Investors sense a sweet deal in luxury

When earlier this year Swatch management declared 2010 looked set to be the best year in the group’s history, the announcement was greeted with scepticism and even amusement in many quarters. The group’s claims were seen as at best naive and at worst arrogant. Following publication of half-year results for the world’s number-one watch group, some are now laughing on the other side of their face. Swatch Group’s sales between January and June grew 22.1% to CHF 2.9 billion (€2.23 bn / $2.83 bn) with net income of CHF 465 million (€357 m / $454 m), up a whopping 54%. “Growth has been solid in July, and we expect a strong result for the second half of 2010 in terms of both sales and profit,” the Group declared. “The major challenge will be to quickly overcome the capacity bottlenecks which already exist in some production areas.”

Investors clamouring for more

Swatch Group isn’t alone in announcing strong half-year results. LVMH recorded revenue up 16% to €9.1 billion. The group’s net profit surged 53% to €1.05 billion. Also for the first six months of 2010, Gucci Group, a subsidiary of PPR, posted an increase in its sales of 11.1% to €1.8 billion. Hermès, meanwhile, announced a 22.8% gain in revenue to €1.07 billion. Needless to say, investors have pricked up their ears at the news.

While the main stock market indices ended the first eight months of the year in the red, with the Dow Jones (-4.2%), Nikkei (-14.7%), Euro Stoxx 50 (-12.5%) and SMI (-6.3%) all losing ground, share prices in the luxury sector have boomed. While Bulgari remains stable after reducing losses for the first half year, and Movado records low growth (+4.1%), Richemont has shot up 13.8% since January, LVMH +17.3%, PPR +20.2%, Swatch +25% and Hermès +58.6%. Boosted by recovery in the markets and strong demand in China, luxury companies have turned their back on the crisis.

"A fundamental trend"

“Strong results in the sector have kept luxury on track in the financial markets,” comments Isabelle Ardon, who heads the Société Générale Actions Luxe luxury fund, in an interview with Capital. “Sharp increases in both half-year sales and net profit at LVMH, the world’s leading luxury group, are the proof. Nor is this dynamic the result of a catch-up effect, as in other segments. Instead it reflects a fundamental trend that took root in the emerging countries. The number of Chinese millionaires soared 30% in 2009. China’s new middle class also aspire to luxury products as status symbols. China alone represents a market of 400 million potential consumers for companies specialising in the high-end.”

Isabelle Ardon’s optimism isn’t tempered by the prospects of a downturn, as already appears to be the case in the United States. “Austerity plans and budget restrictions could weigh on consumption, but the highest revenues should be relatively untouched. As well as being less affected by unemployment, this demographic also benefited from the rebound in the stock markets and the increase, or at least stabilisation, in property prices. The most affluent should go on spending and boost revenues of luxury goods firms in the process.”

As Isabelle Ardon concludes, “It follows that luxury shares are priced above the market. Currently they are trading for 19 times forecasted 2010 earnings, which is slightly below their historic average of 20 times. Luxury shares thus remain an attractive option, particularly as they are expected to post double-digit growth this year and close to 10% in 2011. This is above the sector’s average for the past two decades of around 7%.” Groups with a strong presence in the emerging markets and in particular China, such as Swatch and LVMH, are favoured by the fund.