Slaves to Fashion

James Penn
October 23, 2019

Life may be tough for the majority of people, with the JAMs (or just about managing classes) struggling to make ends meet in many parts of the world.

It’s been a difficult past decade after the last recession, with the recovery in incomes lacklustre by historic comparison.

But for the super-rich, or at least the well-above-average-wealthy, life seems to be ticking along much as normal – and indeed rather well.

This was underlined in some of the figures released by leading fashion groups last week.

Leading up to the third quarter results, there were fears that the slowly weakening economic environment, and in particular the unrest and violence we have seen in Hong Kong (a major tourist destination – particularly for the emerging Chinese middle classes), would throw a dampener on earnings and the future outlook at the big luxury goods companies.

But we saw no evidence of this at all.

French luxury groups Kering and Hermès shrugged off concerns about a deepening Sino-US trade war and protests in Hong Kong, with both companies posting better than expected quarterly sales. This was largely driven by the Asia-Pacific region.

The results were the latest sign that, so far at least, the trade war and lower Chinese demand has had little impact on the world’s largest luxury groups.

Chinese consumers account for about a third of sales for luxury products globally.

Kering said last Thursday that sales rose 11% in the third quarter to just under €4bn. Growth at the owner of Gucci, Saint Laurent and Balenciaga was driven by the Asia-Pacific region, which gained over 16%.

Sales of Gucci products came in at 11%, better than expected, appeasing fears that the fashion brand is running out of steam after a spectacular three years of growth that has seen operating margins double.

At the Q2 results in July the shares had fallen sharply after Gucci sales came in light, suggesting that the turnaround there might be running out of steam.

Hermès, another big luxury products group, also said last week that sales climbed 15% in the third quarter. Revenues in the Asia region, excluding Japan, rose 19 per cent and continued to drive Hermès’ performance.

Mainland China seems to have experienced excellent performance for both companies in the third quarter, more than offsetting the slowdown in Hong Kong, where many of the major brands had to close stores for several days because of the unrest.

Moncler, another major fashion brand, also announced strong trading figures last week.

All this followed LVMH’s Q3 results on October 10th which showed sales in the fashion and leather division up 19%, 4% better than expected. This division provides nearly 60% of profits, so is clearly important.

LVMH and Kering share a number of things in common. Both are French companies; both have leading brands, the appetite for which seems to be undiminished in a decade of austerity, and indeed growing strongly in many emerging parts of the world; and both are led by strong owner/manager CEOs.

Bernard Arnaud has done a brilliant job at acquiring ‘must have’ brands at LVMH and providing just the right amount of marketing for them, while, at Kering, Francois Pinault has been equally adept at restructuring a company away from traditional retail, and onto the higher value added and higher margin possibilities offered by Gucci, Botega Veneta, and Yves Saint Laurent.

For some people in the world at least, the party clearly never ended.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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