Some Luxury Brands Have Priced Themselves Out of Reach

livemint.com:

A few lucky luxury brands have always sold their goods to people who can afford them, no matter what shape the economy is in. Others that are trying to muscle in on this ultrarich patch risk leaving their usual customers out in the cold. Shares in Hermès rose 5% in early European trading Friday after the Birkin handbag maker said sales for the three months through December rose 18% compared with a year earlier.

A 7% average price increase for Hermès goods in 2023 flattered the brand’s top line and helped boost the full-year operating margin to a record high of 42%. Demand is strong in all regions, including in the U.S., where Hermès recently opened new stores in Aspen and Topanga. This results season, shareholders have been pleasantly surprised to learn that shoppers are still spending on designer baubles.

Luxury stocks have been weak recently because of worries that sales would suffer as Americans and Europeans sobered up following a bumper three-year spending spree. Even after reassuring results from heavyweights like LVMH Moët Hennessy Louis Vuitton, major luxury stocks are still 15% cheaper than their five-year average, based on multiples of expected earnings. Hermès is the exception, trading at a 6% premium.

Brands’ performance is becoming polarized, though. Ultra-pricey labels like Brunello Cucinelli boosted sales by 16% in their latest quarter. LVMH managed 10%, slightly above the company’s 9% average over the past 35 years.

But more fashion-oriented brands such as Burberry and Salvatore Ferragamo reported sales declines last quarter. So did Yves Saint Laurent, Bottega Veneta and Gucci, all owned by Paris-listed Kering. Inflation has eaten into the purchasing power and confidence of middle-class shoppers.