Inflation is taking a big bite out of many areas of the discretionary retail sector, including clothing and fashion, jewelry and automobiles. One segment that isn’t being negatively impacted by inflation, however, is luxury wristwatches.
Although the U.S. consumer has remained resilient in the face of persistent inflation, we’re beginning to see the impacts on discretionary spending. Consumers are slowing down spending on big-ticket items (although they continue to spend on experiences), clothing and fashion, jewelry and automobiles.
Perhaps surprisingly though, one segment that’s avoided these negative inflationary effects is that of luxury wristwatches.
As counterintuitive as it may seem in an age of smartwatches and belt-tightening, the makers of expensive Swiss watches just had one of their best years ever and are maintaining a rosy outlook moving forward.
Shown below is a chart that illustrates the impressive growth trend in Swiss luxury watches over the last two decades—but more especially since the launch of the popular Apple watch. It was widely assumed that the advent of the electronic Apple watch would be the death knell of the Swiss watch industry as younger generations of consumers seemingly preferred the functionality of “smartwatches” to the more staid, mechanical timepieces of yesteryear.
As it turned out, that wasn’t the case at all. Commenting on this trend, Francois-Henry Bennahmias, CEO of luxury brand Audemars Piguet, told CNBC: “When the Apple Watch came out in 2014…they said no young person would ever wear a watch again, if they did it would be a smartwatch. The funny thing is, we thought that young people couldn’t appreciate exclusivity, craftsmanship, watchmaking. They did.”
Indeed, the luxury watch industry has experienced a veritable explosion in demand since the Covid crisis, as people with money to spare have spent more of it on collectible items like wristwatches instead of on dining out or shopping at physical stores.
A testimony to the persistence of this trend is that Swiss watchmakers had a stellar year in 2022, which boasted sales not seen since before Covid, while also topping the previous record year of 2021. Providing additional perspective, the Federation of the Swiss Watch Industry said the luxury watchmaking sector “has been on a path of solid growth,” which allowed it to achieve record performance last year.
Swiss watch exports jumped a respectable 11%, to $28 billion in 2022, as the sector benefited from the “strong demand for luxury products and the increase in global wealth,” according to the Federation. The industry group highlighted the particular sales success of “entry-level” watches (luxury watches that cost the least, though still typically in the $5,000 to $10,000 range), which it said were also a resounding success and ended the year on a positive note. (This growth segment of the luxury watch industry speaks to the aspirations of Millennial and Gen-Z customers.)
Geographically, the biggest consumers of luxury watches today are the United States and Europe, both of which are benefiting from strong demand trends from inbound tourists and wealthy collectors. Sales to China are also on the rebound after that nation’s reopening from last year’s lockdowns.
With that said, let’s take a look at two prominent luxury watch stocks. Both companies had a good year in 2022 (and are forecasting continued strength in 2023 and beyond).
2 Luxury Watch Stocks with Momentum
Compagnie Financiere Richemont (CFRUY), more commonly known as Richemont, is a Swiss luxury goods holding company perhaps most famous for its Cartier timepieces and Montblanc watches and pens. It’s currently the fourth-biggest luxury company in the world by market cap, with a portfolio of some 26 businesses, including many of the leading luxury jewelry and fashion brands.
The stock has benefited from a recent series of upgrades from Wall Street, which sees post-lockdown “revenge shopping” among Chinese customers boosting sales this year. An analyst at a major investment bank observed that “the reopening of mainland China is a game changer for the [luxury] sector.” For full-year 2022, Richemont posted revenue of over $20 billion that increased 27% from the previous year. Wall Street sees modest 7% sales growth this year, but this could easily prove too conservative if China’s rebound is stronger than most economists anticipate (and early signs are pointing to this).
Incidentally, it has been widely rumored that Richemont is a takeover target for another major luxury group, which leads us to…
LVMH Moët Hennessy Louis Vuitton (LVMUY), the world’s leading luxury group and owner of brands like Tiffany & Co., Christian Dior and Fendi, is led by the world’s richest man Bernard Arnault. Arnault reportedly has his sight set on Cartier (owned by Richemont), viewing Richemont’s jewelry and watch brand as integral to growing LVMH’s own jewelry segment, which includes brands such as Tiffany & Co., Bvlgari and Chaumet.
As with Richemont, LVMH is expected to be driven by China’s reopening this year, particularly as flight capacity begins to ease. (China is a critical growth driver for the company’s Asia segment.) First-quarter sales for LVMH grew over 20% from a year ago, and analysts expect revenue to increase in the mid-teens percent this year while earnings are expected to soar nearly 30%.
“LVMH had an excellent start to the year, within a geopolitical and economic environment which remains uncertain,” the company said, adding that Europe and Japan benefited from “robust demand from local customers and international travelers,” while the U.S.—a market which continues to grow—had a “steady performance.”
Significantly, LVMH pinned its future hopes on Asia, noting that it experienced a “significant rebound” following the lifting of health restrictions,” paving the way for a solid performance in 2023.
