The market for luxury goods has been fueled by the mushrooming of high-priced fashion, leather goods and watches, just to name a few, that are sought out by the growing affluent in the U.S., Europe and China.
And while luxury stocks, like many other pockets of the retail sector, have seen some challenges due to COVID-19 headwinds, they've also shown resilience.
"In the context of a pandemic, [luxury goods] companies have demonstrated their strengths such as pricing power, high profitability, cash-rich balance sheets and the benefits of digital, all leading to record sales and profit levels," say a team of UBS Global Research analysts.
They identify three "themes" that will likely drive luxury stocks in 2022: Pricing power; margin gaps between outperforming and lagging names; and continued strength in the jewelry category, which lost market share during the pandemic. The team of analysts expect the luxury goods sector to see total forex-neutral revenue growth of 12% this year, even after reaching record sales in 2021.
BofA Securities equity strategists are also bullish on luxury stocks. "2022 will be the year the sector reinforces its (already strong) market position by reinvesting significant operating leverage into brand equity building initiatives supporting future revenue growth, creating a bigger moat, all while expanding margins," they write. The group sees 20% earnings growth this year, which is 10% ahead of the consensus.
Helping things along for luxury stocks will be consumers loosening their purse strings. According to Oxford Economics, Americans saved roughly $3.7 trillion during the pandemic. And the global forecasting firm expects them to spend $360 billion through the end of 2022, with more than 69% of that spending occurring at the hands of the wealthiest 20% of households.
With this in mind, here are three luxury stocks that could be poised to profit off this expected growth. Each of the stocks featured here trade over the counter in the U.S. through American depositary receipts (ADRs).
Data is as of Feb. 8. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
- Market value: $408.0 billion
- Dividend yield: 1.0%
LVMH (LVMUY (opens in new tab), $162.16) is the world's largest luxury company, and its diverse holdings include Tag Heuer, Moët & Chandon and Louis Vuitton.
The Paris-based company, valued at more than $400 billion, completed its $16-billion acquisition of Tiffany & Co. in early 2021. The acquisition helped LVMH post fiscal 2021 organic revenue growth of 40% in its watches and jewelry group after Tiffany took in record revenue, profit and cash flow for the period.
However, the real standout was the company's fashion and leather goods division, which houses several iconic brands, including Fendi and Christian Dior. It saw organic revenue growth of 47%. Total organic revenue for 2021 was up 36% from the prior fiscal year. What's more, the company's operational free cash flow for the year covered the entire cost of its Tiffany acquisition.
"Nothing short of remarkable" is how BofA Securities analysts described the company's financial results.
"We believe that LVMH's portfolio of strong brands, best-in-class execution, diversification of divisions and balanced geographic exposure means that it strikes a unique balance between strong cash generation and defensiveness and cyclicality," they write – all of which will likely appeal to investors into 2022. They have a Buy rating on LVMH, which they also say is one of their top picks among luxury stocks.
UBS analysts are bullish on LVMH too. They have it at Buy and believe it will be one of the best growth stocks in 2022.
The company's success has certainly been fruitful for Bernard Arnault, CEO of LVMH. Arnault has a net worth of $150 billion – making him the third richest person in the world, according to Forbes, just behind Tesla (TSLA (opens in new tab)) CEO Elon Musk ($151 billion) and Amazon.com (AMZN (opens in new tab)) founder Jeff Bezos ($177 billion).
- Market value: $152.2 billion
- Dividend yield: 0.4%
Hermes International (HESAY (opens in new tab), $145.30) is a Paris-based retailer that produces high-quality (and high-priced) Birkin handbags, silk scarves and luxury timepieces.
HESAY, whose iconic logo is of a Duc carriage with horse, sells its fashion, apparel and accessories through its 306 stores in 45 countries around the world.
In the first half of 2021, HESAY reported a 77% increase in revenue at constant exchange rates compared to the same period in 2020. That is up 33% at constant exchange rates compared to 2019. Sales in the first half of 2021 accelerated from the recovery in Europe and strong growth in the U.S.
This strength continued in the third quarter, with sales soaring 31% year-over-year at constant exchange rates. Each geographical region posted double-digit sales growth for the three-month period, led by a 48% year-over-year revenue rise in the U.S. Through the first nine months of 2021, Hermes' strongest segment was watches, which posted 92% year-over-year sales growth at constant exchange rates.
These results are just more of the same for HESAY, which has seen annual growth rates of 12.5% for revenue and 15% for net income over the last 10 years.
While the sector has bounced back after sustaining a significant sales contraction in 2020, Hermes may still have some residual effects because of its self-imposed production limits. It prefers to have long wait lists over accelerating production.
For example, the firm will not increase production of its leather goods more than 8%, even if it results in a shortage of its $9,000-plus Birkin and Kelly handbags, said Alex Dumas, Hermes executive chairman, in an analyst call.
During the pandemic, Hermes did not jettison renovating and opening new stores. Last summer, the retailer reopened its flagship store in Milan and opened its first store in the Detroit, Michigan, suburb of Troy. And in the fall, HESAY opened the doors at a new store in Miami, Florida.
BofA Securities analysts (Buy) think Hermes is one of the best luxury stocks out there for several reasons, including its strong brand heritage, sizable beauty opportunity and best-in-class margins.
"While Hermes is not cheap on 60x 2023 estimates, its premium valuation has not impacted its ability to deliver excessive shareholder returns," the analysts add. "Hermes has outperformed the market by 450% over the last 10 years and in seven of 10 annual periods." If that's not enough, the company is a coveted member of the European Dividend Aristocrats.
- Market value: $10.4 billion
- Dividend yield: 2.9%
An international luxury goods manufacturer and retailer, Burberry Group (BURBY (opens in new tab), $26.00) sells its trademarked women's and men's apparel, fashion accessories and fragrances across roughly 465 stores.
The London-based fashion powerhouse, known for its iconic trench coats and distinctive patterned goods, was ranked among the top 10 most valuable luxury brands in the world in 2021, with a brand value of $3.9 billion.
In its fiscal third quarter, BURBY reported a 26% year-over-year rise in full-price comparable store sales, driven by strength in the Americas and the Asia-Pacific region, while retail revenue was up 8% in the three-month period.
"Full-price sales continued to grow at a double-digit percentage compared with two years ago, accelerating from the previous quarter and reflecting a higher quality business," said Gerry Murphy, chairman of the board at Burberry, in a press release. "Our focus categories outerwear and leather goods performed strongly as we continued to attract new, younger consumers to the brand."
Looking ahead, the retailer expects fiscal 2022 operating profit to increase 35% at a constant exchange rate compared to the prior year and sees high single-digit revenue and meaningful margin growth for the 12-month period.
BofA Securities analysts have a Neutral (Hold) rating on BURBY. As far as luxury stocks go, the team believes there is "more upside elsewhere in the sector." However, they add that "increased evidence over a brand turnaround could be a catalyst for a potential re-rating."
Riccardo is an award-winning business journalist who has covered Fortune 500 companies for news organizations across the United States.
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