High Frequency Luxury Monitoring
Momentum continues for luxury equities apart from Kering, which lost steam on the same day as Sabato De Sarno's second Gucci show at Milan FW24.
February 23, 2024
Our FSW High Frequency Luxury Monitor finished up 3.2 percent on the week, driven by broad based price appreciation across the index's 18 constituent luxury stocks. The biggest gainers were Zegna (up 6.8 percent after its strong preliminary FY23 earnings report) and Ferrari (6.5 percent) while industry giant LVMH was up 3.4 percent.
Kering finished down -0.60 percent on the week after a big sell off on Friday took its share price down by just over 2 percent and broke its streak of six trading days in positive territory. Probably no causality, but today's sell off intensified after Gucci's Milan show with the stock losing over 1 percent from the start of the show until the close of trading in Paris.
Zegna posts a huge FY 2023
February 22, 2024
The Zegna Group, about eight months after the addition of Tom Ford Fashion, delivered spectacular preliminary FY23 revenues numbers on February 21. Annual revenue growth came in at 27.6 percent after a monster Q4 of 40.1 percent growth. Even if we focus on just organic growth, the numbers were big with roughly 19 percent growth for Q4 and FY23.
Growth was strong across the group’s product segments and geographies, the latter of which has been rare during this luxury earnings season. The group’s largest line, Zegna (roughly 70 percent of revenues) chipped in EUR 1.3 billion (19.5 percent organic growth), Thom Browne (20 percent of group revenue) reported EUR 380 million (up 17.8 percent), and the newly acquired Tom Ford generated EUR 236 million during April-December.
Joining the ranks of other “quiet(er)” luxury groups, such as Hermès and Brunello Cucinelli, Zegna reported double digit sales growth across all geographical regions, with growth especially strong in Asia (24 percent) and, though it only comprises 3.5 percent of revenues, Zegna took pains to break out the message that UAE grew over 30 percent.
Forward guidance was for more of the same. The medium-term outlook was for an adjusted compound EBIT growth rate of about 20 percent.
The markets have been pleased with Zegna this year with its share price rising around 25 percent as of intraday trading today, putting it above the 15 percent simple growth rate of the FSW High Frequency Luxury Monitor All-Luxury Index and the roughly 6 percent price appreciation of the S&P 500. Its valuation remains pretty rich with a P/E ratio for the next estimated fiscal year of 29.2x, which is well below the stratospheric levels of Brunello Cuccinelli (63.5x) and Hermès (51.3x), but well above industry giant LVMH (25.6x).
Hermès’ FY23 earnings support shows that a focus on high-net worth consumers pays off in this market for soft luxury.
February 9, 2024
With the release Hermès’ FY23 results today, we have now seen the release of most of the major luxury firm’s results this earnings season. We still have a few to go, but we can start to draw some lessons. Going into earnings season, the markets expected that macroeconomic headwinds would disadvantage soft luxury and brands dependent on aspirational consumers. This hypothesis has been broadly confirmed: Richemont, with its stable of watch and jewelry brands, gave us an upside surprise; Kering commented that its poor results resulted from slowing demand from aspirational consumers; high price pointed Brunello Cucinelli and Ferrari were spectacular, and LVMH, which is so heavily diversified across most fashion luxury verticals with its 60 subsidiaries, was resilient.
In Hermès, we have a soft luxury goods specialist whose price points are better aligned with high-net-worth households. And Hermès’ consumers massively delivered with full-year earnings growth of 21 percent, at constant exchange rates, with gross margins growing by just under 2 percentage points at 72.3 percent.
Unlike most of its competitors, Hermès delivered strong growth across all geographies with the contribution of growth from Asia (40 percent), the Americas (19 percent), Europe (13 percent), Japan (10 percent), and France (10 percent) remaining almost unchanged from last year. Even LVMH did not deliver double digit growth across all of its product lines like Hermes.
This has paid off for investors with dividends growing by over 60 percent and dividends per share up over 15 percent.
The market expects that earnings will slow to around 7 percent in FY24, but this seems unjustifiably pessimistic given Hermès’ position in the price-volume-mix triangle. Hermès has powered past most of its competitors in the luxury bull market of the past few years by wielding pricing power while maintaining strong volume growth with a revenue-enhancing mix of products. With Hermès expected raise prices between 8 and 9 percent this year and a product mix that is already tilted towards more resilient consumers, we expect double digit growth next year.
Valuations for Hermès are pretty eye watering with a P/E (NTM) ratio of 52.7x as compared with 24.9x for LVMH and 20.0x for Richemont. Among the FSW High Frequency All Luxury Index constituents only LVMH constituent Christian Dior and Brunello Cucinelli have richer valuations.
Hermès' share price is up over 10 percent on the day with a total return of over 15 percent year-to-date.
Gucci delivers the anticipated bad news while Tapestry and Ralph Lauren over-perform
February 8, 2024
The earnings season for luxury delivered a lot of news today with Gucci, Ralph Lauren, Tapestry, and Tapestry’s target Capri all coming to the market with results.
As we reported earlier in the week, the market expected another poor outcome from Kering for its full year 2023 results and the results were not good but not as bad as consensus expected. François Pinault announced that revenue was down 4 percent in 2023 from 2022 levels, driven by declines across all of its major maisons (Kering, 51% of revenues, down 4%; Saint Laurent, 17% of revenues, down 5%; Bottega Veneta, 9% of revenues, down 4%). Only Kering Eyewear (5.5% of revenues), which principally has a wholesale distribution model, was up on the year at 7%. These results look pretty ugly when compared to industry giant LVHM, which reported a 8.8% increase in 2023 revenues last month.
The market is hoping that we may have reached trough Kering, particularly Gucci, as a flurry of management reshuffles and creation direction resets over the past year yields results. In addition, the group made a number of large real estate investments in 2023 (including a 25,000-square-foot space for a new Paris flagship at 235 Saint-Honoré and 12-14 Rue Castiglione) and acquisitions (Creed and Maui Jim) which pushed down free cash flow by 40 percent and raised net debt by 6.2 billion Euros but hopefully laid the groundwork for a rebound.
In the Q&A session, Kering management confirmed that they plan to target wealthier consumers to power a return to growth and pointed out that macroeconomic headwinds had negatively impacted aspirational consumers and helped pull down Gucci sales in 2023.
In contrast, two of America’s largest luxury houses came in strong. Ralph Lauren – reporting Q3 results for its FY24 – announced annual revenues had jumped 6 percent, as strong growth in Asia (16% growth) and Europe (11%) offset flat growth in North America. Tapestry (home to Coach, Kate Spade, and Stuart Weitzman) also reported positive, though more modest, growth of 3% for its Q2 with again growth in Asia and Europe compensating for stagnating growth in North America. Tapestry’s takeover target, Capri and its brands Versace, Jimmy Choo, and Michael Kors, met analysts’ expectations for poor growth with FY23 revenue down 6 percent from 2022 and forecasts for almost unchanged revenue growth in FY24.
Stock prices for Ralph Lauren and Tapestry surged by 16.8 percent and 6.5 percent, respectively, on the day, making them the top performing firms in the FSW High Frequency Luxury Monitor All-Luxury Index. With P/E (NTM) ratios of 13.7x and 9.3x, RL and Tapestry looks like good buys. By comparison, Hermès trades at 50.3x and LVMH at 24.7x.
Preview of Kering's February 8 Earnings Report & Near-Term Prospects
February 6, 2024
Kering has been the sick man among major luxury conglomerates for a number of years. There are many ways to measure its relative underperformance. Looking at its share price, it has fallen almost 40 percent since the start of the pandemic. This compares catastrophically poorly with LVMH and Richemont, whose shares have risen 80 and 90 percent, respectively. Looking at just 2024, Kering’s share price is down around 1 percent while the FSW All Luxury Index is up over 8 percent.
In terms of vision and stability, Kering has really struggled in the past few years. The departure of Marco Bizzarri as Gucci CEO in July of last year was a shock. Gucci contributes over 60 percent of the Kering’s operating income and his departure contributed to a sense of directional uncertainty that began with Alessandro Michele’s departure in November 2022.
Things have not been a total disaster as the luxury group is still very profitable (posting net income of €1.79 billion in the first half of last year) but the trend has been in the shape of nosedive (that €1.79 billion was down 10 percent on the prior year) and it has performed exceptionally poorly when compared with its peers.
So what should we expect when Kering releases its full year 2023 returns on February 8? The market expects another poor installment with the average EBITA (earnings before interest, taxes, and amortization) forecast at €6.7 billion, down over 9 percent from 2022. Since FSW is more interested in looking at long-term trends, let’s assess the historical rolling EBITA estimate and stock price for the next 12 months (NTM) below. This gives a picture of the continuation of a down trending earnings estimate (blue line) and is reflected in a free falling stock price (black line).
Yet could this be a storm before the calm? The market does expect positive earnings growth next year (3.2 percent) and very strong growth in 2025 (~ 10 percent). Presumably this optimism originates from the view that the management transitions at Kering slow down and the new strategic directions yield returns amid a hopefully improving macroeconomic backdrop. We remain fairly optimistic about Kering long-term given its commitment to strong brand storytelling across a range of innovative platforms.
You can keep track of Kering’s financial releases on their investors’ page: https://lnkd.in/gN8hVY9r
Ferrari Races Ahead of the Rest of the Luxury Industry
February 1, 2024
So far this earnings season luxury brands, with an exception or two, have beat market expectations for the period of October to December and full year 2023.
Ferrari joined the beat-the-expectations club with their earnings announcement today and we even got a bit of a bonus. On the bonus side, it appears that Lewis Hamilton will make a shock move to its Formula 1 car in 2025. On the earning side, the brand reported full year 2023 earnings that beat Wall Street’s expectations and broke earnings records.
The luxury automaker launched five new models in 2023 en route to earnings (before interest and taxes) of 1.6 billion Euros, up 32 percent from 2022 levels. This translates into earnings per share of 6.90 Euros, crushing expectations for 6.73 Euros and setting a corporate record. Next year continues to look bullish with Ferrari expecting earnings per share to rise to 7.5, which is mostly in line with Wall Street forecasts.
Ferrari’s shares surged by about 12.5 percent today, giving investors in the company's shares (ticker: RACE) at 15 percent total return in 2024, dwarfing the rest of the luxury industry.
You can find Ferrari’s results here: https://lnkd.in/eu-f8ZWz
The next major luxury earnings announcements will come from the US when Ralph Lauren, Tapestry, and Capri (the latter two not yet merged) on February 8.
A bull market in luxury stocks in beginning to form
January 29, 2024
The bull market in luxury stocks continued into Monday with every stock in the FSW High Frequency Luxury Monitor All Luxury Index finishing up on a day with some break taking price appreciation: Dior up over 12%, Moncler 9.4%, Kering 6.6%, Cucinelli 6.3%, and Richemont 6.2%. There was no major announcements on the day and this reflects a carry on from a change in investor sentiment over LVMH's strong 2023 report last week.
As the below shoes, our All Luxury Index is now about a percentage point up on the S&P 500 for the year.
After a strong 2023 earnings report, LVMH's share price powered past the S&P500 for the year.
January 26, 2024
This was the biggest week of the year for luxury stocks, aided by LVMH's (slight) overshooting of analysts' revenue expectations for 2023. Those results, which were released on Thursday, powered LVMH's share price up by 11.5 percent over Thursday and Friday (as compared with a 0.49 percent gain for the S&P 500) and lifted the LVMH wealth path up above that of the broader market for the first time this year (see below).
The FSW High Frequency Luxury Monitor Pure Luxury Index gained almost 8 percent during the week as all 15 constituent companies, apart from Ferrari and Capri, saw positive gains. Apart from LMVH, the biggest gainers were Tapestry (6.4 percent) and Hermès (5.9 percent).
We will dip into luxury automotives next week as Ferrari will release full year 2023 results on February 1.
At today’s 2023 investors’ call Bernard Arnault expressed no concern of slowing growth at LVMH.
January 25, 2024
Bernard Arnault did not express any concern about slowing growth at LVMH today, pointing out that its pricing power comes from product mix and pursuing a growth at all costs strategy reduces brand exclusivity.
After the close of markets in Paris today, LVMHreported 2023 revenue growth of 8.8% when compared with 2022, which was slightly ahead of the market consensus forecast of 8.5%. Organic growth of 13% was pulled down by a negative 4% currency effect owing to weakness in the Euro.
Though these numbers were in line with most forecasts, they tell a cautionary tale for 2024 as growth slowed markedly over the course of the year: Q1 revenue growth was 17%, Q2 17%, Q3 9%, Q4 10%. End of the year forecasts tend to be good leading indicators for the start of the next year (unless there are strong seasonal dimensions, which is not the case here) and these dynamics point to a slowdown for H1 2024.
The geographic composition of sales was mostly unchanged from last year despite the surge in demand from Chinese consumers in Q1: U.S. 25%, Europe 25%, Asia (x. Japan) 31%, Japan 7%, Others 12%.
Among product lines, the gainers, year-over-year, were Selective Retailing 20%, Fashion & Leather Goods 9%, and Watches & Jewelry 3%. Wine & Spirits again lagged and was down 7 percent. This is a breakdown of product lines as a percentage of total 2023 revenues: Selective Retailing 7.6%, F&L 49%, W&J 13%, W&S 7.6%.
Like the rest of the world, LVMH was hit by the effects of the higher global interest rate environment. The cost of net financial net rose from 17 million euros to 367.
LVMH's share price ($LVMHF) surged by over 500 basis points today while the FSW High Frequency Luxury Monitor all-luxury index closed up 287 basis points.
You can find the presentation materials and a replay of the investors' call on the LVMH website: https://lnkd.in/efkeVz5n
Ahead of LVMH’s full year 2023 earnings release tomorrow, analysts expect a weak annual growth rate.
January 24, 2024
Tomorrow we will see the highly anticipated full year 2023 results for LVMH after the market's close. With a $360 billion valuation, LVMH is by far the largest player in the highly consolidated luxury market and this release will draw broad attention.
What should we expect? Looking at sales, the market consensus is that a robust holiday shopping period will drive strong sequential quarter-on-quarter growth (17.8 percent), but anemic when compared to Q4 of last year (3.6 percent growth). As per the below, this translates into the expectation that sales will rise over 10 percent for the full year for 2023 and drift even lower over the next two years.
Our new weighted luxury stock market index shows the industry trailing the broader market heading into earnings season
January 23, 2024
Most "luxury" oriented ETFs include a wide universe of companies that many would not regard as luxury. Though what brands comprise luxury versus premium and so forth is not set in stone, many ETFs include firms such as Tesla and Nike which probably would not fit most definitions. These can be quite distorting, particularly given that many ETFs are cap weighted and Tesla's $660+ billion valuation dwarfs true luxury firms with LVMH being closest at just over $360 billion.
We constructed a narrower, cap weighted, index of what we regarded as the top 15 pure luxury play stocks. The below shows how this index has performed against the S&P 500 since the start of the year. The trajectory of these wealth paths will not surprise many so far (your $100 investment in luxury would be sitting at $93.81 while an S&P 100 index tracker would put you at $102.28) but this will be something to watch as the luxury earnings come in over the next week or so.
To keep on your radar: LVMH will release its next earnings report on January 25 and Dior will follow on January 29.
Apart from Richemont, luxury stocks continued to take a beating this week
January 19, 2024
While the S&P 500 hit a record high at the close of this week, luxury stocks continued to take a beating over the past five with almost the entire sector in the red. Year-to-date returns for LVMH and Kering exceed 10 percent while Hugo Boss is down close to 15 percent. Among the major multi-brand companies, only Richemont stands out, so far, after reporting strong earnings this week with the stock up about 50 basis points year-to-date. Next week we will see how LVMH fared as full year 2023 earnings will be reported on January 25.
Richemont reports strong Oct-Dec, driven by strong retail sales
January 18, 2024
After some mixed results at the start of the luxury earnings season from Burberry (downside surprise) and Brunello Cucinelli (upside surprise), Richemont reported today that October to December 2023 sales were up 8 percent at constant exchange rates with broad-based growth across all geographies (https://lnkd.in/etTsWjem). Growth in Japan was 18 percent, Asia Pacific x. Japan 13 percent, Middle East and Africa 10 percent, and Americas 8 percent though Europe was down 3 percent.
As many predicted, hard luxury looks set to be the main industry growth driver during this post-pandemic normalization period. Growth in Richemont’s jewelry groups generated the strongest growth at 12 percent.
U.S. and China macro data signal strong Oct-Dec for luxury
January 17, 2024
Now that the 2024 forecasts for the luxury industry have been laid out (including that of FSW: https://lnkd.in/eD6FtP4v) we start the job of observing and acting on those trends. Looking a bit backwards in the hope that it gives a small glimpse of future trends, the U.S. and China released Q4 macroeconomic numbers this week that will be of interest to luxury industry watchers.
Today the U.S. released monthly December retail sales which showed us that, after 13 consecutive months of year-over-year declines, inflation adjusted growth was 1.4 percent – the first annual increase since October 2022. If we break out the types of spending that drove this growth (see chart below), we see that nominal annual growth rates were more than 10 percent for food, electronics, health/personal care, cars, and clothing. For luxury watchers, the department store number is worth a look, despite changes in wholesaling trends, and that was especially impressive with a month-to-month break out gain of over 3 percent – by far the biggest monthly winner. Some trends to bear in mind as we look forward to the start of the luxury earnings season over the next few days.
In China, there was no surprise from yesterday’s announcement that 2023 GDP growth came in at 5.2 percent, mostly in line with market expectations and slightly above the government’s target. What the financial press really picked up on was less that this was a fairly poor economic growth number, but the surprise announcement that the country’s population fell to 1.4 billion with births continue to fall. As we noted in our analysis of demography and the geography of luxury sales (https://lnkd.in/egusaCvc) this is a big deal with Asia, excluding China, comprising about 40 percent of industry sales and the region has generally been much more dynamic than the U.S. and Europe for a number of years. But the aging of Asia, especially China, will challenge both the growth of the industry and the way that the industry markets products. China’s working age population was nearly 15 percent in the mid-2000s and now it is below 5 percent, more like the U.S. and Europe.
Bank of America forecasts mixed results from luxury in 2024
January 15, 2024
This nice piece shares BoA’s 2024 outlook for the luxury sector, which finds that while the whole sector will be coming off the post-pandemic bull market to growth rates that are more in line with historical experience, there will be more heterogeneity generally with some continuing to win (Hermès) and others experiencing new challenges (Burberry).
💡FSW discusses why this period of slower growth creates new opportunities for the industry. https://lnkd.in/eM86KajU
💡The FSW 2024 preview concurs with many of BofA’s forecasts and details their implications for luxury strategy makers. https://lnkd.in/eD6FtP4v
Chinese regulators approve Tapestry-Capri deal
January 10, 2024
Seeking Alpha reports that, after some uncertainty, China's regulators have approved Tapestry's $8.5 billion purchase of Capri (https://lnkd.in/e9fyPRb7). It is not clear whether or how severe concerns may be been over the implications of the merger that will bring together Coach, Kate Spade, Stuart Weitzman, Versace, Jimmy Choo, and Michael Kors. Our understanding is that U.S. regulators are continuing the review the deal.
Glossy reported that Tapestry CEO Joanne C. Crevoiserat defended as necessary in the highly consolidated luxury market: “We are competing with very large global competitors,” Crevoiserat said. “So having more scale will help us, as an American company, compete.” (https://lnkd.in/eBtPJJPt)
Capri shares ($CPRI) were up over 150 basis points on opening this morning.
Brunello Cucinelli earnings crush analyst expectations
January 8, 2024
Looking ahead, Bryce Quillin PhD commented:
“Brands like Cucinelli should be able to generate strong margins into 2024 by continuing to exercise strong pricing power that should not materially hurt volume growth,” said Quillin. “Their product mix is well aligned with the enduring trend for quiet luxury amid turbulent macroeconomic times. This is in contrast with much of the [luxury] industry, where we expect weaker price growth opportunities this year.”
Luxury stocks struggle though MasterCard points to some reason for optimism
January 6, 2024
The first week of the year was a weak one for most major luxury stocks as investors began acting on repeated warnings from analysts (including FSW High Frequency Luxury) and luxury CFOs that this year, particularly H1, would represent a return to normal growth rates for some (especially diversified brands and those catering to HNW) and weaker than historically normal for others (especially those that rely on aspiration consumers). The Stoxx Europe Luxury 10 index was down 3.2 percent while broader, sector-weighted, indexes such as the Eurostoxx 50 and the S&P 500 were fairly flat.
One piece of good news that may serve as leading indicator for a better than expected Q4 for some luxury brands is that the MasterCard Spending Pulse™ (https://lnkd.in/e2zN7XpE) indicator pointed to decent consumer holiday spending especially for apparel though jewelry sales looked poor.
Luxury stocks take a beating
January 3, 2024
On the back of expectations for a weak of revenue growth this year, luxury stocks have started the year with a beating as the Stoxx Europe 10 index continued the downward trend that started in mid-December and is down by over 200 basis points today (chart below). We do not read this as a potentially poor year historically for luxury brands, but as a normalization of revenue growth after the post-pandemic surge. However, diverse names (LVMH) and those that cater to wealthier clients (Hermes) will perform better than those who depend more heavily on aspirational consumers.
Stoxx Europe 10 Index Level, October 1, 2023 - January 3, 2024