Hermès continues to defy gravity

Savigny Luxury Index since Jan 1, 2007, courtesy of Savigny Partners
LONDON, United Kingdom — It’s all been a bit doom and gloom around here for months now, and I’m afraid the latest Savigny Luxury Index (SLI) does not deviate from this theme. Valuation multiples have dropped from a peak of 13x EBITDA (operating profit) in June 2007 to 8.5x EBITDA just before Christmas, effectively wiping billions off of the market capitalisation of luxury stocks.

But there is still some good news for so-called ‘AAA Luxury Brands’ in the throes of a synchronised economic downturn.

In Issue Seven of the Savigny Partners Newsletter, Managing Director Pierre Mallevays notes two seemingly conflicting trends emerging in the luxury goods market. “There has undoubtedly been a general downtrading movement, which is causing all to tighten belts and reduce overall spending. This is happening at all price points, and shows that luxury, as a category, is not immune to the crisis,” he notes.

“However, this has been accompanied by a lateral and uptrading phenomenon through which the luxury goods consumer has refocused towards the AAA blue-chip names: high perceived value, high quality, more durable goods which often – but not necessarily – means higher price points, moving away from the bling towards the timeless.”

So which brands are the best positioned to this value-based shopping trend?

“We expect the likes of Hermès, Patek Philippe, Louis Vuitton and Rolex in the luxury universe to more than hold up sales whilst others will continue to suffer decreases well into the double digits,” says Mallevays.

Indeed, the overall picture of the SLI is decidedly downbeat. Mallevays describes two major waves of de-rating in the luxury business since January 2007. The first wave affected “affordable luxury through either brand positioning (Burberry and Tod’s) or product focus (eyewear sector) and those lacking presence in the emerging markets (Bulgari and Tod’s). Stocks with a strong bias towards the US also took a beating (Coach and Tiffany).”

But it is the second wave late last year which has left the industry in a tailspin. “The affordable luxury category was particularly hard hit again. Burberry lost another 54% in its EV/EBITDA rating. The watch sector also took a serious beating, as we had predicted it would in our last newsletter, Richemont and Swatch showing a decline in their EV/EBITDA multiple rating of 39% and 32% respectively.”

And while even the major luxury groups, with diverse product and geographic coverage, were not spared, there has been a notable exception.

“One stock continues to defy gravity, abnormally so in our eyes. Owing to its super luxury brand positioning and ongoing bid speculation, Hermès’ rating increased by 32% since the peak of the market in early June 2007,” reports Mallevays, as he quips, “could a small float, a peculiar legal structure, rules pertaining to the company monitoring of family-held shares and the retail versus institutional make-up of the shareholder base provide keys to understanding such a situation?”