这是用户在 2024-9-23 15:57 为 https://www.barrons.com/articles/luxury-stocks-937e2d8c 保存的双语快照页面,由 沉浸式翻译 提供双语支持。了解如何保存?
  • Comments
  • Read Next
Barron's Logo
(Illustration by Javier Jaen)

How Luxury Stocks Lost Their Shine. These Are the Ones That Will Get It Back.

To steal a line from Coco Chanel, there are people who have money and people who are rich. Right now, it seems, both types have lost ardor for luxury goods such as her namesake handbags—and that is creating major problems.

By all indications, luxury-goods makers should be living the high life. The economy is growing, the stock market is hitting record highs, and the rich are richer than ever. Luxury stocks, though, are suffering. The Roundhill S&P Global Luxury exchange-traded fund has dropped 7.2%, dragged down by companies such as LVMH Moët Hennessy Louis Vuitton, Gucci-owner Kering

KER

-2.71%
, and cold-weather clothing maker Moncler. The sector’s sales growth is slowing, and Wall Street worries that the sluggishness won’t let up. The wealthy, it would appear, have gone AWOL.

Except it isn’t that simple. Yes, moneyed shoppers are definitely laying low in China, beset by a serious economic malaise. But that’s only part of the problem. To a large degree, the brands have shot themselves in their alligator-clad feet.

Advertisement - Scroll to Continue

It all goes back to the early days of the pandemic in 2020, when government stimulus suddenly made many folks feel wealthy. Legions of new luxury shoppers swarmed into the market. The resulting sales boom wasn’t only unsustainable, but also raised fears that the brands’ carefully cultivated auras of exclusivity would take hits. So, one company after another began jacking up prices. Result: A number of prized luxury products now cost 50% to 100% more than in 2019.

That hyperinflation has, by design, shut out many aspirational shoppers—probably more than intended. Worse, it also turned off core customers, the truly rich.

“There has been some fallout from people who have decided, ‘I’m just not going to buy anymore because this is getting ridiculous,’ ” says Gabriella Santaniello, founder and CEO of retail consulting firm A Line Partners. “You can’t say the price is higher due to the artistry of the product when it has nearly doubled in a few years.”

There is some good news in all this. First, a handful of companies are navigating the environment better than others, and their stocks look attractive. More broadly, since a good chunk of the problem is both self-inflicted and fixable, the industry’s weak performance probably isn’t sign of things to come for the U.S. economy.

Yes, consumer spending does merit attention: It makes up about two-thirds of U.S. gross domestic product and is typically the last thing to go before a recession. The lowest earners, who are particularly susceptible to rising prices for food and other staples, have already capitulated, with the strain hurting sales at dollar-store chains like Dollar Tree

DLTR

-2.91%
and Dollar General

DG

-0.57%
and fast-food joints such as McDonald’s. Middle-income consumers haven’t been immune to the pressure, leading many to budget carefully and even start shopping at Walmart.

Wealthier shoppers, however, are still going at it. Some 49% of high-income earners plan to splurge over the next three months, according to a recent McKinsey survey, the highest of any group—despite the industry’s stumble. The fact is, spending near the top of America’s income ladder generally declines only during major economic shocks. The last time it happened was during the financial crisis of 2008-09.

And one look at Ferrari

RACE

-0.74%
suggests the rich are doing just fine. The auto maker’s sales climbed more than 19% and 17%, respectively, in each of the past two years; they’re expected to notch another 11% gain in 2024. The stock, meanwhile, has gained 40% in 2024, while Dollar General has dropped 37%.

Advertisement - Scroll to Continue

“Ferrari and Dollar General stock prices have diverged materially, as the higher-income consumer is still willing to spend on luxury goods while the lower-income consumer faces a more dire reality,” writes Brendan Boken, an investment analyst at Penn Mutual Asset Management. “Higher-income consumers continue to be less impacted by elevated interest rates, and their personal balance sheets remain healthy.”

That much is clear simply from perusing the websites of Louis Vuitton, where the LV Checker Ranger Boot fetches $1,530; Prada, where brushed-leather slippers go for $1,070; or Hermès, where a pair of “bouncing sneakers” costs $920.

The industry’s sales continue to grow: HSBC analyst Aurélie Husson-Dumoutier expects organic sales growth to come in at 2.8% this year, though that’s down from her prior estimate of 5.5%. If she’s correct, 2024 would be the sixth-worst year for sales growth over the past two decades. But there is still growth to be had, if you know where to look— Prada

PRDSF

-3.12%
, Husson-Dumoutier’s longtime favorite, is expected to report top- and bottom-line growth of 14% and 22%, respectively, this year.

Newsletter Sign-up

This Week's Magazine

This weekly email offers a full list of stories and other features in this week's magazine. Saturday mornings ET.

The most obvious problem is China. According to McKinseyExternal link, China delivered more than half the global growth in luxury spending from 2012 to 2018. In 2018, Chinese consumers accounted for about a third of total worldwide luxury spending. After China lifted its most onerous pandemic restrictions in 2022, that growth was supposed to come roaring back, similar to what happened in the U.S. in the post-Covid years. Instead, economic softness has prevailed, leaving millions of consumers with little appetite for high-price goods. China’s total retail sales have increased by less than 1% since the start of 2024.

Advertisement - Scroll to Continue

The issues in China, however, could have been overcome if not for other missteps. With shoppers flush with stimulus checks and the temporarily expanded child tax credit, many consumers could afford to buy some luxury goods. Global sales soared 33%External link in 2021 to some $285 billion, above the previous record set in 2019. But that kind of sales growth proved to be a curse, because it was never going to be sustainable, and chipped away at the brands’ exclusivity. It was particularly problematic for top-tier luxury players, who still court the crème de la crème and would prefer not to cater to customers with fluctuating purchasing power.

To maintain their prestige, luxury brands raised prices to keep many items out of reach, often by multiples of the inflation rate. A small Cartier Trinity ring would set you back 1,540 euros ($1,719), up 64% from 2019, according to HSBC data, while a large Chanel flap bag now costs €11,000, up 91%. Other products that have seen massive leaps include a €3,800 Prada Galleria Saffiano leather bag, a €1,600 Louis Vuitton Speedy Bandouliere 30 Damier Ebene, and a €1,795 Canada Goose Shelburne parka. That priced out even some shoppers the brands would have loved to keep.

“As prices get higher, brands need to generate more and more excitement to get people to spend,” says Joseph Ghio, equity research analyst at Williams Jones Wealth Management. “Even if it’s a brand you love, people start getting priced out.”

Advertisement - Scroll to Continue

That has particularly been a problem for brands that have courted aspirational shoppers—those with just enough cash to indulge in occasional splurges. Many luxury brands, including Versace and Dior, sell items such as keychains and sunglasses, which have relatively small price tags but big emotional components that create lifelong connections. But with prices high and cheap fakes available, many luxury brands missed out on attracting new shoppers who would have proven valuable in their later, higher-income years.

(Illustration by Javier Jaen)

Other companies tried to attract wealthier shoppers than their regular customers, with disastrous results. Burberry, always a step below the ultrahigh luxury names given its lower price points and outlet stores, tried to move upExternal link, raising prices on items like handbags more than 50%. That turned off its core shoppers without successfully attracting more-affluent ones. Sales slipped more than 4% in the latest fiscal year, and are projected to fall 15% in this one. “As the current problems at Burberry show, it’s the companies that skew more toward the aspirational clientele that are having the most problems right now,” Ghio says.

Luxury does make for fertile investing ground, if only because of the idiosyncratic forces at play in the industry. While this earnings season was littered with disappointments—not just from Burberry but also from Kering, Hugo Boss, and even powerhouse LVMH—recent declines make some luxury stocks look attractive. That is, if you can navigate still-cautious consumers, foreign-exchange headwinds, the cost of investing in brand cachet, and other factors.

Advertisement - Scroll to Continue

It’s especially hard to bargain hunt among companies that also have internal problems. That includes some lower-end brands that need aspirational shoppers; Burberry’s push has backfiredExternal link, leaving it reeling and hoping for a takeover. Even at 25 times 12-month forward earnings, the stock doesn’t look like a bargain. Shares of U.S. equivalents—Coach owner Tapestry and Michael Kors parent Capri Holdings —are also struggling as the two companies try to merge, despite Federal Trade Commission opposition. Tapestry, which trades at a modest 9.4 times forward earnings despite the surprising resilience of Coach sales, looks like a decent bet, though the trial over the deal in federal court remains an overhang.

Further up the food chain, Kering also looks to be in a tough spot. The fashion aesthetics at Gucci diverged from customer preferences and it launched fewer new products than rivals, ceding market share. It is taking steps to right the ship at Gucci, both publicly—a new handbag line launched this month—and behind the scenes, with supply-chain optimization and a revamping of its store network. But a turnaround is always tricky, and even harder when the backdrop is so challenging. In all, near-term sales catalysts are in short supply, and the stock trades at more than 14 times forward earnings, which is hard to square with what’s expected to be yet another year of double-digit earnings per share contraction in 2024.

Some luxury players sport multiples that are simply too rich despite the companies’ success. For example, Hermès, the maker of the ultraexpensive, impossible-to-get Birkin bag, has growing sales and expanding margins but trades at 40 times earnings. That’s too expensive, even for the pinnacle of luxury.

Advertisement - Scroll to Continue

LVMH might be a good compromise. After a recent selloff, the shares change hands for less than 20 times forward earnings, even as it maintains a diverse portfolio of popular brands such as Bulgari, Givenchy, and Dom Pérignon. Ghio notes LVMH has used its huge war chest of capital to foster fashion and operational overlap between its brands and excitement around its elaborate fashion shows in a way that sets it apart from the competition. Those advantages make the company’s recent lackluster results —revenue edged up just 1% year over year to a lower-than-expected €21 billion—less worrisome than those of peers, while the stock trades at 19 times 12-month forward earnings, its lowest since late 2023.

Richemont also looks attractive, says Vontobel portfolio manager Markus Hansen, who calls it his favorite luxury name. The reason: Richemont’s Cartier brand is more immune to fashion whims and cheap duplicates. Jewelry is, he says, “timeless, with the main Cartier line offerings…all multidecade, even 100 years old. Timeless is a powerful product marketing.” Richemont stock has inched up less than 3% this year and trades at 18 times 12-month forward earnings.

Ultimately, while luxury stocks aren’t as far above the fray as the world they cater to, they will ultimately regain their shine. Coco Chanel wouldn’t have it any other way.

Write to Teresa Rivas at teresa.rivas@barrons.comExternal link