Forget gold, interest-rate futures and the Vix as indicators of economic uncertainty. The Frox -- or the frock index -- is the one to watch.
Hugo Boss's severe profit warning on Wednesday shows that affluent consumers around the world are reining in purchases of dresses and other clothing as they fret about the economic clouds gathering on the horizon. It said profit would decline by at least 10 percent this year because of weaker-than-expected sales in the U.S. and China, and shares fell to the lowest in almost five years.
True, some high-end luxury groups catering to the super-rich, such as Hermes and its famous handbags and Richemont with its Jaeger-LeCoultre watches, have proved more resilient to recent market gyrations and have been able to benefit from stabilizing demand in mainland China.
But Hugo Boss's clean-lined clothing sits just below that level. It is those customers who are merely economically comfortable who may be more worried about the volatility in Asia, economic stumbles in the U.S. and Brexit.
And clothing, perhaps the most discretionary of all items, is particularly exposed to customers' jitters, creating a double problem for Boss. According to analysts at Bryan, Garnier, the company generates 89 per cent of its sales from clothing, more than the share for most luxury groups.
Boss isn't the only one feeling investors' concerns on its product lineup. Ralph Lauren, which generates two-thirds of its sales from the mature U.S. clothing market, had its biggest one-day loss in more then five years after it warned on profit earlier this month. And shares in Burberry fell 5 percent Wednesday amid fears that it could share Boss's woes.
Burberry generates just over half of its sales from clothing, according to analysts at Bryan, Garnier. It is also heavily exposed to China, with the Chinese consumer responsible for about 40 percent of sales, compared with about 30 percent for the industry as a whole, according to Bain. However, it may have some protection from the premium clothing slow-down. It generates 40 percent of its sales from more-resilient leather goods and accessories, and has a strong digital strategy, as its decision to leapfrog rivals and enable shoppers to buy straight from the catwalk shows.
The diverging fortunes of the high-end luxury players and premium brands are reflected in their valuations.
Hermes is trading on 29 times the next 12 months earnings, even though it said it expected growth to be slower this year. Brunello Cucinelli, the Italian luxury brand best known for its cashmere, trades on 27 times earnings. They are both well above the average of 15 for Bloomberg Intelligence's luxury peer group.
In contrast, Hugo Boss currently trades on just 11.2 times the next 12 months earnings. Shares have fallen by more than 50 percent since October, significantly underperforming the BI luxury peer group. That looks cheap, but for a reason. Burberry is trading just above the broader group, whereas in the past it typically traded at a steeper premium, reflecting the nervousness about conditions in both China and now more-mature markets.
Those concerns show little sign of ebbing, leaving the Frox index highly vulnerable.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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