Cloudy Horizon for Luxury Sector

LONDON, United Kingdom — The Savigny Luxury index ("SLI") and the MSCI World Index ("MSCI") moved in opposite directions this month, with the SLI losing 2 percent and the MSCI gaining the same.  Continued uncertainty over the sector's outlook compounded by increasingly difficult trading conditions in Asia caused the SLI to lose what little ground it had gained since the beginning of the year.

Big news

Whilst results for the last quarter of 2015 have been somewhat of a mixed bag, with only Hermès, Brunello Cucinelli and Moncler coming out with strong results, all players warned of difficult trading conditions for 2016.  Some groups (Ferragamo, Neiman Marcus and Tod's) even announced a drop in like-for-like sales in their shops since the beginning of the year.  The Swiss watch industry echoed this sentiment: January exports were down almost 8 percent, showing no respite for the category.

The luxury sector continued exploring its uneasy relationship with technology this month.  Digital looms heavy, with some observers commenting that online purchases had, for the first time, a real impact on foot traffic in physical stores over the past holiday season.  This contrasts with the sector's digital champion, Yoox Net-A-Porter, whose sales grew by a fifth in 2015.  The online retailer's promising potential was underlined by McKinsey's estimate that, by 2025, the percentage of luxury shoppers online will triple to 18 percent of total luxury purchases.  Nevertheless, the company has some catching up to do in terms of profitability: its 4.2 percent operating margin underscores the complexity of running a luxury e-commerce business.  In accessories, luxury brands made several jabs at the Apple Watch:  Tag Heuer's smart watch was proclaimed a fulgurant success by the head of LVMH's watch division, whilst Bulgari launched a new version of its Diagono Magnesium watch incorporating contactless payment technology.  Michael Kors announced the creation of a wearable technology accessories line, beginning with a smart watch, compatible with both iPhones and Android phones.  Lastly Prada, which was the first luxury brand to incorporate technological advances into its retail environment in 2001 with its interactive changing rooms, is now planning to introduce portable point of sale terminals in its stores (as Apple has done for several years).

Corporate activity was more talk than action this month:  HSBC acquired just over 5 percent of Burberry, sparking takeover speculation, although it turned out that the transaction was an aggregate of unrelated trades.  Similar short-lived speculation spread to Prada, which jumped 21 percent on rumours that evaporated within days.  Real activity took place with Kering's Volcom announcing the sale of Electric, a Californian premium sports and lifestyle brand, to its management, and Samsonite acquiring Tumi for £1.2 billion.

Going up

• Prada gained almost 20 percent in March, as the stock continued its recovery from its all-time low at the end of 2015.

• Tiffany's shares gained 13 percent in a relief rally as the company's fourth quarter results beat (rather pessimistic) expectations.  The market had expected more severe declines in sales over the holiday period than reported by the company (minus 6 percent) due to the hampering effect of the strong dollar.

• Brunello Cucinelli's share price gained over 12 percent on the month as the company forecast double digit revenue growth in 2016 on the back of strong 2015 results.

Going down

• Tod's share price fell 10 percent this month as the company announced disappointing profits and a 6 percent reduction in like for like sales for the year to date.

• Safilo's share price fell 9 percent driven by disappointing 2015 results, which saw a contraction of 14 percent in EBITDA and almost 85 percent in net profit.

• Luxottica fell 8 percent on the month as the company trimmed its profit guidance for the next three years.  The company continued to be plagued by concerns over its governance as it appointed a long-time associate of the De Vecchio family to its board.

What to watch

Worrying signs are coming out of South Korea’s duty free market, which at around $8 billion is the largest duty free market in the world.  Recently opened downtown duty free malls are performing grossly under budget and some of the listed mall operators have lost more than half of their stock market value since their 2015 peaks.  Concerns over the flighty Chinese consumer as well as the government awarding more licenses to open downtown stores have caused some of the bigger brands to hold back from further investing in this market.  Whether this is a general sign of malaise in one of the few remaining growth markets for luxury remains to be seen.