Over the past five years, global luxury goods companies have performed slightly below the market average. The S&P Global Luxury index has risen by less than 50 per cent over this period, while the main S&P 500 index has gained 85 per cent. The most robust gains among luxury companies came after the pandemic shock of 2020, when stocks in the sector gained an average of as much as 180 per cent from the bottom, peaking in November 2021. Since then, stagnation has been evident, heavily influenced by the economic situation following the outbreak of war in Ukraine. The stagnation is mainly in Europe, where many companies in the sector originate from. Demand for luxury goods is also slowing down in China, which is an increasingly important market for this segment. The sales performance of luxury companies is therefore strongly linked to the global economic situation, particularly in developed countries, which should be taken into account when analysing their potential.
Table of contents:
- Investment success does not come from buying the good stuff....
- High-quality homeware from Williams-Sonoma
- Coach, Kate Spade, or Stuart Weitzman from Tapestry
- Jewellery Kay, Zales and Jared from Signet Jewelers
- Tough situation on Christian Dior's stock price
Investment success does not come from buying the good stuff....
Before making an investment decision, it is worth remembering the words of the famous investor Howard Marks: ‘Investment success does not come from buying good things, but from buying them at a favourable price.’ A similar approach is taken by New York University professor Aswath Damodaran, who emphasises: ‘Keep your eyes on the price.’ Hence, the selection of companies for an investment portfolio should not be based solely on liking their products; the main factor should be the price we pay for the company's future earnings. To assess whether an entity is undervalued or overvalued, valuation ratios such as the Price to Earnings (P/E) ratio can be used. For the S&P Global Luxury index, this is 18, while for the S&P 500 index it is as high as 29, meaning that companies in the luxury sector are relatively cheaper. However, this ratio does not take into account expected earnings growth, which may be higher for the S&P 500 due to its strong exposure to technology developments, including artificial intelligence.
Source: TradingView
It is therefore worth looking at the comparative advantages of individual companies, which may arise from brand recognition, the efficiency of production processes or the possession of unique patents. For this purpose, the return on invested capital (ROIC) ratio, which should exceed the cost of capital, can be helpful. In this way, the company generates additional value for stakeholders. A high ROIC, usually above 15 percent, indicates solid growth potential.
High-quality homeware from Williams-Sonoma
A company that fits these criteria perfectly is the US-based Williams-Sonoma Inc. which retails luxury home goods such as kitchen equipment, furniture and home décor. It operates under well-known brands such as Pottery Barn and West Elm. The company's shares are trading with a P/E ratio of 15.9, which is below the market average, and the company has a very high and growing ROIC of 30.7 percent. Its competitive advantage is operational efficiency, with high operating margins of 18.4 percent at the same time.
Source: Conotoxia MT5, WillSonoma, Daily
Coach, Kate Spade, or Stuart Weitzman from Tapestry
Another example from the luxury sector is Tapestry Inc, a US fashion company that owns brands such as Coach, Kate Spade and Stuart Weitzman, specialising in luxury handbags, clothing and accessories. Tapestry shares trade with a P/E ratio of 14 and a ROIC of 18.9 percent. Like Williams-Sonoma, Tapestry achieves a competitive advantage through efficient production, which is reflected in a relatively high operating margin of 18.8 percent.
Source: Conotoxia MT5, Tapestry, Daily
Jewellery Kay, Zales and Jared from Signet Jewelers
Also of interest is Signet Jewelers Ltd., the world's largest jewelry retailer, operating shops under the Kay, Zales and Jared brands, offering a wide range of jewelry and watches. The company's P/E ratio is only 9.2, with an ROIC of 18.3 percent. Despite a relatively low operating margin of 7.9 percent, the company achieves a competitive advantage through economies of scale.
Source: Conotoxia MT5, SignetJewelers, Daily
Tough situation on Christian Dior's stock price
An example of a company achieving a comparative advantage through high margins is Christian Dior SE, a French company specialising in luxury goods, particularly in the areas of fashion, cosmetics and perfumes. Dior owns a renowned brand known for its haute couture collections, clothing, leather handbags, footwear and jewelry. The price-to-earnings ratio for the company is 17.8, which is close to the market average, but the high operating margin of 25.4 percent allows the company to achieve a ROIC of 13.5 percent.
Source: Conotoxia MT5, Dior, Daily
Grzegorz Dróżdż, CIIA, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
The above trade publication does not constitute an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No. 596/2014 of April 16, 2014. It has been prepared for informational purposes and should not form the basis for investment decisions. Neither the author of the publication nor Conotoxia Ltd. shall be liable for investment decisions made on the basis of the information contained herein. Copying or reproducing this publication without written permission from Conotoxia Ltd. is prohibited. Past performance is not a reliable indicator of future results.
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