A thirst for champagne and a yearning for posh handbags is hard to shake off. Luxury goods companies seemingly remain immune from the chill winds blowing through the global economy.
On Monday, the world’s second-biggest luxury group by sales, Richemont, said revenues had risen by nearly a quarter in the four months to the end of July. It expects operating profit in the first half of the year to rise between 20 and 40 per cent compared to the first six months of 2011. Operating margins – the key measure of profitability – are 23 per cent. And on choice jewellery items like Cartier watches, Richemont makes a $330 profit for every $1,000 splashed out.
Richemont is not the only one doing well.
Last month, the French luxury group LVMH, which sells Louis Vuitton bags, Dior perfume and Dom Pérignon champagne, reported a 28 per cent jump in net income to €1.7bn in the first half of the year.
But look behind the headline figures, and the picture is considerably less rosy. Richemont’s latest numbers may have been impressive, but sales growth has slowed since the beginning of the year. And much of the boost to revenue at all the luxury goods companies is because of the effect of currency movements, rather than shifting more stock.
The reasons for the slowdown are not hard to find. The world’s luxury goods companies have long pinned their hopes for stellar growth on the emerging markets, particularly China and the rest of Asia. And consumer demand in China is not what it was.
Last week, Hugo Boss bemoaned Chinese shoppers’ reluctance to spend. Burberry, long the poster child of the smaller luxury goods sector, said sales in the first three months of the year grew at only 11 per cent, rather than the 30 per cent reported in the previous year because of the slowdown in the Chinese economy. Local companies, like Chow Tai Fook, the world’s largest jewellery retailer by market value, are even gloomier.
If demand in Asia falls significantly, luxury goods companies will really start hurting. Europe, mired in its never-ending financial crisis, will not bail them out. Nor will the US, where demand is only stable.
Investors do not seem to have taken the warning signs on board. Shares in a basket of luxury goods companies, as measured by Bloomberg, have risen more than 26 per cent so far this year, 10 percentage points more than global equities. And valuations still look silly. Prada trades on 25 times forecast earnings, and Burberry on 19. Richemont and LVMH look a little more conservatively valued at 16 and 18 times, respectively, but these are not stocks priced for a slowdown.
It is understandable for investors to look for the bright spots in a generally gloomy equity market. But even a pair of Jimmy Choo shoes brings only transitory joy. The moment for buying into the luxury goods story has clearly passed.
sarah.gordon@