January 27, 2022

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Luxury, Barclays focuses on Kering and Swatch as China and US take lion’s share

Luxury, Barclays focuses on Kering and Swatch as China and US take lion's share

The luxury goods sector is raising its head after an unprecedentedly poor performance in 2020 caused by the epidemic. A little for high costs, a little for strong purchasing power, but of course for those who are on the go, for limited range, luxury goods purchases have started again this year. “We expect recovery to continue in 2022 until there are no new waves of large-scale Covit-19,” Barclays analysts warn, as most aircraft are still subject to regions and next year growth will be driven by locals. Consumers more than tourists. China and the United States will play a lion’s share in this recovery phase, while “Europe will gradually recover as domestic costs increase,” they added. According to the latest data from Bain Luxury Goods, the turnover of the luxury sector will touch 283 billion euros this year alone, 31% for 2020 and 4% for 2019, with a growth rate of 6-8 from 2021 to 2025. %

“In the long run, the luxury goods sector will be an interesting sector with 45% of costs from Dragon by 2025 and demand will be driven by the middle class: about 61% of the world’s population will be considered middle / upper class by 2020, compared to 48% by 2020,” they said. However, measures taken by the Chinese government to curb the spread of Covit-19, along with the implementation of “public prosperity” announced last August, could prevent this process.

In addition, millennials and General Z consumer businesses expect to continue to increase their ESG efforts. Following the recent COP26 climate summit, the goal of net zero emissions by 2050 to control global warming to 1.5 degrees is at the top of the priority list. Sharing this CO2 reduction target by 2050, the UN Fashion Charter for Climate Action (including signatories such as Burberry, Kering, Hermes) fits this framework well.

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Barclays analysts say the company, led by Francois-Henry Pinalt, is committed to achieving zero emissions by 2030. The same goal must be achieved by 2050. Swatch and Dots, on the other hand, are lagging behind in the current chart, without even clear targets, they focus on the investment bank. Others like it: For example, Prada began measuring its carbon footprint last year.

“Despite being a decisive driver in terms of ESG, the CO2 reduction target generally has a limited impact on the share price of our coverage, perhaps because brands can easily pay customers for sustainability costs,” they continue. The focus on ESG targets will continue to grow in the coming years as some companies, such as Richmond, seek to further integrate consistent criteria into ratings.

A strange feature in the performance of luxury goods companies this year is the sudden recovery in margins, some of which were pushed above pre-epidemic levels, due to operating forex and higher efficiency and cost savings. For some players like Hermes, excessively high margins are not fixed, while others, such as LVMH, aim to make these values ​​more consistent. However, higher shipping and logistics costs, higher capital investments (e.g. due to opening new stores) and rising marketing and advertising costs can affect revenues.

With regard to these complexes, the ratings of experts in the field of luxury remain positive. “We believe that stability in finance is primarily affected by brand equity and brand size, which explains the excellent performance of giants such as Richmond Hermes or LVMH,” they explain to Barclays. Looking at the subdivisions, athletes like Dots and Ferragamo struggle with the growing competition represented by leather goods and sports brands, whose trends are more preferred than the more formal ones.

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Barclays have high weight ratings on the Swatch (target price 363 francs), Kering (790 euros), LVMH (736 euros) and Richmond (150 francs), the first two being considered favorites in the industry. “We recommend focusing on Kering because we are confident in Gucci’s ability to regain momentum and the opportunities that its smaller brands, Saint Laurent, Poteca Venetta and Balenciaga, have to offer.” In the third quarter, Gucci’s sales fell, but the verdict remained positive as the reasons for the decline were believed to be related to external and short-term factors. “The company is performing well in the US and China, and we expect these trends to continue until 2022 to boost sales and revenue,” they tell Barclays.

As for the Swatch, its flagship brands (Omega, Harry Winston and Longines) have already reached the 2019 levels. “In our coverage, the Swatch has more exposure to Chinese consumers, and we’re optimistic about the market’s long-term prospects,” they told Barclays. Consider the increasing number of Chinese in this class.

Finally, the low weight rating of Dots (target price 32 euros) due to weak brand and less attractive geographical exposure makes researchers believe that it is not possible to restore the edges before 2024. Based on the March based company’s 9% higher than Barclays’ estimates, Dots estimates that it will continue to outperform its competitors in the short term, with sales of around 40 840 million indicating further recession in the last quarter of the year. (All rights reserved)