Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Cartier love bangles and Birkin handbags haven't been enough to save Richemont and Hermes.

Richemont said it expected operating profit in the first half of this year to be 45 percent below the year earlier, while Hermes abandoned its medium-term target of 8 percent annual sales growth, excluding currency movements.

That Richemont's sales and profit outlook have cratered follows naturally from reports that Swiss watch exports have fallen for more than a year.

Richemont Mostly Misses Expectations
Luxury brand sees difficult conditions ahead; only the U.S. results were better than forecast
Source: Bloomberg

Hermes' decision to abandon its medium term sales target -- while sensible -- is more noteworthy.

Hermes has been a strong performer, despite the broader luxury downturn, thanks to demand for its iconic bags, where it has been increasing production to prop up sales. But that strategy isn't enough to shield it from the broader malaise.

Analysts at Exane BNP Paribas expect just 2 percent growth in global luxury goods sales this year, so 8 percent was looking far too high.

That Hermes has recognized the challenging environment underlines the extent of the difficulties in the luxury goods market. Shares in other groups, including LVMH and Kering, fell after the announcement.

But it may well have waited too long to make the adjustment. The odd thing about its more-realistic outlook is that it may have come just at the time when there are some more positive signs brewing for luxury. For instance, Prada said recently that conditions were improving in Asia -- including in Hong Kong and Macau. Even in the troubled watch market, Tag Heuer said the end of the year may be "surprisingly good." 

It's probably still too early to call the bottom for luxury, given the substantial uncertainties. Lingering risks include recent stock market volatility, never good for top-end consumer goods, and the forthcoming U.S. presidential election. Still, the early indications of potential improvement are really worth noting.

The other mystery about today's forecast change is that Hermes has another card up its sleeve. The second half of this year will compare with the period in 2015, when Chinese shoppers were put off from travelling to Europe after the Paris terrorist attacks. It won't be too much of a stretch for its next reporting round to look good by comparison. 

As for Richemont, the news wasn't entirely grim. While the Swiss watch market remains difficult, U.S. jewelry demand was strong, thanks no doubt to all those Love bangles.

It also saw a pick-up in sales in mainland China. Though this was offset by weakness in Hong Kong and Macau, it can benefit from a strategy of buying back slow-moving stock from retailers. That means stores won’t be stuffed with old models when demand in these markets recover, so over time, that should help sales.

Given the severity of the downturn in luxury -- as underlined by Hermes -- there is no guarantee that the first shoots of improvement will blossom into a more extensive recovery. And that is reflected in the valuations.

Hermes Is Out of This World, but Shouldn't Be
Forward price to earnings ratio is much too far ahead of the industry, given sales struggles
Source: Bloomberg Intelligence

Richemont trades on a forward price earnings ratio of about 20 times. The premium to Swatch looks deserved, given Richemont's collection of quality brands, its willingness to control costs and take action such as buying back stock, and the 5 billion euros ($5.6 billion) of cash on its balance sheet.

As for Hermes, its forward price earnings ratio is about 32 times, compared with about 18 times for the Bloomberg Intelligence global luxury goods index. That is absolutely stratospheric, particularly given its down-to-earth outlook.

Even with some improvement in the global luxury goods market in the second half -- and that is by no means a certainty -- that looks too high. Even Birkins can't defy gravity forever.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net