If the bullish stock market encourages consumer spending, and if lots of executives and Wall Street types are getting major options, it follows that their particular form of spending should be rising. It is indeed difficult to define the luxury sector, but we all recognize it when we see it, from the Gucci shoes to Montblanc pen to the Rolex watch on the wrist raising a glass of Mumms. On that basis, in both Europe and North America, their sales been doing very well thank you very much.
And if luxury goods, designer clothes, heirloom watches and similar ‘look on my accessories ye less mighty financially and despair’ type goods are booming, then surely their stocks are as well. After all, their customers are very often high-net-worth investors. But on the other hand, the ghost of a correction haunting the world’s stock markets could put a shade on their otherwise sunny prospects.
Checking these things out is not easy. In the US, there are few analysts who specialize in the luxury sector. The luxury brands are in retail, apparel, beverages and similar analysts’ categories where they may find themselves lumped with the hoi polloi of K-Mart or Wal-Mart or Budweiser. In decadent old Europe where most of these companies are based, the luxury sector is a recognized one and covered as such by analysts across the Continent, snobbishly segregated from the lesser brands without the awe. Even so the FTSE Eurotop 300 list has them lumped under ‘household and textile’. Obviously the compilers live in different neighborhoods from the rest of us.
Rich pickings
Jan du Plessis is finance director of Richemont, purveyors of, among other expensive gewgaws, Cartier jewels, Montblanc pens and Piaget watches. ‘We’re unquestionably in the luxury sector,’ he says. ‘Some 80 percent of our market capitalization is represented by luxury brands.’ Du Plessis adds, ‘There’s obviously a correlation between the state of the markets and our business. We are benefiting from the amazing rate of wealth creation today, which is disproportionate in the sense that there is a tremendous rate of increase in very wealthy individuals – the rich are getting richer – so we certainly benefit and that is to some extent inspired by the equity markets.’
Nonetheless, he says that during the Asian crisis 18 months or so ago, ‘Our business held up amazingly well and continued to show sales growth. If you look at the Japanese economy today, even though the economy is very sluggish, the entire luxury goods business including ours is doing extremely well. A function of confidence – the extent to which these people think well of themselves – and comfort, rather than the overall economy.’ He concludes: ‘The underlying organic growth in the industry and in our business is far greater than GDP growth on a worldwide basis.’
Even so, it seems that there are differences in snob-commodities. On one end of the scale, at LVMH Moet Hennessy Louis Vuitton, IRO Didier Gougou, thinks that people will be drinking his company’s champagne no matter what. In the middle of the sector, Gucci IRO Enza Dominijanni has seen the stock drop during a market slide. However, at the top end – the really big ticket items – Jan du Plessis found that during the correction of 1998, ‘Our sales of watches and jewelry were amazingly robust. The buyers tend to be people who are quite simply wealthy by any standards, and whose decision to buy a piece of jewelry is not that much influenced by the stock market. Some of our customers are simply wealthy enough to afford our products in almost any scenario.’
He also adds, ‘We think that when people buy jewelry and watches, they believe these will at least retain their value, and most probably appreciate in value. They tend to be seen by consumers as investments. Leather goods, perfume, clothing – even in the luxury sector these are seen as consumables. Even the most beautiful Cartier handbag does not last forever.’
At the epitomy
Richemont, overwhelmingly held by institutions, epitomizes the European center of gravity of the luxury goods trade. ‘Only Tiffany is in the same league, and that’s not really in the same niche as Cartier,’ du Plessis considers. These brands are, he says, ‘down to European elegance; down to taste and sophistication based on heritage and a long tradition, to European companies that are one hundred or hundreds of years old.’
Even larger than Richemont is luggage-to-liquor company LVMH, listed in Switzerland and on Nasdaq, which grew 23 percent last year. Gougou admits, however, that with only 3.1 percent of its stock on Nasdaq, LVMH has not soared as high as the dot-coms – although it has done very well for itself by most other standards. ‘I think we were a blue chip but we are partly a new technology stock because we are devoting more resources to e-commerce,’ he says. Even so, he confesses an attachment to the blue-chip approach. ‘If you want to make quick money from that kind of growth, that’s fine, but if you’re looking for steady long-term growth, it’s pointless to benefit. We want long-term growth for shareholders, so sometimes it’s better not to have big surges.’ And he adds cheerfully, ‘If the whole stock market collapses, then of course our stock will also go down – but hopefully not as much as the high-tech stocks.’
In fact, he also thinks that LVMH is fairly well buffered on the sales front. ‘We have a well-diversified portfolio of products and a fairly widespread business. We do not sell just luxury goods. It’s not like selling luxury cars. In comparison, champagne, Cognac or perfume is not very expensive.’
With 22 percent of LVMH’s sales in North America, Gougou is willing to accept there may be some correlation between consumer purchases and rising stock prices. But LVMH has weathered the rising Yen, the Asian crash and Japan’s recent economic performance. ‘For us, the US stock market is only one issue among many,’ he says, while admitting that the company’s Japanese sales suffered in sympathy with the economy there.
Gucci IRO Enza Dominijanni in Florence observes that in Japan it is the state of the economy rather than the Tokyo Stock Exchange that affects sales. And, interestingly, it is not necessarily sales in Japan alone. ‘Japanese tourism goes down when the economy is bad, and they usually buy a lot on their travels. It impacted all the luxury brand sector,’ she remembers.
However, Gucci has noticed the rising stock market effect on sales, to which they are ‘very sensitive,’ not least since the company is, unusually for the sector, listed on the NYSE as well as Amsterdam, and has almost 30 percent of its sales in the Americas. ‘In August and September the stock market was down, and our sales were also down in the US. We can’t quantify it, but I agree if the stock market is going wild then people are more likely to spend on luxury goods.’
American toehold
Donna Karan represents a rare American toe-hold in the luxury brand sector, whose center of gravity is clearly Europe. So it’s not surprising that the company is also targeting European investors, for example at a major Deutsche Bank investor conference in Paris this June. IRO Stacey Yonkus reports that her company was approached by the Paris Bourse to list in the French capital; its largest shareholder as of February was out of London; and groups of Swiss institutions have contacted them. Perhaps a happy consumer as well, a Saudi prince owns 7 percent of their stock. ‘Altogether we have about 50 percent insiders, and 10 percent institutions,’ she says. Of course it’s difficult to describe a Saudi prince as a retail holder, but that’s where he is in the shareholder register.
Like LVMH, Donna Karan’s bets are hedged, with a dual approach of mass market and high ticket items, and a differing emphasis on each side of the Atlantic. Yonkus explains: ‘Our collection brands compete with Louis Vuitton and Gucci, but most of the sales come from DKNY.’ In the US, DKNY is a ‘bridge brand’, while in Europe it’s a designer label.
Yonkus agrees that like any consumer brand, Donna Karan’s success ‘is linked to consumer confidence: when they are feeling good and making money in the market – say their AOL stock is going through the roof – then they’re more likely to spend.’ Still, in the US sales are less likely to be so responsive when they have been engaged in aggressive price cutting to compete with Banana Republic. But as Donna Karan starts opening stores for its own brand, feedback from the stores will help improve the company’s products more quickly – a message Yonkus says analysts are receptive to.
Going e-posh
Texas based Ashford.com gets instant feedback at the click of a mouse – from customers, who have been flocking to this e-posh site since its IPO last September, and from investors, who are, says Ashford.com’s Lisa Bryant, mostly retail. She has been struggling to get analyst coverage, and so far has about six, but she confesses that they do not know whether the company should be a dot-com stock, retail, or in the tiny luxury sector in the States.
When she canvasses for coverage, Bryant finds the company falling between two analytical sectors – with the different analysts initially pointing to each other to take up the research. ‘The bigger houses like Goldman Sachs have the dot-com analysts covering us, but we are also in the luxury sector with Armani, Gucci and so on since we handle all those brands.’
Ashford.com’s price tags range from $400 watches to $40,000 diamonds, and extend all the way up to $125,000, although Bryant candidly admits, ‘We don’t sell so many of those.’ Revenues went up from $4 mn to $20 mn between the first and fourth quarters last year. However, at the end of November when its stock price shot up the same way, it was altogether a less satisfying experience since it plummeted just as quickly. ‘Day traders,’ is Bryant’s summation. Just after Thanksgiving, a Goldman Sachs analyst named Ashford.com as one of the top four dot-coms. With a relatively small free float, and a highly retail-based shareholder body, day trading shops clicked the stop all the way up to the top of the hill and all the way down again.
Until recently, she says, ‘We were not really focused on investor relations. We were figuring out the strategy, concentrating more on the business and growing revenues.’ Having to some extent paid the price for this most undot-com-like behavior she has been having second thoughts. ‘We’re going to look more at investor relations and how we profile ourselves – we need a new category,’ she declares. Indeed, as purveyor of nothing but luxury brands, Ashford.com almost presents itself as a benchmark stock for the sector – if the sector existed in the US.
The sharp edge of any industry in these tumultuous days is, of course, the initial public offering. There the luxury sector is sending mixed messages. Chanel was reported to have postponed its plans for a launch, while Marne & Champagne, France’s second largest brewer of bubbly, thought that the market was effervescent enough to take it. Currently, it offers bonds secured on the 60 mn bottles in its cellars, which would almost have a bondholder secretly hoping for a default, but feels that the future is secure enough to go public.
In contrast, venerable old Mumm’s and Perrier Jouet have gone private. Or at least Seagram has sold them to Hicks Muse Tate & Furst. The Texan firm’s spokesman Dan Blanks points out, however, ‘We’re a private equity firm so we don’t hold onto things for ever.’ Since it has only just bought the companies, ‘We’re not looking for a particular exit just yet. We could do an IPO, find a strategic buyer, or re-capitalize once the debt is reduced, take good cash flow, pay ourselves a dividend and get out.’
Blanks is confident that whatever Hicks Muse does, it will uncork serious wealth. ‘This has not traditionally been a cyclical industry. I’m sure the ability to buy and drink champagne on a regular basis has to be linked to incomes, but it’s a fairly small correlation to the stock market on the global scale. We’re focusing on building a bigger and better business.’ Who knows? If the business is floated perhaps it will do so as bubble.com.
Natural barriers
Jan du Plessis thinks there are ‘many good reasons why investors are prepared to pay quite high multiples for luxury brand stocks. They have real dividends, real assets. And in a luxury context, only a brand with true credibility will be accepted, so there are some very natural barriers to entry. You cannot, for example, build a new Cartier today; you cannot get the credibility to compete.’
He concludes: ‘The industry may have its ups and downs as most businesses do, but in the long run, as more and more wealth is created in the world, more and more individuals will have a tremendous desire to distinguish themselves from others. The tried and tested way of doing that is to buy your wife – or your mistress – a special piece of jewelry, or to buy yourself a watch or to spend it on a handbag. It has been the same since the Pharaohs – people distinguish themselves with jewelry.’
Maybe investor relations officers would be better off selling $150,000 diadems rather than stock. However in the long run, it’s probably better to emulate the pyramid maker than the pyramid scheme.coms now on the market.
