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Posted 3/15/99
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Louis Vuitton Moet Hennessy, Gucci Group and Tiffany vs. S&P 500 over the past year
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Sectors & Trends
Luxury stocks aren't just for the super-rich
Forget the Rolls. Consider conspicuous consumption via shares in Gucci, Tiffany and Louis Vuitton. All could be poised for growth.
By Risa E. Kaplan
Perhaps the receipts from your trip to Europe last week are sprawled on your marble writing desk and read like this: $1,800 for a set of sheets bought in Milan; $20,000 for the room at the Ritz in London; $22,000 for that canary and white diamond brooch.
If so, you prove that the rich are different from the rest of us. And while most folks who didn't get in on the initial public offerings of Yahoo! (YHOO, news, msgs) and broadcast.com (BCST, news, msgs) can't afford these luxuries, it might be smart to consider investing in companies benefiting from the rather large number of people who did.
Although hurt by the Asian currency crisis, these companies -- including Louis Vuitton Moet Hennessy (LVMHY, news, msgs), Gucci Group (GUC, news, msgs) and Tiffany (TIF, news, msgs) -- soon could be the recipients of extravagant spending coming from America's new high-tech millionaires (and billionaires).
Let's go through a short history lesson of wealth. In the 1980s, those American Express receipts belonged to an Arab sheik, in the 1990s they belonged to a Japanese mogul and now they belong to Mr. Joe Smith, the "New Rich American." Money from Wall Street, real estate, inheritances and Internet IPOs has fueled hope for increased spending by a younger generation of wealthy Americans.
Spending up to $100,000 for a watch worn daily is not uncommon, commented Daniel J. Phillips, publisher of Robb Report magazine, a publication focused on luxury lifestyles. In the 1980s, he says, "It was 'show and go,' while hoping to make the mortgage payment. Now it is financial planning with lots of disposable income buying family compounds, $5,000 suits, super yachts and airplanes." From New England, where Phillips publishes his magazine, he said, "The young, new wealthy along with the boomers are spending on themselves and their loved ones -- with little to stop it."
During various times in the 1990s, luxury was considered passe and any sign of recession sent it into hibernation. But Gary Walther, editor in chief of Departures magazine, is not worried, because luxury always makes a comeback. "Luxury has been around for the modern consumer for about 100 years. It has a very durable track record, and now there is even more money."
Let's take a closer look at some of the top luxury players.
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"We are in Asia for the long term, not for the short. I am certain of double-digit growth."
--Bernard Arnault, chairman of Louis Vuitton Moet Hennessy
The grand dame of the luxury trade today is Louis Vuitton Moet Hennessy. A Paris-based company trading on Nasdaq as an American Depositary Receipt, it is controlled by Chairman Bernard Arnault. The company owns such high-end brands as Dom Perignon, Moet & Chandon, Hennessy, Louis Vuitton, Celine, Christian Dior, Givenchy and Christian Lacroix.
Last year, Louis Vuitton shares were slammed as the Asian currency crisis emerged, Japanese and Taiwanese being among the world's leading buyers of luxury goods. Back in October, the stock traded as low as $25 a share as investors and institutions left in droves. But Arnault rallied the stock with sanguine comments and hard work, and the stock has returned today to over $45. In a recent interview he said, "We are in Asia for the long term, not for the short. I am certain of double-digit growth." He points out that worldwide sales last year were up 9.7% to $7.9 billion, even if profits rose by less than a quarter of that.
To reach double-digit revenue growth and increase profits, Arnault plans to steer Louis Vuitton into the role of luxury-goods retailer, as opposed to its current role of wholesaler. He scooped up French perfume retailer Sephora -- hoping that by producing and retailing merchandise, net margins will increase. Arnault also paid $2.5 billion for 61% of the Duty Free Shops retail chain. Unfortunately, he did it at the worst possible time, just before the Asian crisis hit and when its value was at a premium. Plans are in the works to jolt Duty Free Shops' revenues by adding more prestigious and "hot" merchandise to create a one-stop shop for big-spending clientele.
Louis Vuitton also agreed to pay $176.3 million to acquire Krug champagne from Remy Cointreau SA. European newspapers have even reported that Arnault wants to acquire designers Gianfranco Ferre and Giorgio Armani.
David Wolfe, a trend forecaster and creative director of Doneger Group, says Arnault is disappointed that French designers Givenchy and Dior have done so poorly, but is willing to cut losses and is eyeing the successful Italian fashion houses.
Playing that theme, Louis Vuitton recently increased its stake in Gucci to 34.4%. Gucci immediately fought back with a poison pill, decreasing the Louis Vuitton percentage interest by issuing new shares with an employee stock ownership plan. Arnault must be careful. If Gucci president and CEO Domenico De Sole and designer Tom Ford walk, Louis Vuitton could be buying trouble.
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With its stock doubling since its lows of last September, what makes Gucci so hot now? Is it the $6,400 pair of men's lilac trousers with rhinestones and feathers that people love? Robert di Mauro, a trend forecaster with ESP Partnership in New York, says Gucci is successful because it uses "flash to sell the basics and has captured the hip youth market." In addition, Ford and De Sole capitalized on strong cash flow to bring licensed products back in-house and increased the proportion of directly operated stores. Gucci also wowed Wall Street by growing revenues at a compound annual rate of 88% from 1994 to 1996.
Though Gucci's same-store sales fell by more than 20% last year, operating margins were 22.2%. If Gucci continues profitability, this can be leveraged in the future as Asian and U.S. sales begin to pick up. Donaldson, Lufkin & Jenrette analyst Dana Cohen in December upgraded Gucci to a "buy," saying "yen valuations will have positive implications for (Gucci's) global sales." Cohen projects fiscal 1999 earnings per share at $2.93 and fiscal 2000 earnings at $3.18 per share, based on continued strength in Hawaii and Hong Kong and new product launches of such lines as home furnishings and perfume. Analyst Janet Kloppenburg of Robertson Stephens also rates Gucci a "buy."
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Tiffany
Tiffany has worldwide brand recognition. Whether one buys a $30 sterling silver pen or a $50,000 diamond ring, it is packaged in the signature blue box with the white satin ribbon. Though many thought Tiffany offerings were only for the rich, the business model has thrived, introducing consumers to the affordability of Tiffany mainly through advertisement and direct-mail orders. (Tiffany will mail out 24 million catalogs in 1999.)
As it serves as retailer, designer, manufacture and distributor, 90% of the products are exclusive to Tiffany. In fewer than 10 years, the company has gone from net sales of $290 million to over $1 billion in fiscal 1997. Two weeks ago, Tiffany reported its fiscal 1999 earnings were up 24% to $1.54 per share and net sales rose 15% to over $1.1 billion. A model of earnings consistency over the last five years with 20% growth, Tiffany is expected to grow by about 16% over the next five years, according to Mark Friedman, retail analyst at Merrill Lynch.
Says Tiffany spokesman Mark Aaron: "We are well positioned in the future." He cites creativity in marketing, expansion of retail stores and opportunities to build awareness with affordability and value. "With only 34 stores in the U.S., the company has significant potential ahead." The company plans to expand to 50 stores in the U.S. and to add new stores in the United Kingdom.
Kloppenburg rates Tiffany a "buy." In a recent report, she said, "With the stock trading at 21 times fiscal 2000 (EPS) estimates of $3.25, the stock is poised for upward multiple revision." She notes that it is one of the most well-organized companies in specialty retailing. Friedman also rates it a "buy" and has a 12-month price target of $72.
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With the emergence of online shopping, will a wealthy socialite be motivated to click on her platinum-plated mouse to buy lavishly online? Tiffany thinks that for specific occasions, the answer is yes. The company plans to sell mid-priced offerings on its Web site by the 1999 holiday season.
Big-name auctioneer Sotheby's Holdings (BID, news, msgs) also conducts some high-end auctions online, but doesn't rely heavily on the Internet. Walther believes there are difficulties for luxury consumption online. To spend a premium, the discriminating shopper must experience ambience, knowledgeable salespeople, and very focused, personal attention. All three of these traits are inherently missing in Internet sales. When purchasing a $90,000 car, the nouveau rich are not known for doing it quietly.
If a few dollars are burning a hole in your pocket, but a $1,400 Gucci dog bed, a case of Dom Perignon or another diamond ring seem impractical, these luxury stocks, trading at a slight discount, may just have what it takes to make a technology-jammed portfolio sparkle.
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