Moody’s Investor Service said in a new report on global luxury retail that earnings of some of the world’s biggest luxury companies are set to see median growth of about 7 percent compared to 4 percent in 2016 as brands adjust to a current retail market filled with competition and dominated by e-commerce.
While the projection is partially based on the strong start to the year seen by LVMH Moët Hennessy Louis Vuitton and Kering, which saw organic sales at the house rise by just over 48 percent led by a revitalized Gucci, Moody’s said overall sales are expected to slow in the latter half of the year.
The firm also included luxury operators, like PVH Corp., Ralph Lauren, Tiffany & Co., Shiseido Co. Ltd. and SMCP Group, which operates Sandro and Maje, in its group of companies expected to grow earnings this year, but none of the companies are expected to reach double-digit growth.
“A return to double-digit growth for the global luxury retail segment is unlikely until at least 2020 as the Chinese consumer boom has slowed, value-conscious consumers are now less likely to stand for price hikes and competition from other sectors like travel and fine dining remains elevated,” senior Moody’s analyst Vincent Gusdorf said.
Growth is also expected to be slower for U.S. companies more exposed to mall-based department stores, and Moody’s noted that companies in general are “putting the brakes on new store openings, with some choosing instead to focus on improving productivity of existing stores.”
Others still are closing a number of stores, like Ralph Lauren, which has shuttered dozens over the last several months, including some flagship locations.
But Moody’s said more focus on a smaller store portfolio is generally a positive from a financial angle, “as it reduces fixed costs such as rent, improves the financial flexibility of luxury companies and bolsters cash flow generation.”
Luxury operators are still expected to spend plenty during the year however, mainly on acquisitions. Moody’s said the portfolio of companies it looked at for the report are likely to spend $7 billion on acquisitions this year, compared to $2 billion in 2016.
HSBC Bank came to a similar conclusion in an April report, saying a combination of high valuations, management issues and plenty of available cash has the luxury sector “ripe for M&A.”
The bank said at the time that LVMH, Coach and Kering were the most likely candidates to make acquisitions. Since then, LVMH has inked a 6.5 billion euro deal to acquire Christian Dior Couture and Coach executed on a long-speculated acquisition of Kate Spade for $2.4 billion.
As for Kering, HSBC thinks the company could spin off its stake in Puma, which would free up cash for acquisitions, and the bank even floated the “highly theoretical” possibility of a LVMH-Richemont tie-up.
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