauren (up 10 percent) were prime beneficiaries of talks of a potential easing in lockdown measures in the US.
  • Prada gained almost 11 percent this month, mirroring the recovery of the Hang Seng Index; Both Prada and the Hang Seng hit a year-to-date low in mid-March.

Going Down

  • April was not a good month for companies in the middle of a turnaround: Safilo, Tod's and Ferragamo lost 10 percent, 8 percent and 7 percent of their value respectively as the coronavirus added a layer of complexity to their restructuring efforts.

What to Watch

While the welcome lifting of lockdown restrictions is just around the corner, the true key to the sector’s recovery will be whether the world can remain out of lockdown in the second half of the year. A coronavirus comeback in the autumn would ruin the all-essential holiday season. Digital, to which some traditional luxury houses have only paid lip service, is fast becoming a priority.

Sector Valuation

Pierre Mallevays is the founder and managing partner of Savigny Partners LLP, a mergers & acquisitions advisory firm focusing on luxury brands and retail.

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