Market Pulse | Upbeat Results

LONDON, United Kingdom — The Savigny Luxury Index ("SLI") leaped by 3.5 percent last month, outperforming the MSCI World Index ("MSCI") by five percentage points.  Most of the SLI components have had impressive increases this month as the feel-good factor returns to the luxury sector, underpinned by strong results announcements and positive market reaction to leading groups' repositioning strategies.

Big news

• LVMH's repositioning of its core brand Louis Vuitton is starting to pay off, which has had a boosting effect on the whole sector.  The group posted much higher than expected fashion and leather sales in its first quarter results, propelled by creative momentum at Vuitton.  Gucci continued its upmarket repositioning with flat sales in the quarter being affected by the clean-up of its wholesale network.  Nevertheless, Kering's luxury division posted an impressive sales increase of over 6 percent for the quarter, driven by star brand Bottega Veneta and a much re-invigorated Saint Laurent.  The group announced a re-organisation of its luxury division into three groups: Gucci, Couture & Leather Goods and Watches & Jewellery.  Mulberrry reversed its upmarket strategy to revert to doing what it does best — affordable luxury handbags.

• The sector benefitted from a short-term sales rush in Japan as Japanese consumers rushed to the shops in anticipation of VAT hikes.  Hermès benefitted greatly as Japan is still its biggest market: the group posted forecast-beating first quarter results.  LVMH saw its revenues in Japan rise by over 30 percent (in local currency) over the quarter.

• Currency movements continue to eat into the sector's bottom line.  Burberry saw strong progress in its sales, up almost 20 percent in the first half, but warned again that currency headwinds would affect this year's results and could have a material impact on 2015 results.  Luxottica, which makes over half its sales in North America, said currency volatility has shaved more than five percent off reported revenue for the first quarter.  Kering expressed concern over the Ukraine crisis' impact on the rouble: its menswear brand Brioni generates a fifth of its sales from Russian clients.

• Italian brands continue to be the focus of M&A activity.  Versace agreed a 20 percent capital increase to Blackstone, whilst Cavalli looked to be sold to Permira for Eur450 million.  In other news, Labelux announced its intention to float Jimmy Choo this autumn.

Going up

• Most of the SLI components have recorded high single digit monthly increases fuelled by good quarterly results.

• Estée Lauder recorded the highest increase with a 8.5 percent jump as the beauty sector gets investors attention following Elizabeth Arden bid rumours.

Going down

• The big loser this month is Coach whose share price tumbled over 10 percent after it posted a 21% plunge in its third quarter sales in North America, its main market.  The brand continues to lose ground to fast-growing rival Michael Kors.

• Other US stocks such as Ralph Lauren (down almost 6 percent) and Michael Kors (down over 2 percent) have suffered as investors anticipate the effects of the tapering of the Fed's quantitative easing.

What to watch

Men are getting more attention than they ever have! According to a Bain study, menswear is the fastest growing category in fashion and is set to continue growing at a faster rate than womenswear globally.  Men are already the dominant purchasing power in emerging markets and menswear is becoming as important a category as womenswear in developed markets.  Leading groups LVMH and Kering are focusing on this category with their investments in Berluti and Brioni respectively, whilst predominantly menswear brands such as Kiton, Tom Ford and Zegna have been growing at stellar rates.  Prada has announced this month that it aims to almost double its menswear sales to €1.5 billion over three to five years and open more dedicated men's shops.

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