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Luxury Overturned by Covid-19 | Intelligence, Market Pulse, BoF Professional

London, United Kingdom – Knowing very well that the second quarter of 2020 would be the victim of the Covid-19 crisis did not help. Markets continued to react badly to announcements of spring results this month. Safilo, LVMH, Kering, Hermès, Prada, Moncler, Ferragamo, Richemont, Burberry, Brunello Cucinelli and Swatch all posted double-digit sales declines in their latest results, with the median decline in the second quarter of 40 to 50 percent. With rubbing salt in the wound, Moncler, Swatch and Prada reported operating losses for the first half of the year.

Companies’ reassurance that things were getting better seemed to fall on deaf ears, whether it was high double-digit growth in mainland China or triple-digit growth in e-commerce. LVMH’s financial director best summed up the situation in China by making it clear that domestic purchases by Chinese consumers could not compensate for the near-lack of purchases by Chinese tourists traveling abroad. This was coupled with the fact that, despite the increase, e-commerce still represents only a small part of the sales of most luxury players. For example, Kering’s e-commerce sales grew 72 percent in the second quarter, but nevertheless accounted for only 18 percent of retail sales.

Burberry solidifies its leading position in digital innovation in the luxury industry by opening its first “social retail” in Shenzhen in partnership with Tencent. Developed in conjunction with a smartphone widget on WeChat, the store aims to integrate white-gloved gaming, social media, e-commerce and customer service that can be accessed both at home and in the store. Other brands, including Bulgari, Gucci and Louis Vuitton have also developed a presence on WeChat, reaching more than 1 billion users and some have even introduced the concept of gaming to their brick and mortar stores, through claw machines and lucky gifts. For the time being, such an approach is reserved for mainland China.

July business activity was relatively subdued; the iconic French shoe brand Clergerie was sold to the French Legacy Group, a holding company controlled by private equity fund Mirabaud Patrimoine Vivant.

The Savigny Luxury Index (“SLI”) turned down this month, with the luxury sector posting one of its worst quarters ever, according to Bain & Company. The SLI fell just over 5 percent from a near-flat performance for the MSCI.

SLI versus MSCI

SLI chart July 2020

Go up

• Prada gained more than 11 percent this month as investors overcame the massacre of first half results to focus on the company’s strong recovery in China and online.

• Estée Lauder’s long-standing digital presence spanning nearly 50 markets, combined with recent cost-cutting measures and a renewed focus on China, has helped the group stay on top of the Covid-19 crisis. The beauty conglomerate’s stock price ended nearly 5 percent higher in July.

Crash

• Burberry stock took a nosedive this month as quarterly sales fell nearly 50 percent, coupled with plans to cut 500 jobs. The company is also struggling with the disastrous state of the Brexit negotiations. The stock lost more than a fifth of its value this month.

• Hermès declined nearly 8 percent, following the announcement of a 21.5 percent operating margin in the first half, a sharp drop from reported margins that were closer to 35 percent in the past. Nevertheless, this month’s price drop still leaves the legendary luxury group trading at a high premium to the SLI average.

What to watch

While many sighed in relief as the lockdown in Europe was gradually relaxed, the situation in the US remained worrying. Infection clusters are also starting to resurface, a clear sign that the threat is far from gone. When we count the cost of a complete blockage of their economy, most countries will do everything they can to accommodate flare-ups of Covid-19 without resorting to imposing universal lockdowns. But the risk is still there. Should this happen, the impact on consumer confidence and luxury sales could be truly devastating.

Sector valuation