Price Hike On Luxury Goods

The luxury-goods sector is going out of fashion. Aquascutum, whose customers included Humphrey Bogart and Lauren Bacall, has threatened mass redundancies just days after renowned French fashion house Christian Lacroix went into administration. Yet the luxury-goods sector continues to trade at a glitzy premium to the wider market.

In the past that premium reflected an assumption the sector's super-rich target customers would be immune to an economic downturn. But this recession has proved that theory wrong. Sales are falling across the sector as even big spenders have cut back, influenced as much by the idea it's no longer fashionable to flaunt wealth as by waning incomes.

Yet since the stock market rally began in March, luxury goods have outperformed the wider market despite a raft of bad news and no sign that extravagant spending is back in vogue. While the larger groups with diversified products, such as LVMH and PPR, are better placed to weather the downturn than individual fashion houses such as Lacroix, their premiums are nonetheless starting to look overdone.

A few months ago Burberry traded at a 10% premium to the European market, now that's more than doubled to 25% while LVMH now trades at a 33% premium to the market compared to 27% at the end of March. Even the premiums of those companies, such as PPR, which trades below Burberry and LVMH due to its less iconic brands, have risen. But trading conditions have shown no signs of improvement.

Granted the demise of Lacroix doesn't come as a huge surprise. The designer never turned a profit in 22 years as his flamboyant haute couture struggled to make the transition to ready-to-wear collections. But it was the decision by major stockists such as Saks and Neiman Marcus to reduce orders for the fall collection that was the final straw.

As the top-end department stores struggle, they are likely to cut back still further on orders which will hit the whole sector. In that context, the trading multiples of the luxury-goods sector are starting to look as highly priced as the haute couture they represent.

Source: The Wall Street Journal

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