Analysts’ expectations were too high, according to Eric Fourrier of Fourpoint IM.
Tourism, luxury, sports equipment manufacturers: the half-year results of consumer discretionary stocks are generally good, with a few exceptions. However, the markets have severely punished the figures of Richemont and LVMH. Should we worry about the future of these prestigious brands? While the publication season is in full swing, Eric Fourrier, co-manager of a thematic fund around consumption and pleasure, believes that analysts’ expectations were disproportionately high, but that luxury and leisure still have good days ahead of them. Interview.
The luxury groups did not post mediocre results, yet the latter were poorly received by investors. Should we be worried about the future of these signs?
Sector leaders are still posting growth rates close to 20%. However, expectations were much higher, due to China’s restart. But the North American market has slowed. Although it is not the core business, but around 20 to 30% of sales, this deceleration has impacted their growth, hence the decline of LVMH following its announcement.
Richemont, on the other hand, had the misfortune to publish the day of the release of the disappointing figures for Chinese growth. However, the value remains strong. The Swiss group remains number one in jewelery thanks to its portfolio of prestigious brands such as Cartier and Van Cleef. This activity is growing between 8 and 10% per year. In addition, Richemont is gaining market share from local artisans who represent 80% of the jewelry industry. The valuation of the Swiss group has become very interesting. Its PER is below 19x, well below the average of the last 5 years at 24x. The group holds significant cash. A merger or acquisition remains likely, especially with its competitor Kering, but Richemont does not seem ready yet.
Finally, the majority of analysts were expecting poor results for Kering due to the ongoing transition at Gucci. The Italian brand, which weighs around 70% of the group’s profits, has appointed a new CEO and artistic director duo. Kering will thus go through a period where sales of its flagship label will not grow at the same rate as those of LVMH’s high-end ready-to-wear segment. Moreover, its discount vis-à-vis the French company has never been so strong: the investor remains correctly remunerated for the risk. Finally, the group’s balance sheet remains solid, but it is excessively dependent on the results of Gucci and it is not sufficiently present in the jewelry market.
Why are luxury group spirits sales declining?
Spirits remain the only disappointing activities. The good years for Cognac gave way to high stocks. LVMH, but also Rémi Cointreau paid the price. Companies are still penalized by this backlash, but their business has normalized and they are not far from cruising speeds.
What about sports equipment manufacturers, including Adidas, which is recovering from its descent into hell linked to the breach of contract with American star Kayne West?
Due to supply problems, stocks of Adidas, Puma and Nike have piled up as the acceleration of inflation and the end of aid have dented household budgets, particularly in the United States. Rising raw material prices and logistics costs had hit the sector hard. However, the sector is once again offering attractive entry points, with inventory levels normalizing and supply costs starting to fall.
Adidas’ results were in line with expectations, but the stock will still remain volatile due to the repercussions of the Kanye West contract breach.
Tourism seems to have resumed its cruising level since the pre-covid era. What is your reading of the results?
Profits from hotels, tour operators and airlines are back. Occupancy rates are close to 2019 levels, while prices per room jumped 28% in Western Europe in June compared to 2019. Booking.com is benefiting from the return of tourists to Europe, Asia and in the USA.
Dating apps have become mainstream. How are their titles evolving?
Texas-based Match Group, known for Tinder and Meetic, is trying to better monetize its user base by raising subscription prices. It wants to streamline its 100 million customers, because only 16 million of them actually pay for a subscription. But the price increases have led to user volatility. The stock, which traded in 2021 at 51x earnings, is now trading at 20x.
The share of household budgets allocated to discretionary consumption continues to increase. What factors are driving this trend?
The improvement in the standard of living encourages this type of expenditure. The trend is polarized between premium and entry-level products. We also note that the younger generations do not necessarily want to consume less, but better, in accordance with their personal convictions. In general, this generation places less importance on their careers in favor of hobbies. The latter are still underdeveloped in China where the growth potential is colossal.
Is the trend exactly the same on both sides of the Atlantic?
Yes, it is similar. It has also been observed that the share devoted to simple products has fallen from 64% to 54% in the distribution of discretionary spending, because the consumer is looking for a feeling of experience, which the luxury brands have fully understood. They try to tell a story that speaks to customers, but also in line with their values. This phenomenon is striking in the sustainable consumption sectors.