The New Tiffany-LVMH Deal Changes the Landscape for Luxury Brands. Here are Two that are Benefitting from an Emerging Global Trend.
The Tiffany (TIF) brand represents the epitome of style and luxury across the world. That’s why French conglomerate LVMH (LVMUY) is buying Tiffany in the biggest luxury deal ever for about $16.2 billion in cold hard cash!
For many Americans, it’s a sad development since it ends Tiffany’s 182-year reign as the leading stand-alone luxury brand in America. But Tiffany’s had been struggling a bit as revenue was coming in at a slower rate in 2019 than 2018, when the company was in a midst of a turnaround. In particular, Tiffany’s business is heavily dependent on foreign tourism and big spenders splurging at its flagship stores; Chinese visitors to America are way down in 2019.
Meanwhile, LVMH (which owns Louis Vuitton) and other luxury stocks were weathering the slowdown in Japan, turmoil in Hong Kong and the trade war without breaking a sweat.
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This brings me to some interesting trends going on in luxury consumer markets that are making the industry deeper and broader than you might expect.
It’s not just the very wealthy (the so-called top 1%) that are driving luxury sales – at this point, it’s also the emerging global middle class that is splurging on a few luxury items as a sign of status. The Economist predicts that by 2030, 93% of the world’s middle class will reside in emerging markets controlling $6 trillion in buying power and a nice chunk of this will go to luxury products.
This trend seems to be happening around the world – including in America.
Of course, now that it’s been bought out, take Tiffany’s stock off the luxury investment menu. We now have to look elsewhere to benefit from these longer-term trends. My best ideas are two what I call “pink sheet blue-chip stocks,” Hermes (HESAY) and Burberry (BURBY).
One reason I like these luxury stocks is that their lower-end products start in the $100 to $200 range, which is within reach of the emerging middle class. Meanwhile, the companies have demonstrated strong pricing power with their higher end products.
Another plus is their brand strength with a key market – Asian tourists with money to burn. “It’s the global traveling luxury consumer that is dominating,” says Burberry Chief Financial Officer Stacey Cartwright.
Let’s take a brief look at each company.
2 Luxury Stocks to Buy
Hermes International (HESAY), a French luxury goods maker going back to 1837, is partially owned by LVMH, the owner of the Louis Vuitton brand. While Hermes crafts a wide assortment of belts, shoes, fragrances, handbags and gloves, it’s best known for its iconic premium silk scarves and ties.
An elegantly crafted Hermes scarf is highly prized (and priced) and this translates into impressive profit margins. The company made a big splash by introducing a sari for India. The sari is a silk cloth draped around a woman’s body and is a must for many Indian women for special events and formal evenings.
Hermès bags are handcrafted and are priced at the top end at an eye-popping $150,000. It sells its products through a network of 310 stores (including 219 directly operated stores worldwide) and its stock has had an impressive run in 2019, surging 37%.
Burberry (BURBY) was founded in 1856 and this iconic British brand and its products share many of the characteristics of Hermes.
I remember well that Japanese shoppers during the 1980s could not get enough of Burberry’s bags, ties and coats, and the same is now happening throughout the Pacific Rim. A survey of high-end department stores by Credit Suisse suggests that Burberry’s brand is equal to that of Chanel, Louis Vuitton and Hermes.
As of March 31, 2019, the company operated 233 mainline stores, 146 concession stores, 52 outlets, and 44 franchise stores. Burberry’s strategic plan includes opening dozens of new stores in emerging markets. And Burberry stock is up 27% so far in 2019.
These luxury stocks tap into sizable growth markets with healthy profit margins, so consider adding some luxury to your portfolio for 2020.