BT MAGAZINE 2024 VF no marks 8 oct - Flipbook - Page 75
ISSUE 17
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Kering SA has been the most exposed to this deterioration
in earnings as the business was exposed to the Chinese
market and brands that are more cyclical than the higher
luxury brands of LVMH and Hermes. The newly hired
lead designer Sabato de Sarno at its flagship Gucci brand
has also failed to turn the company’s fortunes around.
Management is focussed on ensuring the company
returns to growth with further investment into the core
brands in terms of product and brand awareness.
LVMH which historically has been perceived as a
bellwether for the industry because of its size, footprint
of more than 75 countries, offering high luxury products
from watches, wine/spirits, bags and travel, has also not
been immune to the slowdown in China.
However, other companies in the sector have so far
been immune to the downturn in profitability. Hermes
in its most recent quarter experienced above consensus
earnings growth as wealthy consumers, even in China,
continued to buy its high-end luxury leather goods
which includes handbags of $10,000 or more.
Ferrari has also continued to maintain its growth
trajectory, thanks to management’s strict control of
the supply of new vehicles and investment in brand
awareness. The company continues to increase
production of cars globally, focussed on only a handful
of models, but with demand expected to significantly
outstrip supply, meaning earnings should continue to
be economically agnostic. Ferrari is without doubt one
of the best run automotive companies in the world and
its price to earnings multiple reinforces it as a global
leading luxury brand.
According to Bloomberg consensus forward earnings,
the European Luxury sector earnings growth is expected
to be strong, with only Kering’s earnings forecast to be
negative. By and large, the sector has managed to keep
pricing discipline, even in a more benign economic
environment and ensured their products are distributed
to areas of growth to ensure there is limited inventory
build. This should leave the sector in an advantageous
position to benefit when demand returns, particularly
from China, which was one of the major engines of
growth over the last couple of decades.
At Oakglen Wealth, we believe the elevated multiples that the likes of Ferrari and Hermes are trading on reasonably
reflect the anticipated earnings growth over the medium term. Although the recent weakness in LVMH and Kering
has caught our attention, we remain cautious, recognising the potential for further earnings disappointment in the
short term. Such disappointment could lead to a further compression in the earnings multiples these shares trade
at. Nonetheless, Forbes forecasts that the luxury goods market will expand from $283bn in 2022 to $392bn by 2030.
While the short-future outlook for the sector may be uncertain, the long-term prospects appear promising.
www.oakglengroup.com
Phone: +44 203 4583 1118
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