The 5 Biggest Threats to Luxury’s Remarkable Run



When we talk about pandemic stocks, we typically think about e-commerce retailers or direct-to-consumer brands that rode the lockdowns to record results, and fell back to earth just as quickly as the world opened up again. Luxury brands have experienced a gentler version of this roller coaster. Their wealthy clientele never stopped shopping, and the post-pandemic consumer boom has fuelled big increases in sales and profits. But investors think the category is running out of track: shares of most big luxury firms, among the best performers in 2020 and 2021, have underperformed the wider market this year.

Investors can be (and frequently are) wrong. Still, when LVMH, Kering, Hermès, Prada and Moncler report quarterly results this week, each is likely to put their best spin on the latest numbers while managing expectations for the future. They’ll also need to offer up a game plan for navigating tough times ahead.

Below are five potential ways the luxury party could end, in descending order of threat level:

1 — The Economy

It’s not looking good out there. Inflation continues to rise in most countries, and GDP projections keep getting revised down (the US and Eurozone will report both indicators this week; see the calendar below for more). Fortunately, the one economic indicator that’s remained strong is the one that matters most for the fashion industry: retail sales, which continue to exceed expectations in the US and some other markets. Luxury’s best customers are also relatively insulated from the wider economic picture. Many won’t even notice a mild recession, or whether gasoline prices are $4 or $5 a gallon. But brands will feel it if middle-class shoppers trade down from Louis Vuitton to Coach, or worse yet, keep carrying around last year’s handbag. And a deeper downturn would squeeze even wealthy consumers’ budgets.

2 — China

This week’s earnings cover the bulk of China’s “Zero Covid” lockdowns in Shanghai and other major cities. It won’t be pretty. Burberry reported quarterly sales rose just 1 percent after revenue in China plunged 35 percent. Brands like Gucci and Prada that have relied most on China for growth are the most exposed. That’s doubly true if China’s recent slowdown turns into a recession, or if its alliance with Russia turns into a broader move away from the West, luxury brands included. No wonder so many labels that once talked about China as the future are touting their ambitious American store expansion plans.

3 — Overexposure

Speaking of expansion plans, mega labels like Louis Vuitton and Chanel have seemingly put to rest the old idea that luxury brands can only grow so big before they run out of new customers, or lose their cachet. That bit of conventional wisdom is due for another test, as LVMH and Kering are promising to boost their biggest brands’ sales by billions of dollars in the next few years. Even the biggest brands have new markets they can enter, from cosmetics to furniture and hospitality. The plan is to sell lots more clothes too: Kering says it will open dozens of Saint Laurent and Gucci stores, both in luxury hotspots and relatively untested markets (Kering’s investor day presentation in June indicated at least three new Gucci locations are planned in Ohio alone).

4 — Currency Fluctuations

The euro is at parity with the dollar for the first time in 20 years. For now, there’s mostly upside for European luxury brands, which benefit from hordes of American tourists flexing their newfound spending power at the new Dior megastore in Paris. All those new Gucci boutiques in Ohio will be that much more lucrative for the brand, which thanks to currency fluctuations can charge 20 percent more for the same bag in Cleveland as it does in Milan. The downside is that the euro is weak for a reason: it’s acting as a proxy for the war in Ukraine, and the possibility that Russia will withhold energy supplies to the continent, triggering a recession.

5 — The Crypto Crash

Crypto millionaires and billionaires are some of luxury brands’ best new customers. Or were, anyway. With cryptocurrency and NFT prices crashing, some of the category’s biggest boosters, who once flaunted their wealth in head-to-toe Louis Vuitton or Gucci, are now fending off creditors. Brands say they’re still bullish on crypto, plowing ahead with NFT releases and plans to accept cryptocurrency in stores. One reason they can safely ignore the chaos is that none of these brands had invested all that much in the technology to begin with. If their next NFT project bombs, they can quietly drop plans for the next one. The reason crypto makes this list at all is that so many of the industry’s visionaries see web3 driving fashion’s future, from how we buy clothes to whether we wear them in virtual worlds in addition to the physical one. For that transition to happen, crypto needs to make a comeback.

What to Watch This Week

Monday

Bids for Ganni are due to majority owner L Catterton; China-focused investors like Sequoia China are believed to be the frontrunners

Tuesday

LVMH reports second-quarter results

US consumer confidence for June

The US Federal Reserve starts a two-day meeting focused on curbing inflation; a 0.75 percentage point rate hike is expected

Wednesday

Kering, Moncler and Shopify report quarterly results

Thursday

US second-quarter GDP; Goldman Sachs predicts a 0.7 percent increase

L’Oréal, VF Corp, Prada and Hermès report quarterly results

Friday

The US PCE Index — the Fed’s preferred inflation measure — is released

Euro area GDP and inflation updates

The Week Ahead wants to hear from you! Send tips, suggestions, complaints and compliments to brian.baskin@businessoffashion.com.

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