I guess I’m not sure I’d look good in a Burberry Bucket hat
And at £320 a piece, am not about to “check”
“But Luxury goods companies are quality businesses founded hundreds of years ago with wide moats..”
Yes, but many Banks pre-dated them and it’s much easier to launch a luxury brand today than a bank
Now I agree that many “have been” quality businesses (past tense) – Burberry enjoyed average Gross margins of 69% and ROEs of 22% over the past 10 years
But those variables haven’t stopped the share price from falling 72% since April ‘23 highs to 13-year lows
Things change
And we want to be alert to change
So, yes they WERE outstanding businesses when interest rates were low and money was free,
But maybe those days are over
Perhaps today’s environment of higher interest rates favours banks
Do you know that the European Banks Index has beaten the Goldman Sachs European Luxury Goods index by:
48% over 1 year
66% over 2 years
71% over 3 years
13% over 5 years
Banks aren’t widely considered “quality” businesses but it seems their business models offer better earnings predictability than luxury goods companies today
Ok, but hasn’t Luxury already taken the pain with the shares down a lot?
Maybe
Except Kering said in April
“Taking into account the deterioration of its revenue trends, the Group now anticipates a decline of 40 to 45% in first-half 2024 recurring operating income compared to the first half of 2023.”
This week Burberry warned, “The Luxury market is proving more challenging than expected” and “The weakness we highlighted coming into FY25 has deepened”
Even the mighty Richemont only reported 1% sales growth for the June quarter
And just because the share prices are down, doesn’t mean they offer value
The Luxury Goods index is still trading at 24x earnings
The European Banks index is trading at 7x
Remember that your return comes from 3 sources:
1) Earnings growth
2) Dividends
3) Re-rating
– Earnings growth seems off the table for luxury goods
– The dividend yield for most companies is below inflation
– And earnings multiples hover around 20x
Compare that to European banks where:
– AI cost savings, a resilient consumer, and buybacks could help earnings growth
– Many have dividend yields above 7%
– And their mid-single digit PE ratios offer some re-rating potential
So we’d love to buy luxury goods companies
But only at the right price – offering real returns
So do you think Value will beat Quality from here?
Yes, I think so
I know it hasn’t for the last 10 years
But things change
DISCLOSURE
Ranmore Global Equity Fund holds 0% in the companies mentioned
The content of this marketing material is provided for information purposes only and is not advice
Past performance is no guarantee of future performance
As a value guy, I’m scared of high prices and so have always struggled with luxury goods companies
A