How Are Luxury Sales (Really) Holding Up?

In recent weeks, the luxury segment has seemed the last hope for a retail economy under pressure as high-end sales beat estimates and managers projected confidence for the coming months despite a darkening macroeconomic picture.

Mass- and mid-market players including Adidas, Boohoo and H&M have lowered their guidance or issued profit warnings as rampant inflation, interest-rate hikes and an energy crunch dampen consumer sentiment and squeeze disposable incomes.

Still, luxury players have continued to shine: LVMH reported that quarterly sales in its fashion and leather goods division rose 22 percent year-on-year, beating estimates. “Luxury is not a proxy for the general economy,” LVMH’s chief financial officer Jean Jacques Guiony explained. “We don’t necessarily sell to the average household.”

Birkin- and Kelly-bag maker Hermès reported sales up 24 percent, and managers told analysts the brand was planning to hike prices amid continued strong demand.

But signs of trouble are starting to emerge even for high-end players. Data from the three biggest credit-card operators all show that US consumers, the principal motor of the luxury sector’s post-Covid rebound, pulled back on luxury goods purchases in recent weeks, Reuters reported. Spending in the segment fell 5.2 percent year-on-year in September, according to Mastercard. Quarterly growth in the US already slowed by more than half over the summer for LVMH compared to the second quarter, rising 11 percent rather than 22 percent.

Kering, the owner of brands including Gucci, Saint Laurent and Balenciaga, beat analyst estimates Thursday when it reported quarterly sales up 14 percent. The group has made progress on slashing its exposure to discount-prone wholesalers and demand for its Saint Laurent label continued to shine, growing 30 percent. Still, Kering shares fell 4 percent Friday morning after the group’s management projected a more cautious tone than competitors in an after-market call with investors.

Store traffic in the US remains strong, CFO Jean-Marc Duplaix said. But closing on sales was getting harder as some consumers become less willing to splash out on items like $1,050 sneakers or $2,500 handbags. Demand from the wealthiest consumers continues to grow, but “appealing to a more aspirational clientele, there is some more pressure, less conversion,” Duplaix said. Jefferies analyst Flavio Cereda flagged the warning on entry-level clients, who drive growth for many brands, as “worrying” in a note to clients.

How to make sense of the seemingly contradictory reports?

Of course, luxury brands are reporting on their sales for the summer quarter through September. And even if signs of recession started to rear their head months ago, the return to parties and travel after years of coronavirus restrictions emboldened consumers to carry out their summers as planned.

The holiday quarter through December will be a more significant test of whether luxury sales can continue to thrive, as consumers adjust to the new reality of higher energy costs, higher borrowing costs and a less buoyant labour market.

The bullish message from brands also comes as financial markets have already priced in significant headwinds. Even as sales have continued to surge, shares in listed luxury companies have fallen an average of 22 percent since the start of the year, according to Savigny Partners’ index. Comments dismissing a slowdown are perhaps best understood as a signal that companies expect to do better than market expectations — not that they expect no troubles at all.

And even as cracks begin to show in the critical US market, luxury brands have other avenues for growth: as domestic sales slow, brands say sales to US consumers abroad are booming due to the strong dollar. A continued rebound in long-haul travel and growing awareness of tax-free shopping options are helping to support that shift.

Brands have also managed to grow in recent quarters with little support from the key Chinese market, where the return of strict coronavirus lockdowns in the spring and summer bruised sales. President Xi Jinping’s opening speech for the Chinese Communist Party’s five-yearly conference last week may have dampened hopes that virus restrictions will be loosened soon. But the retail climate is gradually normalising there, and brands may be betting China’s recovery will offset any slowdown in the US.

Even if overall luxury sales do slow, some of the industry’s biggest brands may be positioned to outperform: Hermès is generally regarded as the sector’s most insulated player because of the long-standing shortage for its Kelly and Birkin bags, demand for which exceeds production. The brand’s sales associates tend to have a list of interested clients for each bag that arrives in store — and since clients perceive the bags as an investment, they remain willing to splash out even in economically rocky times.

Louis Vuitton, too, engages in manufactured scarcity strategies (albeit less well-known): the brand is often sold out of its most popular monogrammed bags, like Speedy or Pochette Accessoire, and having frustrated demand for those strong-selling styles leaves the brand with dry tinder to spark growth even when the pool of new buyers shrinks.

As for Kering, the group has prioritised scaling its brands in recent years, rapidly ramping up production to fuel explosive demand, perhaps at the expense of a steadier trajectory.

Flagship Gucci now requires heavy investments to maintain growth, threatening lower profitability in the second half compared to last year, Duplaix warned. More accessible price points than some luxury rivals could also make the group more sensitive to the current economic shocks, which risk dampening enthusiasm from aspirational shoppers. Inventories have already started to climb compared to last year, Duplaix said.

And indeed, Kering’s situation might better reflect the wider luxury market than the likes of Hermès: most brands have joined Kering in racing to meet rebounding demand since the waning of the pandemic.



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Compiled by Diana Pearl.