Update on the Luxury Sector: 2nd Quarter 2009

Today we’d like to continue our commentary on the luxury retail sector by relaying some comments from today’s Financial Times:

Luckily, for luxury goods companies struggling to flog expensive creations to increasingly cash-deficient consumers, even a worldwide recession does not stop people from getting married [Emphasis ours].

Executives at LVMH [Louis Vuitton Moet Hennessy] the Paris-based group, gave thanks for that this week as sales of diamonds shone among otherwise lacklustre sales of watches and jewellery….

Demographic trends were a major reason for our ID=1198">original recommendation of the luxury retail sector, and it continues to be the foundation of our optimism.  The upward trend in marriages is durable, driven by Generation Y (aka the "Echo Boomers" or the "Net Generation").  This enormous cohort of young adults--the children of the Baby Boomers--is currently graduating from high school and college.  This means that we have a decade-long boom in weddings and all of the luxury trappings that go with them--like diamond rings.  Investors with a long-term time horizon should find wedding-related luxury to be an intriguing buy.

The FT also touched on another major plank of our investment thesis: luxury retail as a play on the growth in emerging markets.  The FT writes,

The worst affected markets are the US, Japan and Europe while sales to Asian markets, especially China, continue to grow.

Emerging markets collectively absorb approximately 30% of global luxury goods, and we would expect this percentage to increase over time as incomes rise in those markets.

Finally, there is one final source of potential growth in the sector, one that the FT missed.  It's easy to write off the Baby Boomers as a force in the American consumer economy.  As a group, before the financial crisis they were already approaching the age at which people generally begin to spend less and save more: age 50.  Now, the collapse in stock and home prices have caused this process to accelerate.  Across the board, we expect to Baby Boomers to fade as an economic driver.  That said, we expect them to be a very large force with the luxury subsector.   Spending on many luxury products tends to grow as a person ages, well into the mid 50s.

So, put together, we have a powerful set of trends that should bode well for the luxury sector well into the next decade.  The next several quarters may continue to be weak, as the U.S. recession has shown no sign of recovery and many stores still have excess inventories of luxury goods.  But as a medium-to-long-term investment, we would reaffirm our positive comments on the sector.  

Charles Lewis Sizemore, CFA
www.charlessizemore.com

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