Why stock investors should get exposed to high-end luxury
Rich folk love their brands, even in recession, so our overseas investing expert names his stock to buy.
31st July 2019 10:35
by Rodney Hobson from interactive investor
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Rich folk love their brands, even in recession, so our overseas investing expert names his stock to buy.
Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.
Wherever you live in the world, and however poverty stricken the general population, you will always find some rich people flaunting their wealth.
There will always be people who enjoy the luxury products of brands such as Gucci and Yves Saint Laurent, so it is worth considering investing in parent company Kering (EURONEXT:KER), which also owns Alexander McQueen and Balenciaga.
It's not surprising that despite all the talk of a slowdown in economic growth, particularly in Kering's European heartland, sales have been on the rise. The worry now is whether the rising trend is losing momentum.
That may sound a strange statement when you consider that Kering has just reported a 15.3% rise in sales in the six months to 30 June. Sales at YSL rose 16.6% and at Balenciaga and McQueen they soared by 20.3%. Chairman and chief executive Francois-Henri Pinault was able to boast:
"We created an additional €1.2 billion in revenue in the six months."
The big concern was that Gucci sales, which had been roaring away, were only 16.3% ahead over the period, with sales in the US and Japan falling short of analysts' expectations. The Italian label's second quarter growth of 12.7% represented a slowdown from 20% in the first quarter, which was itself half the 40% level recorded in the same quarter of the previous year.
Gucci's clothes, shoes and accessories account for more than half of Kering's revenues and have been the main driver of growth over the past three years. The effect of the loss of momentum is that Kering is no longer outperforming rival luxury products group LVMH (EURONEXT:MC), owner of the Louis Vuitton, Christian Dior and Moet Hennessy brands, whose key fashion and leather products surged 20% in the second quarter. Critics claim that LVMH has been more successful in revamping its leading brands.
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Kering's stance is that sales growth is merely normalizing and that creations by designer Alessandro Michele are still in demand among fashionistas. Gucci continues to increase its profitability, with operating margins rising to an extremely impressive 41% over the latest six months.
The brand continues to perform well in China as the ballooning of consumerism among the newly created middle class and a weakening of resistance among the authorities to imports of luxury goods is creating demand for more expensive items.
Other encouraging signs are an improvement for the Bottega Veneta fragrances, bags and shoes. This subsidiary has been struggling with falling sales but it returned to growth in the latest quarter, thanks to well received collections from new creative director Daniel Lee.
After a period of tracking sideways, Kering shares have been on the rise over the past three years from €147 to a peak of €537 in April. They slumped, a little unfairly, from €511 to €467 on the results but have started to pick up again.
Source: TradingView Past performance is not a guide to future performance
Based on last year's dividend, the yield is a perfectly acceptable 2.2% at the current price of €466 with the prospect of a further boost in the payout this year. The dividend has started to take off: after remaining static at €4 in calendar year 2015 it edged up to €4.60 in 2016 and then €6 in 2017 before leaping to €10.50 last year.
The price earnings ratio is a little high at 31, but a company selling goods of this quality justifies the rating. The overwhelming majority of companies across the globe would be delighted with double digit sales growth.
Hobson's Choice: Buy Kering at up to €475. More cautious investors might like to see if the shares sink back a little, but you risk missing the opportunity: there is likely to be little downside, while the immediate upside potential is €516.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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