Luxury losses
22 January 2019
In recent months, much has been written about the struggles of mainstream retailers and their falling share prices, however, David Lewis of FIS explains why elite stores are no different
Image: Shutterstock
When considering the purchase of high-end luxury goods, including jewellery, cars, boats and even houses, if you have to ask the price, then you probably can’t afford it. This maxim is there to suggest that those buying luxury goods are rather more immune to economic factors that affect people on lower incomes who might consider interest rates and the cost of their mortgage or rent when considering significant purchases. Logically, then, the share price of purveyors of such luxury items should be relatively immune to most economic factors, or at least those factors that affect the majority of consumers. But is that really the case?
It might be natural to assume that small changes in interest rates, for example, won’t affect high earners’ spending patterns, but bigger macroeconomic and even social issues may well be a cause for concern for high-end marques. One such influence is the Chinese economy and its slowing rate of growth. Only this week, Jaguar Land Rover announced a £2.5 billion cost-saving programme and, while they would not confirm this included job losses, it is hard to imagine achieving those kinds of savings without up to 5,000 jobs going. This is particularly likely when some manufacturing plants are already on short time or have experienced periodic shutdown to “balance production levels”. The slowdown in China has been cited as a primary cause, with Chinese nationals thinking harder about committing to big-ticket items.
Economic reliance on the future growth of the Chinese economy appears to be ever more acute, perhaps even eclipsing that of the US economy as the world “pivots to Asia,” to quote the analysis of the former US President back in 2016. Other luxury goods reliant on the growth of high-end consumer brands in China include watches. Switzerland’s biggest export market for timepieces is Hong Kong, gateway to mainland China sales. Hong Kong and greater China account for 25 percent of sales for Richemont (Compagnie Financiere Richemont SA, CRF), owner of Cartier, but including sales to Chinese nationals abroad, this rises to 44 percent. While this is a significant level of concentration of one, albeit large, geographical segment, both Swatch (The Swatch Group AG, UHR) and Salvatore Ferragamo (Salvatore Ferragamo SPA, SFER) rely on China for even higher proportions of their annual sales.
Social issues can also affect financial performance, but these are significantly harder for analysts to predict. France has seen significant amounts of civil unrest in the last months of 2018, some of which has spilt over, although with less intensity, into 2019. Known as the “Yellow Vest Movement,” their prime aim was to address issues affecting low-paid workers in France through protest and direct action, but they have also had a direct effect on the economy, including the high-cost brands such as Richemont, LVMH, Moncler and Hermes. Richemont is least exposed, with France representing just 1 percent of the company’s annual sales, but with 14 percent and 10 percent, respectively, Hermes and LVMH have suffered more from the pre-Christmas shutdown across their Paris flagship stores.
Short sellers have been quick to capitalise on some of these economic and social pressures, but not in a uniform pattern. Richemont and Salvatore stand out from the pack, with Richemont seeing a significant climb in short interest volume beginning in the fourth quarter of last year, up by over 190 percent from 1 October. Richemont shares saw a 12-month trading low of CHF 60.44 just after Christmas, representing a 39 percent drop from the 12-month peak of CHF 99.02 seen in May. The shares have recovered a little in January, reaching over CHF 67 by January 10. Salvatore followed a remarkably similar pattern, reaching a peak of €25.50 in May and hitting a 12-month low of €17.17 in the first week of January, a loss of some 33 percent. Again, the shares have recovered a little, closing at €17.83 on 10 January. Figure one shows the short interest volume for both Richemont and Salvatore over the last 24 months, identifying a reducing trend through 2018 for Salvatore, matched by the levels of utilisation, suggesting a constant level of supply as large investors kept hold of their investments. Richemont saw much greater volatility in short interest volume, rising sharply in February and staying high through to October, before bouncing back through November and December. Utilisation levels, by contrast, stayed within much narrower bands, suggesting significant changes in ownership between large funds that lend and those that do not participate in the lending market. At 10 times the market capital of Salvatore, Richemont is likely to see larger flows in and out as investors adapt their strategies, but the differences in volatility between volume and utilisation are marked.
While not all economic influences that affect share prices can be identified or predicted, such as social unrest or extreme weather events, some, such as the relative health of significant economies like China, can be more easily related to share price fluctuations. The impact on the luxury brands discussed here illustrates that the position a brand occupies in the market, with regard to price point and the relative wealth of their clients is no protection from the economic headwinds blowing some economies off course. Much has been written about the struggles of the more mainstream retailers, from Sears to Debenhams, but the falling share prices among the elite stores go to show that they are really no different to their lower-grade cousins in the end.
Figure one: Short interest volume two years to January 2019
Source: FIS’ Astec Analytics
It might be natural to assume that small changes in interest rates, for example, won’t affect high earners’ spending patterns, but bigger macroeconomic and even social issues may well be a cause for concern for high-end marques. One such influence is the Chinese economy and its slowing rate of growth. Only this week, Jaguar Land Rover announced a £2.5 billion cost-saving programme and, while they would not confirm this included job losses, it is hard to imagine achieving those kinds of savings without up to 5,000 jobs going. This is particularly likely when some manufacturing plants are already on short time or have experienced periodic shutdown to “balance production levels”. The slowdown in China has been cited as a primary cause, with Chinese nationals thinking harder about committing to big-ticket items.
Economic reliance on the future growth of the Chinese economy appears to be ever more acute, perhaps even eclipsing that of the US economy as the world “pivots to Asia,” to quote the analysis of the former US President back in 2016. Other luxury goods reliant on the growth of high-end consumer brands in China include watches. Switzerland’s biggest export market for timepieces is Hong Kong, gateway to mainland China sales. Hong Kong and greater China account for 25 percent of sales for Richemont (Compagnie Financiere Richemont SA, CRF), owner of Cartier, but including sales to Chinese nationals abroad, this rises to 44 percent. While this is a significant level of concentration of one, albeit large, geographical segment, both Swatch (The Swatch Group AG, UHR) and Salvatore Ferragamo (Salvatore Ferragamo SPA, SFER) rely on China for even higher proportions of their annual sales.
Social issues can also affect financial performance, but these are significantly harder for analysts to predict. France has seen significant amounts of civil unrest in the last months of 2018, some of which has spilt over, although with less intensity, into 2019. Known as the “Yellow Vest Movement,” their prime aim was to address issues affecting low-paid workers in France through protest and direct action, but they have also had a direct effect on the economy, including the high-cost brands such as Richemont, LVMH, Moncler and Hermes. Richemont is least exposed, with France representing just 1 percent of the company’s annual sales, but with 14 percent and 10 percent, respectively, Hermes and LVMH have suffered more from the pre-Christmas shutdown across their Paris flagship stores.
Short sellers have been quick to capitalise on some of these economic and social pressures, but not in a uniform pattern. Richemont and Salvatore stand out from the pack, with Richemont seeing a significant climb in short interest volume beginning in the fourth quarter of last year, up by over 190 percent from 1 October. Richemont shares saw a 12-month trading low of CHF 60.44 just after Christmas, representing a 39 percent drop from the 12-month peak of CHF 99.02 seen in May. The shares have recovered a little in January, reaching over CHF 67 by January 10. Salvatore followed a remarkably similar pattern, reaching a peak of €25.50 in May and hitting a 12-month low of €17.17 in the first week of January, a loss of some 33 percent. Again, the shares have recovered a little, closing at €17.83 on 10 January. Figure one shows the short interest volume for both Richemont and Salvatore over the last 24 months, identifying a reducing trend through 2018 for Salvatore, matched by the levels of utilisation, suggesting a constant level of supply as large investors kept hold of their investments. Richemont saw much greater volatility in short interest volume, rising sharply in February and staying high through to October, before bouncing back through November and December. Utilisation levels, by contrast, stayed within much narrower bands, suggesting significant changes in ownership between large funds that lend and those that do not participate in the lending market. At 10 times the market capital of Salvatore, Richemont is likely to see larger flows in and out as investors adapt their strategies, but the differences in volatility between volume and utilisation are marked.
While not all economic influences that affect share prices can be identified or predicted, such as social unrest or extreme weather events, some, such as the relative health of significant economies like China, can be more easily related to share price fluctuations. The impact on the luxury brands discussed here illustrates that the position a brand occupies in the market, with regard to price point and the relative wealth of their clients is no protection from the economic headwinds blowing some economies off course. Much has been written about the struggles of the more mainstream retailers, from Sears to Debenhams, but the falling share prices among the elite stores go to show that they are really no different to their lower-grade cousins in the end.
Figure one: Short interest volume two years to January 2019
Source: FIS’ Astec Analytics
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