Dior, Louis Vuitton outperform at Christmas

Despite an easing of the rate of decline in sales, the fourth quarter has not saved the luxury sector from one of the most turbulent years on record. Luxury analysts are also wary about the prospects for a quick bounceback in 2021. The first quarter of 2021 has opened amid global economic uncertainty, with few tourists and travellers and many countries combating a third wave of Covid-19. Still, some global leading luxury brands have proven resilient — and the luxury sector could emerge stronger from the crisis. Prada ends the year on a better note. The company issued a financial update on 5 January on its second-half performance: retail sales, accounting for 90 per cent of the group’s total sales, were down by only 6 per cent, a dramatic improvement on the first half when total net revenues dropped 42 per cent. Prada Group’s earnings before interest and tax also returned to positive territory by the end of 2020, the company said. Whether its performance is an indicator of how other luxury conglomerates will perform in the fourth quarter remains to be seen. Richemont releases its financial Q3 (ending 31 December) results on 20 January with LVMH to follow with its annual results, likely on 26 January, Kering on 17 February and Hermès on 19 February. The third and fourth quarters are unlikely to throw up any surprises. “The luxury industry saw an easing in the rate of decline in the third quarter, with sales down in the mid to high-single digit percentage on average, with a handful of winning brands managing to turn back into positive territory,” says Thomas Chauvet, Citi’s luxury goods analyst. “We do not expect revenue trends to be materially different in Q4 at global or regional level.” Winning brands LVMH’s Q4 could be one cause for optimism. According to Morgan Stanley’s forecast, sales at LVMH’s fashion and leather goods division should be up 13 per cent year-on-year in the fourth quarter of 2020, driven by Dior and Louis Vuitton. “Dior will likely prove to be one of the key outperformers in luxury this year, along with Vuitton, as these two brands benefit from LVMH’s relentless investment in building up desirability,” writes Morgan Stanley analyst Edouard Aubin in a note. By contrast, sales at Kering (excluding eyewear) in the same period are expected to be down by 0.9 per cent year-on-year — and its largest brand, Gucci, could report a sales decline of 8 per cent, according to Morgan Stanley estimates, following on from an 8.9 per cent decline in Q3. Hermès, meanwhile, is expected to grow 8.1 per cent. Richemont’s Jewellery Maisons, which accounts for the lion’s share of Richemont’s sales and profits, is expected to be up 8 per cent in the quarter ending 31 December. For the full year, LVMH fashion and leather goods division is expected to be down 8 per cent in 2020, while Kering could report a 16 per cent drop (Gucci alone down 22 per cent), according to American investment bank Jefferies. “Dior and Louis Vuitton recovered faster when China reopened, because they are stronger in leather goods and have a wealthier/older clientele while Gucci is more reliant on ready-to-wear and millennials who took longer to return. As for Europe, brands that sell more to the local European clusters, like Louis Vuitton, Dior and Saint Laurent, fared better,” says Flavio Cereda-Parini, a luxury goods analyst at Jefferies. “Although the latest Gucci collection is clearly aimed at addressing this so management is tackling the issue.” The Gucci question Some analysts and investors have questioned whether the exuberant aesthetic of creative director Alessandro Michele is best suited to a time of crisis. In a recent note, Morgan Stanley’s Aubin notes that “Gucci’s top-line performance has been lagging other leading luxury brands in recent quarters”. He writes: “The debate on Gucci is whether the recent weakness is a function of a certain ‘Gucci fatigue’ or if it is a function of the fashion pendulum shifting away from baroque to classic/minimalist. This will determine the potential length of the top-line softness.” China offers the prospect of renewed momentum for Gucci, suggests Aubin, “should Gucci be in a position to materially improve its desirability in China”. He adds: “The brand plans to step up its investments [in China] in the coming months — this could lead to both upwards earnings revision as well as a re-rating of the shares.” Gucci’s collaboration with The North Face, which was launched in China on 29 December, drove so much traffic online that Gucci’s website momentarily crashed. Luxury woes in Europe Europe remains the most challenging of regions. Usually in Q4, around 50 to 60 per cent of European luxury sales come from tourism. “With depressed tourist flows and closure of non-essential stores in France and the UK in November, and again in the UK and Germany around Christmas, Europe is unlikely to see an improvement from the 30 per cent sales decline experienced in Q3,” says Chauvet. However, lockdown restrictions were less severe than in the spring and retailers were better prepared than during the first lockdown, says Chauvet. He highlights strong e-commerce operations and a pivot to video appointments and door-to-door deliveries as sales drivers. In the US, the end of so-called helicopter money — the stimulus handouts from the government to support households — is expected to have a negative impact on consumer sentiment. But US equity markets remained strong throughout Q4. “We expect luxury demand to remain positive, marginally below the Q3 trend,” says Chauvet. Chinese New Year The luxury sector continues to rely heavily on Asia in 2021. The region, excluding Japan, is likely to deliver double-digit revenue growth in Q4, with outperformance in Mainland China, Taiwan and South Korea compensating for weakness in markets such as Hong Kong. “While Chinese New Year on 12 February is almost three weeks later than last year, the implied negative impact on December sales should be manageable,” says Chauvet. Beyond Asia, the start of 2021 could be bumpy for the luxury sector, says Chauvet, citing a slow vaccine rollout in Western Europe and the US as well as fresh lockdown measures in the UK and restrictions in Germany. Jefferies’ analyst Cereda-Parini agrees. “The dynamic for the first quarter of 2021: China very strong, Europe very weak and the US weak-ish. We’ll never see again the revenue mix of 2019, where two-thirds of the Chinese purchases were made outside of China,” he says. “It’s pretty clear that tourism from Asia to Europe won’t meaningfully restart in 2021." Peak valuations Luxury’s long-term prospects remain strong. Investors perceive the industry — with its strong balance sheets and liquidity — as a good risk-return opportunity and see few alternatives other than the tech world. Despite all the challenges of 2020, luxury shares were up by 15 per cent by the end of the year and the sector has once again outperformed the market. “Investors quickly wrote off the 2020 disruption to focus on month-on-month sequential demand improvement since last summer and potential for a strong recovery path in 2021-22,” says Chauvet. The positive expectations are already reflected in share prices, according to Bernstein analyst Luca Solca. “We see peak valuations,” he says. LVMH’s market capitalisation was €253 billion on 7 January 2021, up from €200 billion in November 2019, prior to the Covid-19 crisis. It could be a busy year for M&A. “2020 has been a stress test for luxury groups,” says Bruno-Roland Bernard, a finance professor at Institut Français de la Mode. “Powerhouses have proved their ability to control costs and to deploy their firepower in e-commerce and in China. We have also seen a ‘flight to safety’ with consumers favouring established brands. The recovery won’t happen right away but investors are confident that it will happen, hence the luxury conglomerates’ spectacular valuations. This creates an environment favourable to mergers and acquisitions in 2021.” To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com. More from this author: Inside L'Oréal's digital future What Tiffany’s new management says about LVMH’s plans Pierre Cardin, couturier and businessman, dies at 98

Make better business decisions

Make better business decisions