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After a challenging end to the year, luxury’s slowdown continued in the first quarter as challenges persisted for many in China. While there were success stories, some brands — especially those with a more aspirational customer — are battening down the hatches.
“If you look at the three French luxury groups, you have Hermès (a sound beat at up 17 per cent), Gucci (huge underperformance, down 18 per cent) and LVMH fashion and leather, in between the two. If you put them together, you get very limited [industry-wide] growth,” says Aurélie Husson-Dumoutier, director of HSBC equity research in luxury and sporting goods, noting that Q2 could be worse as the comparison base toughens.
Miu Miu was the indisputable winner. After soaring 82 per cent growth in the fourth quarter of 2023, it grew by another 89 per cent in Q1 of this fiscal year.
Hermès and the Moncler brand also bucked industry trends, increasing by 17 per cent and 20 per cent respectively in the first quarter. LVMH’s fashion division, Prada and Bottega Veneta grew in the single digits, while Gucci, Saint Laurent and Kering’s ‘Other Houses’ division — which includes Balenciaga and Alexander McQueen — were in negative territory. Burberry and Richemont will report their numbers on 15 and 17 May, respectively.
The industry continued to be polarised in the first quarter, says Luca Solca, managing director of luxury goods at Bernstein. “High-end brands are doing better (Hermès, Brunello Cucinelli), as well as brands with strong momentum (Moncler, Miu Miu). Brands with high exposure to middle-class consumers are at the polar opposite of that (Gucci, Burberry). Mega-brands (Louis Vuitton, Cartier) are somewhere in between.”
Here are the key takeaways from Q1.
China’s sluggishness persists
Amid an uncertain economic climate, a softening demand and a tough comparison basis in Q1 (the first quarter of 2023 marked China’s reopening after three years of strict Covid-related restrictions) plus Chinese customers shopping abroad, notably in Japan, “Mainland China is proving to be tough,” as HSBC analysts put it, following a trip to Asia to meet with investors and corporates in Singapore, Hong Kong, Shanghai and Seoul. “With the exception of high-end brands in luxury (for example Loro Piana, Cucinelli, Hermès, Zegna), edgy outdoor and sporting goods, and beauty retail developments, we haven’t picked up many supportive comments in luxury with the noticeable exception of Miu Miu, Moncler and Van Cleef Arpels. ‘Mainstream luxury’, an oxymoron of sorts, is not doing well,” they wrote in a note in late March.
Earning reports proved them right. Hermès, Prada and Moncler were the outliers in China, but for most, it was rough. Kering CFO Armelle Poulou cited a “huge drop in traffic in Asia Pacific”. “China is the worst area of difficulty for Gucci at the moment. And probably all the weaknesses of the brand are exacerbated in China. It’s true in terms of perception of the brand and also in terms of the necessity in raising the exclusivity of the distribution,” Poulou said.
Moncler pointed to the opportunity. Chinese customers strongly uphold functionality, one analyst noted during the Moncler call. The analyst asked whether Moncler Grenoble, the technical line rooted in the brand’s mountaineering heritage, is outperforming other lines for this exact reason. “We believe that the potential in China is very, very high for the reason you mentioned,” replied Luciano Santel, executive director and chief corporate and supply officer at Moncler Group.
Japan’s luxury boom
Most companies reported a revenue surge in Japan, boosted by wealthy Chinese travellers drawn by favourable exchange rates, as well as locals who shop at home to avoid the pinch of the weak yen abroad. LVMH’s revenue in Japan grew 32 per cent, Prada Group retail sales were up 46 per cent, Hermès 25 per cent, and Kering’s retail sales grew by 16 per cent. Even Gucci, the underperformer, was up 7 per cent in Japan in Q1.
“Japan is a bright spot for everyone, but part of the growth in Japan is linked to price increase to compensate for the yen weakness,” says HSBC’s Husson-Dumoutier. Moncler’s Santel said that, due to the deterioration of the local currency, some brands including Moncler increased prices to protect margins. “This is having some impact on local consumption but nevertheless, the Japanese cluster is still positive,” the executive said.
Growth in Japan could be more subdued if the currency exchange swings back. Still, HSBC predicts the country will lead the luxury sector’s 7 per cent global growth in 2024.
A long road ahead for Kering
After a sales warning on 19 March, which played out in its Q1 results, Kering announced it was bracing for slashed profits for the first half of the year.
The group’s houses are pursuing its elevation strategy while aspirational customers remain a drag: “In North America, the relative withdrawal of aspirational customers continued to weigh on Saint Laurent’s performance,” Kering’s Poulou said. The group noted a slight improvement on that front however. “We start to see slightly improving trends with younger customers compared to the recent quarter. Younger and aspirational isn’t always the same definition but there is a bit of improvement there,” Claire Roblet, Kering director of financial communications and market intelligence, told analysts.
“On a positive note, Bottega Veneta and ‘Other Houses’ (mainly Balenciaga) are showing clear signs of retail sales improvement following nearly a year of quarterly revenue pressures,” wrote Thomas Chauvet, head of luxury goods equity research at Citi. Bottega Veneta “did exceptionally well in North America”, driven by local clients, according to Kering; and Balenciaga “recovered up double digits on easy comps” in the region. (The Balenciaga ad scandal of November 2022 had a large impact on Q1 2023.)
“I am determined to bring about improvements by the end of this year and 2025,” Kering chairman and CEO François-Henri Pinault told shareholders at the group’s annual general meeting.
Bracing for Q2
Despite their strong beats, Moncler and Hermès stocks slightly slipped as the markets reacted to executives’ comments on April trends. “Honestly, there are no regions that are performing particularly well or particularly badly. A region that is of particular attention for everyone is China and the Chinese cluster: the performance is still positive, but not as strong as the results we reported for the first quarter,” Moncler’s Santel said.
At Hermès, the management flagged a softer store traffic in Greater China in March. Solca pointed to “a couple of clouds” over Hermès. “The China footfall decline does raise the question whether the non-leather goods métiers, which are more exposed to the middle class, can keep up the pace,” he said. Chauvet agrees: “While leather goods volumes are capped at a 7 per cent growth per annum, risks of normalising growth in non-leather categories (particularly ready-to-wear, watches and jewellery, meaning around 40 per cent of sales combined) could materialise this year.”
According to HSBC estimates, sector growth will further decelerate to 1.5 per cent before returning to double-digit growth in Q3 and Q4. “The performance divide between top-of-mind brands and the others will continue to enlarge in the second quarter and rest of year,” says Mario Ortelli, managing partner at consultancy Ortelli Co.
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