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Opinion

The latest results prove it: luxury is ever more expensive

Arthur Jurus

By Arthur Jurus27 juillet 2021

The luxury sector’s attractiveness is not decreasing! In 2020, the sector turned out to be defensive by quickly overcoming the economic crisis. In 2021, sales have rapidly accelerated due to a swift improvement of Chinese economy, which managed to reach its pre-COVID level.

Nevertheless, while a normalization of sales was expected as of 2021, we probably will have to wait until 2022. Indeed, China remains a strong consumer of luxury products and the main drive of demand, while the American market’s strength has been a positive surprise. However, the delay in vaccination campaigns and the lack of international tourists have affected sales on the European market. We will therefore have to wait for a more significant return of interregional tourism to recover the 280 billion dollars of yearly income on a global scale, and therefore confirm its return to normal.

In the meantime, we already have a few certainties for the coming years. The trends profiled in 2020 have already been confirmed. The appetite of Chinese consumers is growing, the product collections are increasing, more than 60% of sales are linked to digital experience and pre-owned markets are contributing up to a 30-billion-dollar income in 2021. Indeed, luxury companies with sustained growth and that are capable of overcoming short term production constraints linked to a return to demand will remain leaders of tomorrow in the sector.

These perspectives are positive for the luxury sector, which confirmed its attractiveness among investors. On one hand, transactions in mergers and acquisitions, globally, have turned out to be dynamic since the beginning of the year and reached more than 1,200 billion dollars by quarter. The companies’ capability to pay were significant, with an average premium of 25%. This attractiveness also concerned luxury, where operations where significant (LVMH on Tiffany, VF Corporation on Supreme, Moncler on Stone Island). Luxury conglomerates are best positioned to acquire targets by offering annual revenue over 500 million dollars.

On the other hand, performances of European luxury values are 2 to 3 times superior to those of European stock indexes. In 2021, Hermès grew by 40%, Richemont by 33%, LVMH by 25% and Kering by 20%. The momentum is favorable and the growth trend on profits will continue. The recent results of LVMH show it: revenue has increased by 14% vs the second quarter of 2019 and margins have risen by 5.5 percentage points to 26,6%. Perspectives are also beneficial for Richemont: the average yearly growth of its jewelry houses could therefore reach 12% over the next two years, vs a rhythm of 10% before the crisis.

However, selection between stocks have become necessary for four reasons. First, markets 30% higher than average could tire these stocks. Secondly, luxury products overconsumption, including of precious objects, could lead to an inflexion on the sales dynamic in regions where current sale increases remain exceptional, like in the Americas and in the Middle East. Thirdly, the risk of high interest rates persists and could affect their valuation by reducing mid to long-term yield. Finally, the new political momentum aiming at reinforcing fiscal pressure on rich individuals and on companies could increase. Risks that need to be monitored and which will compel to more selectiveness while remaining exposed. Normalization is close.

Arthur Jurus is Senior Strategist at ODDO BHF

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