GOLDEN CHOICE by Lux Creative International: The TAG Luxury Stock Index

Dec 2, 2011

The TAG Luxury Stock Index

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Year-to-date (as of 28 September 2011), the TAG Luxury Stock Index increased 6.6%, well above the major indices which fell (14.1%) on average. Year-to-date, the France CAC 40 (down 21.3%), Japan Nikkei (down 15.8%) and FTSE 100 (down 11.6%) all declined. Over the last month (29 August), the TAG Luxury Index increased 0.7%, better than the major market indices which decreased (2.7%) on average. The highest gains were registered at Ralph Lauren (up 5.9%), Burberry (up 4.1%) and Richemont (up 3.1%), while the biggest declines were recorded at Tod’s (down 7.3%), Hermès (down 4.1%) and LVMH (down 3.8%).

During CY2Q11, our luxury goods companies continued to accelerate despite the tougher comparisons, with sales soaring 21.5% at constant currency, up from 17.0% in CY1Q11 thanks to (1) sustained robust momentum of fashion & leathergoods and a solid acceleration in watches & jewelry; (2) outperformance of Asia-Pacific ex-Japan, a meaningful uptick in the Americas, and ongoing strength in Europe; (3) better-than-expected recovery in Japan with improving trends through the quarter; (4) growth across most price points, particularly at the high end, suggesting the return of a feel-good factor; (5) solid tourist flows in Europe and an uptick in the US, marked by healthy growth from mainland China and the gradual return of visitors from Russia and the Middle East; and (6) selective price increases, especially in the watches & jewelry sector.

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Meanwhile, operating margin performance generally improved during CY2Q11 despite pressure from higher input costs and marketing spending, driven by (1) solid expense leverage from topline growth; (2) ongoing mix shift towards leather goods; (3) improved supply chain/operational efficiencies; (4) selective price increases; and (5) lower markdown activity. Encouragingly, the sales momentum has continued so far into CY3Q11 despite increased global macro uncertainty. LVMH indicated no sales slowdown in both Europe and the Americas in mid-September. Richemont’s stellar five-months ended August with constant-currency sales growth of 35%. Tiffany’s August sales continued to exceed company expectations.

Overall, we remain positive on the luxury sector in 2H11 as we anticipate sales to maintain a healthy pace, albeit at a lower magnitude given the tougher comparisons and uncertain global macro landscape, helped by particular strength of Asia-Pacific ex-Japan and the Americas. In FY11, we forecast the $160bn+ global luxury goods industry to sustain its high-single-digit sales momentum from FY10 with the best-in-class players, such as Burberry, Hermès, LVMH, Richemont and Tiffany, continuing to capture market share.

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Macro Overview In the past month, the major global market indices retreated as a result of continued sovereign debt concerns in Europe and macro challenges in the US. The S&P 500 fell (4.9%) to 1,152 points at the end of September amidst worries that the US could spiral into a double-dip recession. The US dollar strengthened against the pound and the euro at $1.56 and $1.34, respectively. Gold prices slid back to $1,623/ounce after reaching a record high of over $1,921/ounce on September 6 as investors sold to cover losses in the equity markets. As of the end of September, the US Federal Reserve, Bank of Japan, Bank of England, European Central Bank and People’s Bank of China maintained their key interest rates at a range of zero to 0.25%, 0.1%, 0.5%, 1.50%, and 6.56% respectively.

Eurozone In September, the Euro-area’s economic sentiment index (ESI) declined (3.4) points to 95.0 vs August, driven by worsening sentiment across every sector, particularly in industry and services. Italy (down 5.1 points), France (down 3.5 points), the UK (down 3.4 points) and Germany (down 2.1 points) all declined in sentiment. Euro-area retail sales in July rose 0.2% from June and fell (0.2%) compared to the prior year.

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Emerging Markets China’s August exports climbed 24.5% vs 20.4% in July, while imports rose 30.2% in August vs 22.9% last month. Consequently, China’s August trade surplus shrank to $17.8bn from $31.5bn in July. China’s August consumer prices increased 6.2%, continuing to exceed the government inflation target of 4%. August retail sales rose 17.0%, in line with 17.2% in July. India’s August exports climbed 44.2% vs 81.79% in July, while imports rose 41.8% in August vs 51.5% last month. As a result, the trade deficit increased to $14.1bn from $11.1bn in July. Russia’s annual retail sales in August climbed 7.8% vs LY. Real disposable income rose 1.4% in August.

UNITED STATES The Reuters/University of Michigan’s Final Index of Consumer Sentiment in September increased to 59.4 from 55.7 in August amidst expectations for economic stabilisation rather than worsening conditions. August retail trade sales increased 7.5% vs LY and up 0.1% from July.