Sales at biggest luxury groups set to recover as early as this year

The luxury sector’s biggest groups are on track to shrug off the hit from Covid-19 as early as this year as eager shoppers in the US and China help push sales above pre-pandemic levels.

Hermès on Thursday blew past analyst forecasts with the highest industry growth so far, delivering first-quarter revenue of €2bn that was 33 per cent higher than the same period in 2019.

Sector leader LVMH had set the tone last week with first-quarter revenues up 8 per cent like for like from the same period in 2019 before the pandemic gored the global economy with lockdowns and travel curbs. The revival at Kering was less pronounced with a 5.5 per cent rise, as its star brand Gucci is in the middle of a makeover. 

While none of the groups give annual guidance, analysts forecast that revenues at all three this year will match or exceed those of 2019, according to Thomson Reuters Eikon data. LVMH and Hermès are also expected to report higher net profit than in 2019.

The improvement among luxury leaders began in the middle of last year and has since gathered pace, suggesting that they are taking market share from smaller, independent brands.

Thomas Chauvet, a luxury analyst at Citigroup, said investors’ worst fears for a long luxury slump were looking unfounded. Central bank action and huge government stimulus has propped up asset prices and stock markets, leaving consumers — especially the wealthiest — feeling upbeat and with money to spend.

“The downturn this time was severe but in reality was short in duration unlike prior crises,” he said, referring to the 2008 financial crash.

LVMH’s recovery has been led by its star brand Louis Vuitton © Kevin Frayer/Getty

Investors had fretted that a freeze in international travel would cripple the luxury sector because it relies heavily on tourists in the fashion capitals of Europe to drive sales. Chinese shoppers in particular would load up on Louis Vuitton, Gucci, and Chanel during trips to Paris and Milan, not only to enjoy the high-end experience in flagship stores but also to capitalise on lower prices. 

Analysts at Bain and Altagamma in November forecast that luxury sales would take up to three years to recover and contract 23 per cent to reach €217bn globally in 2020.

But in reality the hit to the biggest groups had been much milder, roughly about 10 per cent last year, said Luca Solca of Bernstein Research. Chinese and American consumers are shopping at home, and brands have successfully pivoted to courting local clientele instead of tourists.

“The second half of last year was very buoyant indeed and the speed is picking up still now,” said Solca. “It’s quite clear that underlying demand is quite strong especially for the biggest brands.”

Whether the trends continue will depend in large part on the virus and the pace of vaccination campaigns, and how much spending shifts away from luxury once the travel and leisure sectors reopen. 

Line chart of share prices rebased in local currency showing a two-speed recovery in luxury

Eric du Halgouët, chief financial officer of Hermès, said on Thursday that it was “difficult to predict” whether a full recovery could be made this year given “worrying developments on the virus”, such as in Japan where fresh lockdowns are being contemplated. 

“Things will get moving again, but the recovery risks being chaotic,” he told reporters on a call.

With LVMH shares at all-time highs, billionaire owner Bernard Arnault projected more confidence at a recent shareholders’ meeting. “Our houses have been through a number of [crises] over the last decades, and they always teach us valuable lessons that provide a powerful foundation for the years of growth that follow,” he said.

“Even if the future is uncertain with regard to the pandemic, one can be reasonably optimistic.”

LVMH’s rapid recovery has been led by its star brand Louis Vuitton where creative director Nicolas Ghesquière has explored “genderlessness” and androgyny in his designs, while the business side has powered through repeated lockdowns to deliver strong growth.

That helped LVMH take the crown as Europe’s biggest listed company from consumer goods maker Nestlé this year. Its shares have climbed almost 50 per cent since January 2020, pushing Arnault up the list of the world’s richest people. 

The 72-year-old tycoon and his family are now worth $185bn, according to Forbes billionaires’ list, second only to Amazon founder Jeff Bezos, whose fortune is estimated at $196bn. Four of Arnault’s five children work at LVMH. 

The risk remains that there is a two-speed recovery in luxury, and that smaller groups will struggle for much longer than the leaders. Salvatore Ferragamo, Tod’s, and Hugo Boss are not expected to recover their 2019 sales levels until 2023 or beyond, according to analyst forecasts from Eikon.

Such polarisation has become a feature of the sector in the past decade, analysts say, and the pandemic risks accentuating the divide. Consumers have gravitated to more classic, timeless garments in the past year, and brands that convey a sense of heritage, which favours the likes of Hermès and Chanel over smaller names. 

Even the usually exuberant Gucci has toned down some of its designs as it seeks to rekindle growth — one of its new Diana handbags comes in a rich brown leather with a bamboo handle that harks back to the 1950s. 

 “The recovery could indeed be asymmetrical,” said Solca.

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