The high-end international luxury market has recently gained remarkable momentum. This fact is borne out by the performance of the S&P Global Luxury Index, which has surged over 10% on a one-year basis, handily outpacing the modest 3% gains of the broader benchmark, for the same period, as of Aug 16.
This exceptional performance of the luxury goods market is far from over. The 2023 forecast from Bain & Company for this market shows a potential growth ranging from 5% to 12%, building on the record year in 2022, despite the prevailing economic uncertainties. The market is projected to be valued between about US$577 billion and US$621 billion by the year 2030, doubling in size from 2020.
Investors interested in a segment of the market that remains somewhat invulnerable to the global economic fluctuations may consider the following high-end luxury goods companies and wait for a meaningful pullback to create a margin of safety.
Globally renowned luxury name, Hermes (RMS) is best known for its Birkin and Kelly bags. The company generates about half of its revenue from the leather goods and saddlery segment, while clothes and accessories (25% of sales), silk and textiles (7%), and other products such as perfumes, watches, jewellery, and home furnishings make up the rest.
The company operates approximately 300 stores worldwide catering to both aspirational consumers and high-net-worth individuals, while also functioning as sources for gift items, “providing Hermes with recurring demand and protecting it from cyclical demand fluctuations,” says a Morningstar equity report.
The wide-moat company boasts a unique place in the luxury goods industry, which helps produce consistently superior returns on capital. “Hermes’ iconic leather bag styles (part of the more than EUR 4 billion leather goods segment) are in limited supply, supporting the brand’s exclusivity perception and providing the company with demand visibility and significant pricing power,” asserts Morningstar equity analyst Jelena Sokolova.
The prestige and demand for its brand are evident from the fact that “Hermes Birkin and Kelly bags are sold in secondary markets and auctions for significantly higher than the initial purchase prices—an impressive feat for soft luxury goods,” says Sokolova, who recently upped the stock’s fair value to EUR 1,270 from EUR 990, prompted by stellar annual results.
The rest of Hermes' product range, which includes small leather goods, scarves, jewelry pieces, saddles, and dining sets, also boasts a substantial competitive advantage or wide moat.
Luxury heavyweight, LVMH (MC) owns such premium brands as Louis Vuitton, Fendi, Givenchy, Tag Heuer, Hennessy, Moet & Chandon, Dior, Bulgari, Tiffany, and Sephora.
The firm operates six segments: fashion and leather goods (its largest and oldest); watches and jewelry; wines and spirits; perfumes and cosmetics; selective retailing (including Sephora); and others. Paris-based LVMH operates more than 5,000 stores around the globe.
“We believe that a portfolio of strong leading brands in several luxury niches grants LVMH Moet Hennessy Louis Vuitton a wide moat and should allow it to generate economic profits well into the future,” says a Morningstar equity report.
The crown jewel of its fashion and leather goods (over half of the company’s profits) is the 100-plus-year-old globally recognized Louis Vuitton brand, regarded as a status symbol globally.
The firm’s product portfolio also includes smaller but iconic brands, including Fendi and Loro Piana. It’s wines and spirits (17% of profits) segment features Hennessy and Moet & Chandon brands that hold substantial market share and widespread brand awareness, the report says.
LVMH's brands have established strong positions within distributors’ supply chains and wield significant bargaining power due to their heft. “Long production cycles and high need for inventory in Champagnes and cognacs, as well as supply limitation due to land availability, create barriers for new entrants,” points out Sokolova, who recently raised the stock’s fair value to EUR 640 from EUR 590, incorporating better expectations for 2023 sales and profits.
Luxury goods conglomerate, Richemont (CFR) owns 20 upscale brands including Cartier, Piaget, Vacheron Constantin, Jaeger-LeCoultre and Montblanc. Jewellery and watch brands make up over 70% of sales, while accessories including writing instruments, clothing and online luxury retail make up the rest.
Considered ‘the king of jewellers and jeweller of kings,’ “Cartier is arguably “one of the best-known and strongest brands” in the precious jewellery industry, says a Morningstar equity report, adding that jewellery accounts for 58% of total revenue and over 86% of profits.
The high share of gifting in the case of jewellery (about 70% in major jewellery-consuming countries, such as the U.S., China, and Japan), supports the category's conspicuous value and demand for its brands among high-net-worth individuals.
Wide-moat Richemont is the number-three global luxury goods conglomerate by revenue. “Over the years, the group has amassed and developed a portfolio of very successful global brands, mostly in the hard luxury segment,” says Sokolova, adding that “despite more pronounced cyclicality, hard luxury goods benefit from much longer product cycles and lower fashion risk.”
Most of the group’s brands are at least a century old, have iconic collections lasting 40-80 years, and have historically commanded significant pricing power, notes Sokolova who puts the stock’s fair value at CHF 140, and forecasts a 6.5% revenue growth over the next decade, driven by an increasing number of high-net-worth individuals globally.
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