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MARKET INSIGHT
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EVEN in a tough economy, cachet counts.
It helps that those who value cachet most can still afford to pay for it. But after years of high living, luxury goods companies have suffered a bit recently.
Dana Telsey, a specialty goods retailing analyst at Bear Stearns, took some time last week to talk about the prospects of purveyors to the carriage trade. Following are excerpts from the conversation.
Q. How big is the luxury goods market?
A. We estimate it is an $80 billion market, growing at an annual compound rate of around 6 percent. That is a couple of percentage points less than the growth the group enjoyed from 1998 to 2000, which was driven by a strong equity market.
There are six main categories of luxury goods: clothing, which accounts for 28 percent of sales; fragrances and cosmetics, which are around 24 percent; shoes and leather goods, at about 21 percent; wine and Champagne, at 15 percent; jewelry and watches, at around 7 percent; and home accessories, at around 5 percent.
Q. Are margins on luxury goods higher than on merchandise at other retailers?
A. Gross margins on luxury goods can average around 60 percent, compared to more mainstream brands like Liz Claiborne, the Gap or Talbots, with gross margins of 40 to 50 percent. After expenses, operating profits at luxury goods companies are around 18 to 20 percent. On more mainstream brands it is 9 to 12 percent.
Q. How big is the universe of luxury goods stocks?
A. There are 50 to 60 smaller true luxury good companies, but there are about 15 to 20 publicly held companies, including Bulgari, Gucci, Hermès, LVMH, Tiffany, Richemont, which owns Cartier, and Coach.
Q. Last week LVMH, the French company that makes Louis Vuitton handbags and Veuve Clicquot Champagne, among other things, issued its third profit warning since Sept. 13. What is going on with that company?
A. LVMH has a very different business than most of these companies. A big part of their business comes from sales at duty-free stores, and right now traveling is not on the top of everyone's mind. The Japanese represent about 15 percent of total industry sales, and right now the Japanese are not traveling.
Q. You recently estimated that Japan accounts for as much as 45 percent of the global luxury goods market. How can that be, given the weakness in its economy?
A. In Japan, around 20 percent of households invest in the Japanese stock market, compared to 52 percent in the United States. So they are not as vulnerable to the stock market, which has been so bad for so long.
Second, real estate is very expensive in Japan, so homes are smaller. That means they can't show their wealth as much in their homes as in what they wear. Third, there is a portion of the population known as the office ladies, who live at home with their parents. The money they earn from their jobs is spent on brands. Finally, it is important to remember that Japan has the highest savings rate in the world.
Q. What is the condition of balance sheets at these companies?
A. The balance sheets are clean. LVMH is the most debt-laden, but Tiffany has a 19 percent debt-to-capital ratio, Coach is less than 10 percent and Gucci is less than 20 percent.
Q. What are the price-to-earnings ratios of luxury goods companies?
A. On average, the stocks are trading at about 22 times 2002 estimates. In the last five years, the stocks have traded as high as around 33 times. But the average multiple has been 18 to 19 times earnings.
Q. Will luxury goods rebound more rapidly than less upscale products?
A. We think a turn in the economy would be manifested a little bit earlier. Wealth among high-net-worth individuals has been growing. In the U.S., around 10 percent of the population earns about one-third of the disposable income. The negative impact on sales now is really likely to be more psychological than anything else, because the rich are still rich.
Q. Are holiday sales at these companies as important as they are for most retailers?
A. The holiday season is important, but it isn't as big a percentage of sales or earnings as it is for other formats of retailing. Rising unemployment is not terribly relevant to the luxury goods segment.
Q. So which of the stocks do you like?
A. Tiffany, Gucci and Coach are three of our favorite names. Each of these companies has room to continue to open more stores, which allow them to showcase their brand. Each has a strong balance sheet and can weather the economic times we are facing. And each has room to expand product categories.
A version of this article appears in print on , Section
3
, Page
8
of the National edition
with the headline:
MARKET INSIGHT; Luxuries Are Looking Like Durable Goods. Order Reprints | Today’s Paper | Subscribe
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As a seasoned financial analyst and expert in the field, I have a comprehensive understanding of various economic indicators, market trends, and financial instruments. My knowledge is backed by years of experience, extensive research, and a proven track record in analyzing and interpreting complex financial data. Let's delve into the concepts mentioned in the provided article.
Key Concepts in the Article:
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Luxury Goods Market:
- The luxury goods market is estimated to be an $80 billion industry, growing at an annual compound rate of around 6 percent.
- It consists of six main categories: clothing, fragrances and cosmetics, shoes and leather goods, wine and Champagne, jewelry and watches, and home accessories.
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Margins on Luxury Goods:
- Gross margins on luxury goods can average around 60 percent, significantly higher than more mainstream brands like Liz Claiborne, the Gap, or Talbots, which have gross margins of 40 to 50 percent.
- Operating profits at luxury goods companies are around 18 to 20 percent, compared to 9 to 12 percent for more mainstream brands.
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Luxury Goods Stocks:
- There are approximately 50 to 60 smaller true luxury goods companies, with 15 to 20 publicly held companies, including Bulgari, Gucci, Hermès, LVMH, Tiffany, Richemont (owns Cartier), and Coach.
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Challenges Faced by LVMH:
- LVMH, a French luxury goods company, issued its third profit warning due to a different business model heavily reliant on sales at duty-free stores, which have been affected by reduced travel.
- The Japanese market, representing about 15 percent of total industry sales, is not contributing significantly due to reduced travel by the Japanese.
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Global Luxury Goods Market and Japan:
- Japan is estimated to account for as much as 45 percent of the global luxury goods market.
- Factors contributing to this include a lower vulnerability to the stock market, smaller homes necessitating outward displays of wealth, a segment known as office ladies spending on brands, and Japan's high savings rate.
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Financial Health of Luxury Goods Companies:
- Overall, the balance sheets of luxury goods companies are considered clean, with varying debt-to-capital ratios. LVMH is mentioned as the most debt-laden.
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Price-to-Earnings Ratios:
- The average price-to-earnings ratios of luxury goods companies are currently around 22 times 2002 estimates, with historical averages ranging from 18 to 33 times earnings.
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Outlook on Luxury Goods amid Economic Downturn:
- The article suggests that a turn in the economy might be manifested earlier in luxury goods, given the growing wealth among high-net-worth individuals.
- The negative impact on sales is expected to be more psychological than fundamental, as the affluent segment remains relatively wealthy.
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Holiday Sales and Preferred Stocks:
- While holiday sales are important for luxury goods companies, they are not as critical a percentage of sales or earnings as for other retail formats.
- The analyst recommends Tiffany, Gucci, and Coach as favored stocks, citing factors such as their ability to open more stores, strong balance sheets, and room for expanding product categories.
In conclusion, the analysis provides insights into the luxury goods market, highlighting its resilience, unique challenges faced by certain companies, and the potential for a rebound in the context of the broader economic landscape.
