“I like to say this [industry] is all about emotional consumption,” said Gillian Diesen, senior client portfolio manager at Pictet Asset Management, during an investor presentation in June. She continued: “These are the companies that are producing super high-quality products and services that are catering to consumer aspirations.”
[Tiffany in New York City] is a destination, an art gallery
Diesen suggested that these products are not to be found only at luxury companies but also in the “travel, fashion, cosmetics, sporting goods, food and drink” industries.
Five common attributes
Diesen explained that the first feature is about carrying a strong heritage reflected by iconic and differentiated products such as the mountaineering merchandise at Moncler. “Premium brands are, I like to call it, inclusively exclusive,” said Diesen. She thinks that brands such as Ferrari are good at creating “a hook for younger generation consumers.”
The second one is about experience. She thinks that LVMH has created a luxury ecosystem virtuously and mutually feeding all its brands. “What about having a Dom Perignon champagne while wearing my Dior dress and Tiffany jewelleries on the balcony of the Cheval Blanc hotel?” teased Diesen. Referring to the Tiffany store in New York City, she thinks that the store is more than just a story. “It is a destination, an art gallery.”
Cognisant of the earnings power from financial ecosystems created by Apple, Nvidia and LVMH, Delano questioned Diesen as to whether other firms enjoyed a similar environment in the luxury space. She thinks that Ferrari and Kering maintain such an ecosystem while she assessed the latter stock as being “undervalued.”
Read also
A third facet is about brand integrity. Diesen noted that companies mind their reputation and legacy in the long term when making decisions. Typically, they want to maintain control over their supply chains and are “very active in philanthropy and community initiatives… to build brand loyalty with customers.” She recalled that during covid, some of these companies quickly shifted to produce hand sanitiser and clothing to healthcare workers thanks to their control over their supply chains.
The fourth factor is about digital integration. It’s more than only online sales. “It is about digital across the value chain, using analytics and creating online communities,” stated Diesen. She observed that digitalisation doesn’t only help sales with the younger generations but also with “geographical middle America” (such as Colorado or Arizona) or Chinese inner cities which have not been traditionally associated with luxury products. “Developed markets still have a lot of runways to go in terms of penetration,” not only emerging markets.
Her fifth hallmark is operational excellence. Diesen thinks that these premium brand companies tend to display pricing power and “superior revenue generation, superior margins and extremely solid balance sheets... not just to the average company in the MSCI World, but also to consumer discretionary, in general.” Referring to Amex, Hermès and Ferrari--“the highest end of the luxury names”--they can still increase prices and “grow all their markets” despite the higher prices of the last few years.
Weather the storm
Diesen opined that the five characteristics indicated above ensure the resilience of these companies over time, and “enable them to weather these different economic environments.” It also helps that clients for the premium products tend be also more resilient and display “very strong brand loyalty” even during difficult economic situations, such as when covid hit.
Younger generations are still trendmakers
“It’s all about being outdoors, it’s not so much about going to the gym anymore,” said Diesen. She thinks it may explain the success of sporting brands such as “On.” She also noted the return of the Adidas retro lifestyle trainers (like the Samba and Gazelle).
Secular trends may favour the luxury industry
Diesen sees travel, Asia and emerging markets, “consumer sentiment and the general macro backdrop globally” as supportive for the sector.
Enjoying pent-up demands, she noted the sky-high prices for plane tickets and fully occupied hotels--“even more so for high-end”--whereas business travel is only starting to recover. She reported that construction costs and labour shortages for new hotels have been an issue. Instead, hotels decided to convert standing rooms into suites.
“Group and corporate travel have yet to come back.” She observed that China stopped its ban on group travel only a year ago. “Tour bus style [trips] are just starting to return,” said Diesen. Despite the doom and gloom about China, she noted that LVMH’s sales into China were up 70% in 1Q24.
Luxury companies to better manage your risk
Diesen admitted that the sector is confronted with an uphill battle compared to the performance of the tech sector. Moreover, she warned that the sector comes out a period of stellar and stratospheric results. She therefore expects a period of normalisation in 1H24 but a stronger development in the second half on the back of “a more optimistic consumer backdrop… as interest rates will come down.”
Given the focus by the media on tech, the US and its mega capitalisations, Diesen argued that a very differentiated portfolio focusing on European luxury companies and consumers (discretionary or staple) may “help your .”
Premium and ultra-premium: driving stock performance
Pictet noted that ultra-premium hotels and Hermès bags made a difference in terms of sales but also on stock performance for the corporations behind these products. On the other hand, companies with aspirational products have seen their stock lagging the sector. She claimed that it is not sufficient to look at the sub sector, a focus on brands and companies is key.
Value is in the eye of the beholder
Diesen commented that some of the most expensive names in their portfolio such as Ferrari, Hermès and Brunello Cucinelli traded at P/E of 50x, which “still looks pretty good…. There’s still gas in the tank.” She argued that their earnings momentum is “extremely positive… with a full order book for the next couple of years.”
After extensive research and discussion with futurists and academics, an advisory board of external experts meet twice a year to discuss about secular growth trends in the sector. Once a theme is chosen, Pictet selects companies, ideally pure plays, or as closely aligned to the secular growth trend as possible “to outperform the broader markets over economic cycles.”