Luxury sector pricing
The continuing rise in energy and food prices is eroding consumers’ real purchasing power and, combined with the global supply chain issues, provides a significant drag on the global economic outlook. YTD the sector underperformed the MSCI World Index by 12%. However, most companies reported solid double-digit revenue growth compared to 1Q21. We do not observe that normalized revenue growth trends have slowed down compared to 4Q21, the strongest quarter last year.
Bank of America believes that the luxury sector share prices have underperformed the market this year for three reasons. First, they argue that bullish positioning at the beginning of the year caused stocks to sell off during the slowdown. Second, the higher yield environment led to value rotation and a downgrade of higher quality compounders. Third, they see fear in global growth as luxury goods companies are considered highly cyclical. However, they emphasize that 2009 saw a moderate decline of 4% followed by double-digit growth.
Impact of the china lockdown
The 1Q22 earnings season showed strong results with companies beating consensus estimates. Usually, the first quarter of the year is fairly impacted by demand from Chinese customers. On the one hand, many buy around the important Chinese New Year and, on the other, the sector benefits from two additional Valentine’s Days. In March, rising COVID cases and the implemented lockdowns in China weighed on the luxury goods sector. However, historically, the second quarter has been a lot less exposed to Chinese consumption given less travel and important shopping holidays.
We believe that the reopening of China’s borders will be the biggest positive tailwind for global luxury demand.
Five opportunities for luxury fashion
While inflation worries and the risk the Federal Reserve and other central bankers may throw the global economy into a tailspin, the luxury demand has remained solid in 2Q22, despite China lockdowns. The Boston Consulting Group has recently published a study on the luxury industry, where they argue that “the luxury industry has shown resilience with a return to pre-COVID performance levels and an estimated sector growth of more than 6% between 2022 and 2026”1. Moreover, they argue that the industry is facing paradigm shifts in all areas and mention particularly the areas:
- production and resources => in the face of resource scarcity, industry must maintain quality and accelerate innovation
- life cycle => the industry must balance sustainability, utility, rarity and novelty.
- customer relationships => From physical experience to digital reconciliation
- corporate responsibility => ESG transition
- and globalization => companies must open up new territories and anticipate risks
Six major pullbacks in past 20 years
The figure emphasizes that the sector has been hit by 6 major pullbacks in the past 20 years. (1) the Global Financial Crisis, (2) the Chinese anti-corruption campaign, (3) fears of a China-US trade war, (4) the COVID pandemic; and (5) the China Common Prosperity announcement. (6) Currently, the share price decline for the sector is 23%.
Moreover, the illustration shows that the luxury industry has demonstrated its ability to endure and overcome crises. Boston Consulting Group estimates sector growth to be more than 6% between 2022 and 2026 and Bank of America writes that luxury demand (excl. China) is solid.
