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The Fog is Lifting on the Luxury Goods Sector

The SLI continued its ascent this month on the back of some good corporate results and a rebound in China.
Savigny Luxury Index November 2016 | Source: Savigny Partners
  • Pierre Mallevays

LONDON, United Kingdom — The Savigny Luxury index (SLI) rose almost 4 percent, in line with the MSCI World Index, thanks to reports of green shoots of recovery in local Chinese spending as well as a more resilient US market.

Big news

Chinese consumers contributed to strong quarterly results announcements from Hermès, Tiffany and Brunello Cucinelli, helping overshadow a continued tough trading environment in Europe ex-London. Nevertheless, more widespread signs of recovery are being felt, with most markets except Japan doing better or in line with previous trends according to a report published by HSBC this month. The fog seems therefore to have lifted on the sector with investors taking long positions in most stocks, with the exception of watch stocks which tend to lag in recovery.

The US market is proving more resilient despite continuing softness in department stores/malls. Having clamped down on discounting and reduced its exposure to department stores, Coach benefited from a 22 percent jump in quarterly profits. Not so for Estée Lauder and Michael Kors who both reported a decline in sales through this channel; in the case of Kors deliberately cutting back on sales to department stores in order to protect its brand equity. Ecommerce has taken a stronghold in the US, with internet sales growing by double digits over the Black Friday/Thanksgiving/Cyber Monday weekend vs the same period in 2015.

Estée Lauder continued its acquisition spree, signing the biggest deal in its 70-year history with the $1.5 billion purchase of millennial favourite Too Faced Cosmetics. Italian leather-goods brand Piquadro bought 80% of manufacturer Il Ponte Pelleteria; Luxottica bought the remaining 63% it didn’t own of optical chain Salmoiraghi & Vigano. In the digital space, Vente-Privée which now has sales of just over $3 billion, announced that it was looking for acquisition opportunities to grow its market penetration, and Farfetch’s CEO stated that the company will be looking to IPO in the next two to three years.

Going up

  • Tiffany's shares reached their highest level since August 2015 following its first quarterly sales rise in two years. The share ended the month 12 percent up.
  • Ralph Lauren's stock rallied after its second quarter results announcement in which the company maintained its 2017 guidance. The share gained almost 7 percent this month.
  • Hermès gained almost 6 percent in November on the back of its strong results announcement and guidance that, whilst sales would only grow in single digits this year, margins would improve vs 2015.

Going down

  • Safilo lost a fifth of its value this month as a result of concerns over the loss of its Gucci eyewear license.
  • Estée Lauder reported the slowest quarterly growth in over a year as a result of softness in the US department store sector and reduced tourist traffic to its US-based MAC stores; the share lost 11 percent of its value this month.
  • Ferragamo's share price declined by 9 percent in November as its quarterly results were weighed down by poor performance in Europe. The company will present a new strategy in January and is already focusing on renegotiating its store leases.

What to watch

Christmas is coming and the signs are looking more encouraging than they were a few months back. All eyes will be on the web, as a growing number of consumers seem to want to shop from the comfort of their sofas. The burning question is not necessarily how much sales will be made but rather at what price will those sales be made and, last but not least, whether returns will continue to rise.

Sector valuation

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