A Contradictory Life

First time published!


You have to learn the rules of the game, and then you have to play better than anyone else. – Albert Einstein

The company for which I work sends out a daily Newsletter every morning. Last week my first little write up was included – such a great feeling to finally be contributing in a meaningful way at work! I started work at a fast growing South African asset management company at the beginning of July and haven’t looked back. For anyone interested in signing up for our daily newsletter visit the Anchor Capital website here and go to the Newsletters tab, some great market and company insight will be delivered to you daily!

Luxury growth slows, but still strong

It seems that the consumer goods sector, particularly the luxury goods space, is finally mirroring that of decelerating global economic growth. Luxury is a late cyclical play and comparatively, against the record highs of 2010/11 following the global financial crisis, revenue growth is down (but still strong).

Although the fundamentals of the sector are still in place: China and the Bric countries remain the key drivers and although growth is slowing, this will by no means be recessionary. China has been the main catalyst behind the elevated results of this sector and here the growth rate is normalizing – past spend on luxuries is not  sustainable. In addition up to 30% of luxury spend in Europe is from Asian travelers and there has been a marked slowdown of tourism in Europe including the Asian travelers.

Recent financial results from luxury players in global markets reflect this view. Burberry released their 1H2013 trading update last week reflecting retail like-for-like sales rose by 3%, but this reflected a 6% gain in the first quarter followed by just 1%. Retail revenue on an underlying basis was up 10% whilst total sales rose by 8%. This is the 14th consecutive 6-month period where Burberry has delivered double-digit growth at constant exchange rates.

The external environment is challenging and footfall is declining, but brand momentum is on the increase. Even though growth was sharply lower than a year ago, the results were better than the markets expected and the share price soared 13% on the results reveal. Tiffany $ Co (NYSE:TIF) and Coach (NYSE:COH) advanced just over 2% on the better than expected underlying sales growth. New stores, higher prices and an increase in the average spend helped sales. Tiffany reported a slightly higher profit in Q2 with Coach reporting sales up 12% although this figure missed analysts expectations. Coach reports its next quarterly results on October 23, while Tiffany is expected to report on November 29.

LVMH, the world’s largest maker of luxury goods, yesterday reported a marked slowdown in sales with their slowest quarterly sales growth since the last three months of 2009 as demand for leather goods and watches slowed. Total revenue rose 15% to €6.9 bn, in line with consensus estimates of €6.88 bn. LVMH stated that it “remains confident in its outlook for 2012” and shares gained 0.8%. Prada and Hermes international said they have yet to be affected by the weakening world economy.

On the upside, the minimum wage in China increases every year by 10-15% and with a current CPI of 2% this means disposable incomes for the vast majority of Chinese is increasing rapidly which creates great upside to buy status products. Distribution channels in China are critical as Tier I cities are already quite penetrated but in Tier II and III cities, there is huge potential as here most stores are the
smaller local kind. China is definitely exceptionally trend and fashion driven and this can be seen in the results of “stone” sales of late – Emeralds and rubies have seen 30-40% growth because of the fashion move to wear more colour.

With regard to diamonds; in the West a large proportion of wedding rings contain diamonds whereas in China this is only at a figure of approximately 30% (the rings are mostly made of pure gold) which creates opportunity.

All this being said Richemont is trading at a multiple of 14.8 times (well below the longer term average of closer to 20x) and is expected to grow at 13% for the next three years, an attractive prospect given the range of choices in the market at present. We still feel this counter will outperform many other shares in the SA sphere going forward. The recent pegging of the Swiss Franc to the Euro could be Richemont’s saving grace.

Looking forward to contributing some more in the future!