Lipstick, Louis and Leather

• Global
• Kering, Luxury, LVMH, Richemont
• July 19, 2021

Let’s talk about lux, baby. Luxury, that is.

Like the K-shaped recession recovery we witnessed in 2020, in which different groups of individuals recovered from the recession at different paces, a global K-shaped recovery is taking place. Countries with more effective vaccination rollouts and virus control are set for major economic expansion this year, while many others, including South Africa, are staring down a torrid end to 2021.

The IMF projects that the average annual loss in per capita GDP over 2020-2024, relative to pre-pandemic forecasts, is projected to be 5.7% in low-income countries and 4.7% in emerging markets, while in advanced economies the losses are expected to be smaller at 2.3%.

This is all the more visible in the luxury goods market, which is experiencing a reversal of fortunes following a rebound in consumer confidence, but only in certain markets.

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Lipstick? Leave it.

The “lipstick index”, a term coined by former Estée Lauder chairman Leonard Lauder in response to the rise in lipstick sales following the 2001 economic downturn, is often used as a pseudo-indicator of consumer confidence. To Lauder, it indicated “that women facing an uncertain environment turn to beauty products as an affordable indulgence while they cut back on more expensive items”, such as Gucci handbags or Chanel garments.

The pandemic, and the introduction of masks into everyday life, flattened makeup sales and the reliability of the lipstick index, but it does raise a good point. If an increase in purchases of relatively inexpensive luxury items signals low consumer confidence, the opposite should also be true: a rebound in higher-end items should follow a rise in consumer confidence.

Taking a look at Richemont’s financial results for the quarter ended 30 June 2021, it appears that the luxury goods group is on the right side of the K-shape graph:

• Year-on-year revenue growth was 129%, but the comparable period of Q2’20 (April to June 2020) was the height of global lockdowns and would thus be considered a “soft base” or an “easy comp” as analysts would call it.
• As a through-the-cycle view, revenue increased by 22% compared to the quarter ended 30 June 2019.
• The strong comeback was propelled by the performance of its jewellery portfolio, its largest revenue driver, which grew 43% vs Q2’19 (+142% vs Q2’20).
• Regionally, the Americas (+47%) and Asia Pacific (+40%) contributed the most to Richemont’s rebound, while growth in Europe (-15%) and Japan (-14%) was still stifled.
• On the back of the trading update, Richemont’s share price hit an all-time high of R182.71 and is currently up 30% year-to-date, although it dropped sharply amid concerns this week around the potential impact of the Delta variant.

Richemont’s results paint an even clearer picture of economic sentiment. Americans saved $2.5 trillion more than usual during the pandemic and high-income consumer spending is 11% higher than pre-pandemic levels. With almost 50% of the population fully vaccinated, it’s easy to understand why consumers in the United States, flush with stimulus money and in the throes of summer, are feeling good about spending again.

In Asia Pacific, and China in particular, luxury spending has steamrolled on. Despite the pandemic, China’s luxury goods markets grew 48% in 2020 and Chinese consumers contributed almost two-thirds of global luxury spending growth. It was the only major economy to achieve positive growth last year and is on course to become the world’s largest luxury market by 2025.

Fashion Is Back En Vogue.

Two large luxury conglomerates are also looking to put their pandemic woes behind them and chart new paths.

French group Kering, which houses iconic brands such as Gucci and Yves Saint Laurent, is hoping that its stellar Q1 results will provide enough momentum to last throughout 2021:

• Revenue rose 26% year-on-year and 6% vs Q1’19.
• Asia Pacific and North America again led from the front, with revenue growing 83% and 46% respectively.
• Impressively, Kering has managed to grow e-commerce to 14% of retail sales, buoyed by a 108% increase in online sales.
• Kering’s share price is up 26% year-to-date.

Kering approached Richemont chairman and controlling shareholder, Johann Rupert, with a merger proposal in January. Such was his lack of interest that Rupert did not even submit the offer to Richemont’s board.

Speculation over a possible partnership between Kering and Richemont has been rife for years. In theory, it would be the perfect marriage. Kering has strength in “soft luxury” such as fashion and leather goods, while Richemont has strength in “hard luxury” such as watches and jewellery. A merger could finally present a worthy challenger to luxury’s current standard-bearer: LVMH.

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Moët Hennessy-Louis Vuitton (“LVMH”) is luxury’s largest conglomerate, with a market cap of $389bn (Kering: $107bn; Richemont: $69bn). LVMH completed its $15.6bn acquisition of Tiffany & Co. in January, beefing up its ailing jewellery and watch division and setting its sights firmly on Richemont’s territory.

LVMH’s Q1 results also signal that a turnaround is on the cards:

• Revenue grew 30% year-on-year and outpaced Q1’19 by 8%.
• Fashion & Leather Goods, which is 48% of overall revenue, grew 52% y-o-y and 37% vs Q1’19, driven by excellent performances in Louis Vuitton and Dior.
• Perfumes & Cosmetics (-4%) and Watches & Jewellery (+1%) faltered vs Q1’19, but recorded growth of 18% and 35% respectively year-on-year.
• While not breaking out specific figures, LVMH noted double-digit growth in Asia and the US while recovery in Europe was slower.
• LVMH’s share price is up 28% year-to-date.

It’s the Roaring 20s…somewhere.

South Africa might be on the wrong end of the K-shape but luckily our money can be given a passport. In the case of Richemont, the passport doesn’t even need to be stamped, as the company is listed on the JSE.

At home, it certainly doesn’t feel like the “Roaring 20s” – the period after World War I and the Spanish Flu, during which people celebrated being alive and the economy grew at such a rate that it entered the Great Depression within a decade!

In the US and in China though, luxury brands are performing well. The world’s wealthiest people continue to appreciate the finer things in life. Even if you can’t afford the jewellery or the watches, you can participate in the profits from selling them.

Be warned though: these companies are as expensive for investors as they are for customers. They command high valuation multiples and that brings the risk of painful sell-offs if things don’t work out to plan.

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