Luxury Slows Down, Just A Bit

Sebastien Callebaut -

The U.S. Is Getting Cautious

LVMH's sales report for the first quarter revealed that consumers in the United States are reducing their purchases of high-end fashion and leather goods, which is consistent with other indications that the strong consumer spending spree after the pandemic may be coming to an end.

  • Despite an 8% increase in revenue in the U.S. market during the quarter, the company's finance chief attributed most of the growth to the Sephora beauty chain
  • All while demand for more expensive luxury items such as fashion, leather goods, and jewellery was weaker
  • However, LVMH's sales in China rose 17%, which contributed to a 5% increase in the company's share price, resulting in a record high in early trading on Thursday

Still Going Strong

Luxury fashion brands such as Louis Vuitton, Dior, Chanel, and Hermes have benefited from strong demand from American consumers who emerged from lockdowns with savings and a willingness to spend on designer labels. LVMH's sales in the U.S. rose by 15% last year, accounting for 27% of the company's total revenue, as shoppers overlooked the rising prices and market volatility.

  • This surge in demand led to an influx of investments from rival brands, including Hermes and Kering-owned Gucci, which opened new retail stores in sprawling malls such as American Dream in New Jersey, South Coast Plaza shopping centre in California, and Austin, Texas
  • However, the trend of luxury spending by shoppers is beginning to wane, as Citi's credit card data revealed that luxury spending in the U.S. decreased by 18% in March, the lowest monthly rate in almost three years

Boosting France's Stock Market

Investors are pouring money into luxury goods companies listed on France's stock market, causing a series of record highs due to hopes of increased demand from Chinese consumers for high-end brands. The CAC 40 has seen a 16% increase this year and over 30% since the end of September, outperforming other region-wide markets.

  • Morgan Stanley reports that China is the most crucial market for European luxury brands, with two-thirds of Chinese consumers' spending on expensive accessories taking place abroad
  • Luxury stocks are currently appealing to investors who find indirect exposure to China via European stocks to be more liquid, easier, and less risky than direct investment in Chinese shares, according to Emmanuel Cau, head of European equity strategy at Barclays

Solid Companies

Besides the return of Chinese consumer demand, luxury goods groups have solid balance sheets, profit margins, and the ability to pass on higher prices to consumers, making them a hedge against inflation.

  • However, a possible recession later in the year could affect their progress, as luxury goods performed relatively poorly in past recessions. Nevertheless, more growth seems likely in the short term as Chinese consumers flock back

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.

Credits

Photo by Simon Launay on Unsplash.