Luxury companies increasingly more cautious, globally

According to a recent report by EXANE BNP Paribas, inhibited demand environment in mainland China has hampered a re-acceleration in the second half of 2013, with consumer confidence stagnating among rich Chinese, after a period of buoyancy
mid-year. China’s economy has been lukewarm YTD, and is only now seemingly re-accelerating.

Channel overstocking seems to be finally easing gradually, while major luxury players are putting the brakes on space growth. All this has a material effect on Luxury as the Chinese still account for the vast majority of growth in the luxury market (c.60% in 2012) and consumption (c.29% in FY13e).

Luxury demand trends are mixed in the rest of the world

Luxury demand in the USA seems to be moderating slightly, having been a strong support in the past 18 months. Domestic demand in Europe appears to have reached a trough after years of unceasing decline. A revival in Europe may be on the cards for the future but there is no sign of a meaningful rebound yet. Japanese demand is softening, after a sparkling start to the year, adversely impacted, among other things, by sharp price increases.

EXANE‘s report favours hard luxury (fine jewellery and luxury watches). Richemont Group seems well supported in the short term by strong growth in jewellery and a slowly rebounding watch market. Swatch Group should be favoured by the latter, as well as by further retail developments, and less damage from the gifting retriction; however, it is suffering as a result of lower hedges. The fact that repositioning Louis Vuitton will take longer and will be bumpier – but will eventually be successful, we think – opens the opportunity to buy LVMH in steps, with the potential bonus of a solution to the Hermes stall. Patrick Thomas, CEO Hermes International said in September that stores in mature markets will be refurbished but no new store openings. Overall, the total number of stores is not expected to increase, but the average store size will double from 300 sqm to 600 sqm.

The trading updates released so far in H2 13e point to organic growth trends similar to those seen in H1 13, despite easier comparables. This seems the key message from LVMH’s Q3 update: all divisions came in either 1% or 2% above or below the Q2 13 numbers, with the group growing organically 8% in Q3 13 vs 9% in Q2 13 – even factoring in the company-specific challenge of repositioning Louis Vuitton. Burberry’s message was much the same, with organic growth moderating in Q2 14.

David Bowie, the new face of Louis Vuitton’s Winter 2013-14 ad campaign