The luxury industry has shown resilience despite the ongoing inflation and the fears of an economic downturn due to its affluent clientele. The recent quarterly earnings of some of the major luxury brands are proof of it. In fact, the luxury sector has outperformed the benchmark index in the last three years as the S&P Global Luxury index returned 16.6% annually compared to the S&P 500 index, which returned 13.9% each year over the same period.

Exhibit 1: 3-Year Performance of S&P Global Luxury Index vs S&P 500

Source: Stockal Research, Data as of 17 August 2022

But what exactly is luxury? The meaning and essence of luxury can be different for different people but when we look at luxury from a broader perspective, it is comfort, convenience and the enjoyable situation that one doesn’t actually need but desires, and for which the person is ready to pay the premium cost. These desires are fulfilled by luxury brands all over the world. A few examples are Louis Vuitton, Hermes, Dior, Versace, Ferrari, and other high-end brands. While Europe can rightfully be called the house of luxury, the United States is also home to some of the biggest luxury companies like Versace-owner Capri Holdings (CPRI) and Coach handbag-owner Tapestry (TPR).

Exhibit 2: Top 10 Global Luxury Companies by 2021 Revenue (in USD billion)

Source: Stockal Research, August 2022

According to Statista research, the market for global luxury goods is expected to grow at a CAGR of 3.7%, from US$349.1 billion in 2022 to US$419 billion in 2027. Although the COVID-19 pandemic and cuts to discretionary spending caused a sharp decline in demand in 2020, the market has since experienced a significant upturn, which is anticipated to continue over the medium to long term. The luxury car market accounts for nearly half of the global luxury industry, while the personal luxury goods market represents a quarter of the industry.

Exhibit 3: Share of Global Luxury Industry by Market Type (in %)

Source: Stockal Research, Statista.com, January 2022

Tourism-dependent luxury market badly hit during the pandemic
As the whole world came to a standstill at the onset of the COVID-19 pandemic, the historically tourism-dependent luxury market was adversely affected. By the first quarter of 2020, the pandemic had already brought about a decline in the fortunes of luxury corporations, like LVMH reporting a 36% drop in its sales from the fourth quarter of 2019. While some feared contagion, others saw little value in purchasing personal luxury products like leather goods, clothing and footwear, timepieces, or jewellery. They believed there would be limited opportunities to wear or use certain things in the near future. Therefore, spending was curtailed and consumer confidence had taken a knock. However, as pandemic restrictions began to ease, luxury business roared to life – fuelled by pent-up demand and revenge spending.

Exhibit 4: Sales of Leading Luxury Brands during and after the Pandemic (indexed to 100%)

Source: Kearney.com, March 2022

Luxury industry exhibits robust recovery post-pandemic

Following a significant decline in 2020, the S&P Global Luxury index surged over 22% in 2021, resuming its pre-COVID growth. Due to the opening of international borders, lockdown-inspired home renovations and combined living and working areas; luxury products, in general, were the first to rebound to their 2019 levels. In addition, spending growth in China and the United States, increasing dominance of millennials and Generation Z, growing share of domestic purchases in contrast to tourist purchases and the continued strength of the online channel are the major factors driving this recovery.

In 2021, the luxury industry grew 14% as a whole with the personal luxury goods category leading the charge with 29% growth. By geography and customer nationality both, the Americas region topped the global luxury goods sales last year. However, Bain & Company predicts that Chinese consumers will soon emerge as the top spenders in the luxury industry by overtaking the Americas. This rise is anticipated to be sufficiently driven by the rising middle class’s desire to buy luxury products.

Exhibit 5: Global Luxury Goods Sales in 2021 (in %)

Source: Bain & Company, Luxe Digital, January 2022

Online spending takes over luxury retail as well

Serving as a stepping stone, lockdowns in 2020 and 2021 were the ideal test for the online luxury sales channels. The share of online sales for personal luxury products reached the $70.1 billion mark, growing from 12% market share in 2019 to 22% in 2021. According to Bain & Company, online sales are expected to surpass all other channels as the largest personal luxury goods sales source by 2025, accounting for 30% of the global market. Even the luxury car segment will experience an increase in online sales.

It’s interesting to note that brands are increasingly using their own websites to drive purchases. Gucci, for instance, is giving shoppers more freedom to buy products from its directly run e-commerce platform. The growth of the online market demonstrates the growing significance of the younger client base for the global luxury market, especially among Gen Z and Millennials.

Exhibit 6: Online vs Offline Spending on Luxury Goods in 2021 (in %)

Source: Kearney.com, March 2022

Fashion meets technology in the metaverse

New-age technology, like metaverse and NFT, untapped a plethora of new opportunities for luxury firms to interact with tech-savvy youthful consumers. According to projections from investment bank Morgan Stanley, the metaverse and NFTs would account for 10% of the overall luxury goods industry by 2030, representing a $56 billion revenue opportunity, of which $10 billion to $20 billion will come from a completely new digital market that can be served.

Luxury companies are expected to continue to explore NFT collections, either to offer alongside physical goods or as standalone digital collectible assets. They also plan to introduce specialised virtual experiences to improve online and offline customer experiences through metaverse. Gucci and Balenciaga have already registered trademarks for connected clothing and smart glasses. Whereas Louis Vuitton launched its NFT game, Louis: The Game, to mark its two hundredth anniversary.

Ultra-rich continue to splurge, undeterred by inflation

The major luxury groups are still growing despite the uncertain state of the global economy. Where big-box retailers like Walmart and Target are feeling the pinch of rising prices, luxury brands are posting strong quarterly results. Global luxury brands are seen making up for the drop in sales in China due to COVID-related shutdowns, with gains in Europe and the United States where they have increased prices without losing customers.

Unlike the mass-market retail industry, the luxury industry’s clientele is made up of the most privileged socio-professional groups. They are wealthier and less sensitive to inflation, the threat of a recession, and worries related to a slowdown in the labour market. The interest in luxury health and wellness is rising; high-end consumers haven’t ceased spending on a luxurious lifestyle.

Ferrari reports record orders in Q2, raises 2022 outlook

The luxury sports car manufacturer Ferrari (RACE) raced past the second quarter with record orders and upbeat earnings. Adjusted EBITDA rose 15% to 446 million euros in the quarter, well above market expectations of 427 million euros. Bolstered by a strong business performance in the first half, Ferrari raised its full-year 2022 adjusted EBITDA outlook to 1.70 – 1.73 billion euros, from prior guidance of 1.65-1.70 billion euros.

Hybrid car models accounted for 17% of Ferrari’s shipments in the second quarter. Earlier in June, the Italian company announced plans to make 80% of its car models electric and hybrid by 2030, with a promise to deliver its first fully electric car in 2025. Meanwhile, Ferrari aims to deliver its first sport utility vehicle, Purosangue, in 2023.

Versace-owner Capri rides high on luxury boom

Capri Holdings (CPRI) posted strong quarterly results that beat market expectations, both on topline and bottom line, as demand for luxury goods remained steady despite rising inflation. The owner of luxury brands like Jimmy Choo, Michael Kors and Versace reported quarterly revenue of $1.36 billion, up 8.5% from a year ago. Analysts were expecting $1.29 billion in revenue.

Adjusted earnings of $1.50 a share also beat market estimates of $1.36 in profit per share. However, the company saw a decline in revenue from Asia as COVID-related lockdowns in China during the quarter hurt demand in one of the major luxury goods markets. For the next quarter, the company expects total revenue of about $1.4 billion and earnings of $1.55 per share.

Online sales drive 30% of Tapestry’s total revenue

Owner of brands like Coach, Kate Spade and Stuart Weitzman, Tapestry (TPR) said that online sales accounted for 30% of its total revenue in the fiscal fourth quarter ended July 2, 2022. As a strong sign of the luxury industry’s resilience during biting inflation, Tapestry acquired 1.8 million new customers in North America. The company expects double-digit growth in the fiscal year 2023 with an earnings guidance range of $3.80 to $3.90 per share. The board also approved a quarterly cash dividend of $0.30 per share, up 20%. Tapestry also expects to buy back around $700 million in common stock in the fiscal year 2023.

Fourth-quarter revenue of $1.63 billion was 7% higher than the pre-pandemic levels. Operating income grew 17% to $260 million from the fiscal fourth quarter of 2019. The New York-based fashion house that gets about 20% of its sales from China is seeing a recovery in demand in the region. It expects sales in China to fall only 15% in the next quarter compared to a 32% plunge in the last quarter.

Ralph Lauren posts upbeat quarterly revenue

Quarterly revenue for the upscale apparel company Ralph Lauren (RL) increased to $1.49 billion from $1.38 billion a year ago. This is handily above market expectations of $1.41 billion in quarterly revenue. The results indicate a firm demand for premium range clothing from high-income consumers in the United States and Europe despite soaring inflation.

Same-store sales in North America rose 5%, Europe grew 34%, and Asia climbed 19%. Excluding items, earnings of $1.88 a share beat Wall Street’s expectations of $1.71 a share.
For the fiscal year 2023, the company anticipates capital expenditure between $290 million and $310 million. The company also sees a strong U.S. dollar hurting its revenue growth.

Exhibit 7: Luxury Stocks Price Projection

Source: Stockal Research, Data as of 17 August 2022

Exhibit 8: Luxury Stocks Valuations

Source: Stockal Research, Data as of 17 August 2022