This analysis is by Bloomberg Intelligence Senior Industry Analyst Deborah Aitken and Bloomberg Intelligence Senior Associate Analyst Andrea Ferdinando Leggieri. It appeared first on the Bloomberg Terminal.
Luxury-goods makers’ ability to drive double-digit sales and earnings growth in 2023 is partially dependent on China reopenings. Louis Vuitton, Hermes, Chanel, Gucci, Dior, Cartier and Rolex lead brand interest, pricing and profit via new designs, direct marketing and storytelling. Below are key charts and datasets covering 2023 drivers.
Luxury P/E begins rebuild on robust delivery, China
Consensus estimates luxury goods median sales will rise 12% in 2022, up another 180 bps through 4Q, despite drags from Russia and China on growth. Demand seems resilient into 2023, with store investments and marketing budgets solid, orders buoyant and travel pickup building gradually for mid- to high-single-digit growth next year. Discounting online toward end-2022 in entry level luxury brands in the US after an inventory build to combat supply chain bottlenecks is limited for now.
Forward luxury-goods P/E has built to 22.5x from 20x in September, with forex gains in Europe lending a boost to earnings confidence. Consensus 2022 EPS growth has crept to 20% from 19% in September and 16.6% in June. Sturdy raw-material agreements and the ability to raise prices backs sizable gross margin and low supply-cost ratios.
Top luxury makers’ demand resilient, margins up
Best-in-class luxury-goods companies distinguished themselves by boosting prices via new designs, innovation and collaborations, and more increases are due in 2023. The largest brands proved ready to handle cost inflation, aided by a robust recovery in consumer appetite after lockdowns yielded sizable savings hoards and pent-up sales. Solid demand, the ability to price and cuts to expenses protect gross, operating and net margins.
Geopolitical upheaval meant price gains were ahead of guidance for mid-single digits in 2023, favoring heritage brands such as Hermes, Louis Vuitton, Christian Dior and Cartier. New limited editions and partnerships are driving strong demand. Sales may climb 10% (40% of which is price related) in 2023, after consensus’ 12% growth for 2022 (2021 sales recovered after 2020’s 16% decline).
Luxury tourists’ gradual revival continues
Luxury sales could improve in 2023 as tourism in Europe, the Middle East and North America repairs more. A full recovery is unlikely in the short term, given that some China health restrictions will ensue. However, we believe the upside could outweigh the downside with more reopenings in China to extend Asia-Pacific’s potential. At worst, we think Asia would be flat vs. 2022. Global tourist arrivals through July were 43% below the first seven months of 2019, according to UNWTO, yet price-agnostic customers in the rest of the world could travel more than the mass-market’s 2023 expectation.
Kering reported Western European 3Q sales to tourists were nearly 10% below 3Q19, though UNWTO suggests the region may be about 13%-17% faster at recovering vs. the global trend, mainly due to weakness in the euro.
Luxury cash pile favors investment, payouts, deals
Against a mounting macroeconomic slowdown, European-based luxury-goods companies will largely enter 2023 a stronger force, with bolstered balance sheets, raised investment — backed by forex benefits, bigger cash returns to shareholders — and with greater M&A scope. Even amid the Zero-Covid policy in China, where a return-to-store recovery trend depends on reopenings, the industry is more versatile globally, driving superior growth and profit. That’s helped by robust US consumer-spending growth at the high-end, a European rebound boosted by tourism, the expansion of own-retail stores and e-commerce investment.
More nimble business models and net cash of 0.4x Ebitda by 2023 — including lease liabilities — point to a higher number of deals to fill adjacent categories and regional expansion (e.g. Asia).
LVMH the deal benchmark; Farfech lifts activity bar
Luxury-goods market M&A amounted to $37 billion over the past five years, and rising net cash balances and lowered sector valuations suggest greater activity in the coming year. LVMH holds the crown for being the most avid acquirer, making up 27% of total deals, of which Tiffany — fully integrated in 2021 — is the biggest. E-marketplace Farfetch follows, with 10 purchases since its 2018 IPO, and investment in Richemont’s Yoox Net-a-Porter pending. Kering is next with nine deals in five years. Of note, 20% of the total is being undertaken in 2022, led by Farfetch.
More activity looks likely given P/E valuations are 30% lower vs. a year prior. Cash build-up will probably also spark more transactions, with a foreign-exchange tailwind to investment, dividends reinstated and buybacks underway.
Bloomberg
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