Luxury is Strong — For Now

LONDON, United Kingdom — The Savigny Luxury index ("SLI") outperformed again this month, gaining 5.4 percent in April, whilst the MSCI World Index ("MSCI") flat-lined for the second month running. Better-than-expected results from sector leaders prompted a series of rallies throughout the month.

Big news

LVMH, Kering and Hermès delighted the market with double-digit first quarter sales growths. Kering, in particular, saw stellar performance, with like-for-like sales growth of 29 percent, underpinned by a whopping 48 percent sales increase at its revived Gucci brand and a very strong 33 percent growth at Saint Laurent, where the designer transition seems to have paid off. LVMH signalled growth in all markets and in all of its divisions, whilst Hermès pointed, in particular, to the strength of its business in China and America.

The US  did not prove a blessing for all however. The market turned out to be the thorn in the side of Luxottica and Burberry's quarterly results, mostly related to company-specific reasons (less discounting at Luxottica and focus on apparel for Burberry). The general sentiment echoing across the results, however, was clear: the sector had turned a corner, notably with the effects of the Chinese government spending stimulus flowing through the market, but we should not expect sales to continue growing at the same rate as this quarter for the rest of the year.

Radical changes are happening at Ralph Lauren: the company will shut down a number of stores, including its Fifth Avenue Polo flagship and cut staff across the company with the aim of saving $140 million of costs each year. The total bill for this restructuring initiative will be $370 million.

In value terms, April has been a record-breaking month for luxury mergers and acquisitions. Most notably, LVMH’s complex ownership structure via Christian Dior was unravelled at a net cost of €6.5 billion to the Arnault family and Hong Kong-based luxury distributor Belle International Holdings was taken private by its directors at a cost of £3.7 billion. CVC Capital Partners agreed to acquire 80 percent of Breitling: sources estimate the deal to value the Swiss watchmaker at around €800 million. French jewellery group Marcel Robbez Masson acquired Christian Bernard Diffusion, a designer and manufacturer of jewellery, for an estimated minimum consideration of €40 million.

Three apparel deals were also announced this month: Italy-based Style Capital acquired a 51 percent stake in luxury womenswear brand forte_forte; L Catterton acquired a controlling stake in swimwear brand Maaji; and Adastria Holdings Co Ltd, the listed Japan-based casual wear chain acquired LA contemporary brand Velvet. Finally, Burberry reversed its beauty strategy and licensed its fragrance and beauty business to Coty for an upfront payment of £130 million plus £50 million for inventory.

Going up

• Kering share priced soared over 17 percent this month, on the back of sterling first quarter results from its flagship brands Gucci and Saint Laurent.
• Prada gained almost 12 percent in April despite reporting a double-digit decline in sales and profits for the year ended January 2017; the company maintained that it had turned the corner in the second half of its financial year, with sales accelerating in past months notably in China and Russia.

Going down

• Burberry lost over 6 percent this month following poor fourth quarter results highlighting weakness in the USA, Hong Kong and South Korea.
• Coach saw its share price come down by nearly 5 percent, mostly due to uncertainty in the build-up to its acquisition of Kate Spade.

What to watch

The grey market for watches is set to pick up as excess inventory has continued to build up despite hopes of a stabilising market. Swiss watch exports fell 10 percent in 2016 and have fallen a further 8 percent in the first two months of 2017. A flurry of websites selling discounted luxury watches are popping up, notably in the USA, which is gaining ground over Hong Kong/China as one of the largest markets for luxury watches in the world. This may cause pricing issues further down the line for watch brands as consumers get the taste for bargains in this otherwise exclusive segment.