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Canwest News Service
The glitter may be coming back to bling as evidenced by Tiffany & Co.'s third-quarter earnings, which beat the Street this week.
Luxury retailers may have lost their traditional resilience during the financial crisis, but they now offer attractive leverage to Wall Street's resurgence, the global recovery and wealthy emerging-market consumers.
The market meltdown not only produced higher saving rates in many parts of the world, it also took its toll on the world's wealthiest. In the United States, the number of high-net-worth individuals declined 19% last year, according to Merrill Lynch and Capgemini's World Wealth Report. This so-called “Madoff effect” caused plenty of pain for the luxury-goods segment.
“What's been interesting about this cycle is it is the first time that we've seen luxury lose its resilience in the face of a downturn,” said Peter O'Reilly, head of global equities at Investors Group in Dublin, who owns names like Christian Dior SA, Pernod Ricard SA and Coach Inc.
The portfolio manager feels the luxury market, where share prices have generally done well since March, will continue to be strong as stocks rebound and people worry less about their net worth. He also sees opportunity in the upper-mid retail market due to rising incomes in such places as China. This category includes such companies as Spain's Inditex SA, which owns Zara, and Swedish clothing chain Hennes & Mauritz AB (H&M).
“That part of the market seems very underserved,” Mr. O'Reilly said.
In the future, wealth creation is forecast to be strongest in Asia– the region is expected to replace North America with the highest concentration of wealth by 2013. UBS analyst Eva Quiroga thinks China will be a major source of the region's long-term growth. It should soon overtake Japan as Asia's largest luxury market on the back of robust economic expansion, favourable demographics and more overseas travel.
The European luxury segment should also benefit from renewed wealth creation, particularly in emerging markets, as well as a recovery in GDP growth.
The luxury market has historically outperformed the global economy, with the exception of the 9/11 and the SARS-related downturns. Equity market indices have proved to be good indicators for the sector's performance.
FTI Consulting Inc. predicts the luxury group will see substantial gains when compared with last year, primarily as a result of Wall Street's comeback and a stronger sense of optimism among the wealthy.
Fitch Ratings director Monica Aggarwal, who tracks such high-end retailers as Saks Inc., Nordstrom Inc. and Neiman Marcus Inc., says holiday sales for luxury stores could beat the 4% year-over-year decline anticipated for department stores.
Odlum Brown analyst Barbara Gray likes the long-term prospects for Coach Inc. and Lululemon Athletica Inc. She noted that these names, as well as Tiffany, resisted the temptation to deeply discount products during the recession. Tiffany posted double-digit sales growth in Asia and a slower rate of decline for the United States — an encouraging sign for upscale retailers.
“They're the ones that maintain their brand integrity,” Ms. Gray said. “Coming out of the recession, these companies are really in a good position and I think that is one of the biggest differentiating factors. At the end of the day it's how the consumer views the brand.”
jratner@nationalpost.com
