Luxury stocks still in fashion despite the pandemic

The prospects of an effective vaccine and the recovery in markets such as China have raised hopes within the luxury industry. The sector is also focusing on several important long term trends which will continue to be present even after the end of the pandemic.

Fast recovery?

Not even the luxury goods industry could escape the negative economic effects of the pandemic. Especially at the beginning of 2020 when boutiques and other so-called ’non-essential shops’ were forced to close. At the same time, global travel came to a standstill due to border closures and lockdowns. This was a particular blow for an industry where tourists are such important customers. People are often in a mood to spend whilst travelling and take home souvenirs such as watches, jewellery or clothes. At LVMH (Moët Hennessy Louis Vuitton), the world’s largest luxury goods company, one of the effects felt of the pandemic was a 21% year on year decline in sales in the first nine months of 2020 to EUR 30.3 billion.

The French group which is known for brands such as Louis Vuitton, Christian Dior, Givenchy, Bulgari and Tag Heuer, also saw its sales decline 21 percent. The Swiss industry competitor Richemont (Cartier, A. Lange & Söhne, Montblanc) for its part reported sales revenues of 5.5 billion EUR for the first half of the 2020/21 financial year. That amounts to a decline of more than 26% compared to the same period last year. However the industry could already see signs of stabilization and recover in the third quarter of the year. The French luxury goods firm Kering (Gucci, Saint Laurent, Brioni) recorded a decline in sales of 4.7% between July and September compared to the previous year, compared to a decline of -43.5% from the second quarter. A similar trend was seen at LVMH, Richemont and other competitors.

Note: Past performance is no reliable indicator of future results.

Luxury meets E-Commerce

The industry benefited from the fact that many lockdown restrictions were lifted in the summer of 2020 and it was again possible to shop in city centres. At the same time the pandemic has shown the luxury goods industry that they need to be more actively engaged in online shopping. Richemont’s internet sales made up about 7 percent of their total sales. In the beginning of November the group also announced a cooperation with the Chinese e-commerce giant Alibaba. The groups are also joining Farfetch with their expansion projects in China. There are also other big industry names involved such as Kerings biggest shareholder, François-Henri Pinault. In addition Farfetch’s shopping channels will be released on Alibaba-platforms ”Tmall Luxury Pavillion” and ”Luxury Soho”, which specialise in luxury and premium articles. Through these platforms Farfetch aims to expand and reach Alibaba’s approximately 757 million consumers.

Farfetch, Richemont and Alibaba speak to a young, technology-centred target market seeking status symbols. In this regard, the Chinese market is even better addressed. Together with other emerging markets, China has driven the growth of the luxury goods industry in recent years. In the case of Richemont, China recently surpassed the US as the single most important market. The pandemic has also contributed to this development. Whilst China was the seen as the starting point of COVID-19, rigorous government lockdown measures and Beijing’s support for the domestic economy have helped it recover earlier. In the coming years, the luxury goods industry should continue to benefit from economic growth, the rising middle classes and the overwhelming increase in wealth in emerging markets.

LVMH stands out

Many of the large luxury companies will likely survive the crisis relatively well since they can often rely on several strong brands. This contributes to their diversification. In this regard the industry leader LVMH is particularly well positioned with their 75 brands and have over 160 000 employees worldwide. LVMH achieved this position through the help of a series of takeovers. Even before the outbreak of the pandemic, LVMH had embarked on their biggest venture in history with their acquisition of Tiffany. With the help of this valuable American jewel LVMH’s US market presence will undoubtedly be improved.

But the pandemic brought uncertainty to the deal. Especially because trade-related matters play an important role in the relationship between France and the US. Meanwhile the two parties came to the agreement of a lower takeover price. Instead of the original $135.00 a share offer, LVMH brought its bid down to $131.50, bringing the total price tag to $15.8 billion. Owing to the clarity regarding the Tiffany takeover, shares in LVMH were able to go into 2021 with a strong performance. In turn, the whole industry has been helped by vaccine prospects and the recovery of emerging markets in Asia Pacific, led by China, which are important for the industry.