Despite Slowing Economic Growth, Luxury Goods Names Could Pamper Investors' Returns
MARTINSVILLE, N.J., Aug. 1, 2012 /PRNewswire/ -- With fears of slowing economic growth in the United States, Europe, and emerging markets intensifying, some investors have questioned whether the luxury retail market, which has been surprisingly resilient in recent years, can continue its strong run. Despite the economic woes, this area continues to have several tailwinds at its back and should deliver strong revenue growth in the coming years, according to Ken Schapiro of Condor Capital Management.
In recent weeks, several companies in this space have reduced their earnings guidance and some analysts have reduced their estimates. However, Schapiro feels that this is more a function of estimates getting ahead of themselves in recent months rather than a significant deterioration in the underlying fundamentals. To illustrate, while handbag and accessories maker Coach recently reported revenue that the market perceived as "disappointing," as North American same-store sales rose an underwhelming 1.7% over last year, its overall sales still grew 12% year-over-year and an impressive 60% in China. Although it is possible that near-term results for luxury goods companies could face pressure due to various uncertainties around the globe, selloffs could present a buying opportunity for long-term investors. This sentiment was recently echoed by Goldman Sachs, which upgraded jeweler Tiffany to a "Buy" rating. Goldman analysts noted that despite the possibility for near-term weakness, "Tiffany's long-term brand franchise remains rock solid."
In the U.S., despite slowing employment growth and a decline in consumer confidence, Schapiro still believes that the high-end segment is poised to outperform in the second half of the year. Although higher-income consumers are less leveraged to gasoline prices than others, a price decline at the pump nonetheless provides a solid psychological boost. Furthermore, with Thanksgiving falling on November 22nd, the earliest day possible, the holiday shopping season should benefit from an increased number of days between Thanksgiving and Christmas. Across the pond, predictions of a recession in Europe have dampened some investors' enthusiasm for the segment since the region is the largest luxury goods market in the world. Even with this turmoil, consulting firm Bain & Company projects 2-4% growth for luxury goods in the region for 2012. Although this is slower growth than in other parts of the world, it is encouraging considering that E.U. GDP is projected to contact by 0.30% in 2012 according to the World Bank. Some of this resiliency may be attributed to shopping by tourists visiting from emerging markets. When considering China's 30% tax on luxury goods and a sharply weaker euro, Louis Vuitton Moet Hennessy (LVMH) Chief Financial Officer Jean-Jacques Guiony estimates that Chinese consumers can save 45-47% by shopping in London or Paris instead of their home market.
Looking towards developing markets, powerful cultural, economic, and demographic trends should continue to support robust growth for luxury goods in these countries. Although aggregate GDP growth has slowed in India, Brazil, and China, these nations are beginning to transition from infrastructure-fueled growth to consumer-led economies. As a result, even though the pace of economic growth has slowed, consumer expenditures will have a greater impact going forward. A report by investment bank CLSA Asia-Pacific estimates that emerging markets will account for 73% of global luxury goods sales by 2020, with China surging to a 44% share from just 15% today. One driver of this increase is the coming surge in middle class consumers within the BRIC nations. Collectively, these countries could have one billion middle class consumers by 2015, a gain of 376 million over 2010. In China, per capita income rose 8.4% in 2011 for urban residents and 11.4% for those in rural areas on an inflation-adjusted basis. Looking forward, some analysts predict that Chinese per capita income could hit $8,500 by 2020 and as much as $20,000 in 2030. In China's hierarchical culture, where success, wealth, and social standing are highly regarded, much of this newfound disposable income may be used to purchase high-end goods that highlight success. A poll by Harris Interactive shows that 72% of Chinese respondents and 74% of Indian consumers indicate that brand names are important them, in contrast with just 26% of shoppers in the U.S.
Outside of goods, a study by Boston Consulting Group shows that, of the $1.4 trillion spent on what consumers define as luxury, sales of high-end "experiences" are growing 50% faster than those of goods. The report noted that an increasing share of shoppers "love experiences that make them feel pampered." While this sentiment certainly bodes well for areas such as luxury hotels and high-end travel, it also has ramifications for the goods market. In the U.S., stores such as Nordstrom, sporting legendary customer service, could be viewed as providing both a luxury good and a differentiated experience. The same holds true in China, where wealthy shoppers flock to malls populated by stores that not only offer U.S. and European brands, but a pampered Western-style shopping experience as well.
Considering everything, although there are certainly a number of headwinds facing the luxury segment of the retail market, Schapiro feels that sales within developed nations may come in better-than-expected for the second half of the year and the longer-term secular tailwind provided by emerging markets remains intact. While he is cognizant of the potential for volatility in these names in the near-term as the market reacts to various headlines and data points, Schapiro feels that their long-run appeal is unaffected and remains bright.
At the time of this article, Condor Capital Management held long positions in Tiffany and Coach in some of its clients' portfolios.
Founded in 1988, Condor Capital is an employee-owned, SEC-registered investment advisor based in Martinsville, N.J. employing 15 professional and support staff. Since Condor is a fee-only investment management firm, its fees are based on portfolio size, not sales commissions or number of trades. For more information on Condor Capital, please visit www.condorcapital.com or call 732-356-7323.
SOURCE Condor Capital