Luxury industry offers value despite recent setbacks

Despite a recent slowdown, the luxury industry remains strong, and there is still an investment case for it.

This is according to Old Mutual Wealth research analyst Tasneem Samodien, who told Moneyweb Now that there is definitely still an investment case for luxury.

Following the Covid-19 pandemic, there was a boom in the luxury industry as luxury spending increased rapidly.

“When we came out of the pandemic, there was this amazing boom in luxury spend, and the trend so far in the three years since 2020 has been about 5% points higher than pre-pandemic trends,” said Samodien.

LVMH, a company generally considered a bellwether for the luxury industry, saw growth of around 20% per year following the pandemic.

However, recent results have been disappointing compared to post-pandemic numbers.

LVMH recently released its results for the second quarter of 2023, which showed a solid growth rate.

The company reported a 17% increase in sales in the quarter, which beat expert expectations of 16%. The company saw double-digit revenue growth that was also above market expectations.

However, the company’s share price fell in response and has dropped by 2.45% over the past month.

Reuters reported that the narrow beat for a company that had routinely delivered results ahead of expectations flagged the “normalisation” of the sector after years of stellar growth driven by post-pandemic euphoria.

“We never said that growing 20% per annum as we’ve been doing roughly speaking…is a new normal,” LVMH CFO Jean-Jacques Guiony said.

“The executive suggested the rate of the company’s share price, up around 11.5% per year for the past three decades, was a better measure,” Reuters reported.

Richemont chairman Johann Rupert

More locally, Johann Rupert’s Richemont met a similar fate after publishing its Q2 2023 results.

The luxury goods company showed a 19% revenue increase in the period, keeping the effect of foreign currency constant.

The group reported €5.32 billion in total revenue compared to €4.65 billion in 2022, with growth attributed mainly to strong sales in the Asia Pacific region.

However, its growth in two key markets – the US and China – fell short of expectations. 

Following the release of their results, the company’s share price declined by 9.5% and is down 8.89% on the JSE over the past month.

However, Samodien said, despite the current negative consensus towards luxury companies, they still have the best margins.

“The brands are still highly desirable, even if we do see a slowdown in global growth, these are still companies that have proven to be very defensive in economic recessions,” she said.

The investment case for these companies is still centred around the fact that they serve wealthy consumers who are not as impacted by economic slowdowns as the mass market.

“So you’ll see the valuation still hold up relatively well. You’ll see a lower drop in revenue,” she said.

“The balance sheets of these companies are so strong, and most of them are family-owned, and they have so much cash that they’re able to see it through.”

In addition, Samodien said the industry is seeing its target market become larger.

“More people are able to afford luxury brands, and they’ve become more well-known. These brands have done a lot in terms of investing in what they call ‘brand desirability’, and so it has become more desirable,” she said.

For example, she pointed to a recent trend in the industry of appointing celebrities as brand ambassadors or creative directors to appeal to a broader and different audience.