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Luxury Stocks Get Richer as LVMH Seen Immune to Budget Cutting

While consumer companies wrestle for sales amid tax hikes and budget cuts, LVMH Moet Hennessey Louis Vuitton SA, Burberry Group Plc and Hermes International SCA  will lift revenue at least 9 percent, according to estimates compiled by Bloomberg, after a bumper 2010 followed the worst year on record. Photographer: Antoine Antoniol/Bloomberg
While consumer companies wrestle for sales amid tax hikes and budget cuts, LVMH Moet Hennessey Louis Vuitton SA, Burberry Group Plc and Hermes International SCA will lift revenue at least 9 percent, according to estimates compiled by Bloomberg, after a bumper 2010 followed the worst year on record. Photographer: Antoine Antoniol/Bloomberg

Jan. 14 (Bloomberg) -- European luxury-goods makers won’t be going out of fashion this year.

While consumer companies wrestle for sales amid tax hikes and budget cuts, LVMH Moet Hennessey Louis Vuitton SA, Burberry Group Plc and Hermes International SCA will lift revenue at least 9 percent, according to estimates compiled by Bloomberg, after a bumper 2010 followed the worst year on record.

As the wealthy regain spending confidence and the number of millionaires rises in China, LVMH’s Neverfull bags and Burberry’s jackets may be among their latest purchases. Sales of shoes, leather goods and watches will lead the industry through 2015, led by demand in Asia outside Japan, according to Luca Solca, an analyst at Sanford C. Bernstein.

“High-end consumers in the U.S. and Europe are willing to spend, even in a subdued economic environment,” while Chinese demand for luxury at home and abroad shows no sign of slowing, Antoine Belge, an analyst at HSBC in Paris, wrote in a Jan. 6 report. “Welcome to the new ‘new normal’.”

Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, this week said mounting pressure on consumer finances will make business tougher. Sales at Carrefour SA, the biggest retailer in Europe, will rise 4 percent in 2011, according to the average estimate. Nestle SA, the world’s largest food company, will post sales that are little changed, the survey showed. Nestle received its first “sell” ratings since April yesterday on concern that earnings growth won’t meet forecasts.

‘Rich Get Richer’

“In Europe, the poor are getting poorer, the rich get richer and it’s the middle class that’s squeezed,” Piaget Chief Executive Officer Phillippe Leopold-Metzger said in an interview this week. He’s aiming for record sales in the next fiscal year for the watchmaker, a unit of Cie. Financiere Richemont SA. Richemont’s sales may expand 8.9 percent in that period, the survey of analysts showed.

As models showcase the latest suits and accessories at the Milan Men’s Fashion Week, which starts tomorrow, investors can look forward to sales growth of 10 percent at Fendi-owner LVMH and net income expansion of 15 percent, the estimates show.

Sales at Burberry, whose shares rose 88 percent in 2010 amid rising sales and takeover speculation, may expand 11 percent in the fiscal year ending March 2012. Burberry offers one of the best top-line and margin expansion outlooks in the industry, according to Belge.

Gucci Group owner PPR SA is forecast to post a 4 percent sales increase, held back by its general retailing units and Puma AG sporting-goods division.

‘Correction’

The pace of growth will likely trail 2010, when luxury makers benefited from easier comparisons to 2009’s contraction.

“Last year was a correction,” said Jean-Marc Bellaiche, a senior partner at the Boston Consulting Group in Paris and head of the consultant’s luxury topic area. “We should expect less growth in 2011 versus 2010, but still we see a very good development ahead.”

The luxury industry’s ability to outpace most other consumer and retail segments in terms of earnings growth will continue to attract investors, as long as demand rises and the broader economic recovery doesn’t accelerate, Solca said.

The relative share outperformance won’t be as pronounced as 2010 as some investors may take profit on luxury stocks to invest in other sectors, according to Belge. The Bloomberg European Fashion Index, which includes LVMH, Richemont and Hermes, climbed 60 percent last year, boosted by Burberry. The Bloomberg Europe Food Retailers Index rose 4.3 percent, and the Bloomberg European Food Index of 14 companies gained 24 percent.

Merger Talk

The luxury stocks are already trading at higher multiples than other consumer-goods rivals. Hermes has a price to estimated earnings ratio of about 40.4, while Burberry trades at 25.1. Nestle’s is 16.3 and Marks & Spencer has a ratio of 11.6.

Stock prices may also get a boost from mergers and acquisitions. Luxury’s luster may attract buyers, particularly from China and Korea, who see local economic growth and want to tap the rising demand for expensive timepieces and leather bags, according to Boston Consulting Group.

Small and medium-sized brands in Italy will be the most likely targets, said Bellaiche. LVMH could buy more of Hermes after building up a 20.2 percent stake, Solca said. Investors in the Birkin bag maker shouldn’t sell their shares, Belge said.

To maintain their hold, luxury companies will need to work harder to convince people that their products and services are worth the price, according to Uché Okonkwo, executive director of Paris-based consultancy Luxe Corp. Wise to the profit margins on some luxury goods after heavy discounting, and more informed about brands thanks to the Internet, shoppers will be less loyal and more discriminate in how they spend their money, she said.

“This is the year when it will be seen very clearly which brands actually are qualified to be called luxury,” Okonkwo said.

To contact the reporter on this story: Andrew Roberts in Paris at aroberts36@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.

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