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It’s not just luxury products that seem expensive these days.
A stake in Hermès International now costs you €2,000 ($2,200) — enough to buy one of the brand’s signature anchor chain bracelets and a hand-stitched wallet.
In the year The company – which was launched on the Paris Stock Exchange in 1993 at 6 euros per share (in francs) – has become the world’s second most valuable fashion company after LVMH when its market capitalization surpassed Nike this January. The stock continued its 35 percent gain to reach a value of 209 billion euros ($229 billion) when it closed on Tuesday.
LVMH is also trading at record highs: The maker of Louis Vuitton handbags and Tag Heuer watches last week became the first European company to surpass $500 billion in market capitalization. Its current valuation is on par with oil giant Exxon-Mobil and electric vehicle maker Tesla. For Chairman and CEO Bernard Arnault, the higher share price has translated into an additional $51 billion in wealth since the start of the year, according to Bloomberg estimates, further cementing his position as the world’s richest man after eclipsing Elon Musk for that title last year. .
Shares in Milan-based Prada and London-based Burberry rose about 30 percent. The list goes on.
Does it mean business is booming?
The increased valuations come despite a relatively bleak forecast for luxury after several years of high growth. Bain last fall forecast that growth would slow significantly this year, from 22 percent in 2022 to between 3 and 8 percent this year. Two-thirds of economists polled by the World Economic Forum say a global recession is likely by 2023.
Gucci-owner Kering’s sales report on Tuesday reinforced this gloomy outlook. The company’s first-quarter sales rose 1 percent. The difference is that consumer fatigue at the height of Gucci and the slowdown in Balenciaga’s push-button marketing is as much to blame as the global economy.
In recent weeks, better-than-expected sales reports and comments by LVMH and Hermès have raised hopes that luxury’s high-end customer base will once again be isolated from the cold (as it was in the 2020s due to strict pandemic lockdowns and last year), interest rates and inflation. They raised their heads when it increased).
Sales growth is slowing, but investors are increasingly hopeful of a quick recovery in China after the country reversed Covid-19 measures that damaged sales last year. At the same time, the feared slowdown in the U.S. — which has been key to luxury growth since the pandemic — is now predicted to be shorter and more severe than some companies and analysts fear. Even domestic customers in Europe, where a massive energy crisis caused by Russia’s invasion of Ukraine stretched household budgets, continued to buy: LVMH sales to French and Italian customers rose by double digits in the first quarter.
What else is an investor interested in?
An optimistic view of sales is part of the picture. The top-10 European luxury stocks have risen more than 25 percent this year, with earnings per share estimated at only 5 or 6 percent, Citibank analysts estimate. That suggests that much of the stock’s recent moves can be attributed to multiple spreads: stocks become more expensive without a change in a company’s fundamentals, say investors. For example, Hermès now trades at 66 times its annual earnings, compared to an average of 14 times for European stocks.
The rise in valuations can be attributed in part to investors playing catch-up: luxury stocks have fallen an average of 10 percent in the past year.
Another big contributor could be a global “flight to safety” among investors: economic uncertainty and high borrowing costs drive capital away from risky bets, such as bankrupt tech startups, and into established bets like European luxury-led sectors. Century-old brands that have weathered previous crises and are managed by experienced family shareholders.
What about Kerings?
Keyring’s direction in recent quarters has been somewhat out of step with rival luxury companies: after historic expansion in the years before the coronavirus pandemic, its largest and most profitable brand, Gucci, has struggled to navigate a long-term decline from 2020. Tourism and changing consumer tastes. Much is riding on Gucci’s designer transition: After Alessandro Michele left last November, the company hired Sabato de Sarno, a behind-the-scenes designer from Valentino, who is set to present his revamped vision for the brand in September. The team faces uncertainty over how long it will take to recover from last fall’s scandal.
Still, investors have been willing to bet on Kering’s recovery — shares are up 21 percent year-to-date as of April 25.
When Kering executives spoke to analysts after releasing results on Tuesday, investors were listening closely for comments on China’s recovery and U.S. demand, the company’s experience may be more reflective of the volatility that many companies in the luxury sector are facing compared to behemoths such as Vuitton-owner LVMH. .
While the results were relatively lackluster, some of the brand’s feedback was reassuring. Chinese consumer sales are recovering fast Growing at a low double-digit percentage compared to the same quarter in 2021, mainland China has rebounded strongly from the first round of Covid-19 lockdowns. Saint Laurent rose 8 percent, beating estimates. “If the tide is starting to turn on fear,” Bernstein analyst Luca Solca asked Kering in a note to clients.
U.S. sales fell 18 percent, but increased growth pressure in other regions.
Are these stock prices sustainable?
Most stock analysts continue to recommend investing in LVMH despite its high valuation, with the most popular rating remaining “Buy”. For Hermès, the advice to “hold on” is becoming more prominent in the company’s current valuation (although the brand is stable during the crisis, the strategy of growing leather goods at a controlled pace limits the potential for future growth.)
Looking ahead, luxury companies will ultimately need to deliver higher profits to capture record valuations. “Luxury stocks will not continue to perform without earnings-per-share improvements,” said Citi analyst Thomas Chauvet.
That could prove difficult, as China’s domestic rebound and a relatively mild slowdown in the US have already been priced in, limiting room for positive surprises. But the big impact from Chinese customers resuming travel is one thing that will help overcome current expectations.
On the other hand, a more severe slowdown in the US would certainly hurt prices.
At this stage, investors aren’t expecting any impact from the “quiet luxury” trend that has emerged on social media in recent months. (While luxury brands offer many understated products, the “logomania” of recent years is for their cultural significance and undeniable benefit to the bottom line.) .
Why are these high stock prices important?
For the most part, if these companies are not in your portfolio, day-to-day stock price movements are not that relevant. Most of the big luxury companies are family-controlled, meaning that ultimately it’s the Arnolds or Pinaults who call the shots. If investors are unhappy with the stock’s performance in Gap Inc. Nor can they exert the same pressure that they do on Macy’s.
But higher valuations allow bigger players in the sector to explore bolder moves. With earnings like LVMH, they get easy financing for deals in a climate where many companies struggle to navigate high interest rates. On the other hand, LVMH’s record valuation makes it difficult to find rapid growth in recent years.
Comparative inventory also moves the issue. A few years ago, Kering was looking for a deal to acquire Cartier owner Richemont. But now Richmont is the bigger company of the two.
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