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The Luxury Goods Market: Pre- and Post-Pandemic Trends

Yiting Liu, CFA

Discretionary spending declined substantially in 2020. How have companies, particularly luxury brands, fared in 2021? International analyst Yiting Liu, CFA, gives an update on the state of the luxury goods market today.

(Expand Transcript)

The following text is a transcript of a portion of the speakers’ podcast originally recorded in July 2021. This transcript solely represents the views of the individuals who spoke, which are subject to change.

Video 1: The Luxury Goods Market—Pre- and Post-Pandemic

Douglas Gimple, Senior Portfolio Specialist:

What are some of the trends in this luxury goods market pre-pandemic, and then how did the market overall fare during the lockdown? And now that we've got some reopening and consumers getting back out there, how did the luxury goods market navigate through from pre- to post-pandemic?

Yiting Liu, CFA, International Research Analyst:

In terms of luxury, historically, there's been a very high correlation between global GDP growth and luxury market growth. Luxury goods consumption is highly discretionary. It can be cyclical. So during a typical economic recession, consumers, generally speaking, are going to feel relatively worse off than before, right? Their “feel good” evaporates. Discretionary spend gets reduced. And what you see is typically a decline in top line revenue growth of luxury goods companies. That makes sense in a typical global recession. And also, because this industry has really high operating leverage—so as top line revenue growth contracts, a lot of your expenses are actually somewhat fixed. You can't reduce them as much. Unfortunately, your operating margins contract big time as well, which then usually leads to a contraction in earnings, free cash flow. It is usually a cyclical low point in your profitability, which then results in a low valuation multiple in the marketplace. That's how it usually works in a typical global recession.

But what we have experienced in terms of COVID-19 in 2020 has been a bit of a different phenomenon or sort of like an anomaly. Prior to the pandemic, luxury goods companies were basically turning out very healthy growth. Companies like LVMH was growing organically in terms of top line revenue at a double-digit pace in 2019 in constant currency. That's really a healthy pace, despite what was going on in Hong Kong in terms of pro-democracy protests and all these things that actually negatively impacted some of the luxury sales in the territory. Even in spite of that, LVMH was growing organically at double digit pace year-on-year in 2019, which is pretty good.

And then, of course, the pandemic took place—first in China and then spread elsewhere. So in the first quarter and second quarter of 2020, organic growth at LVMH was actually down a lot, 20% year-on-year and 40% year-on-year in those two respective quarters, just to give you a ballpark gauge. However, by third quarter 2020, despite a near complete stop to international travel, luxury goods demand has proven to be quite resilient.

And actually LVMH confirmed—their management mentioned this on their earnings call—that the top nationalities in terms of luxury purchases (the Chinese, the Americans, Europeans) all had positive year-on-year growth in terms of luxury spend in the third quarter after a significant decline, of course, in the first half of the year.

Now, if you fast forward to today, the latest reporting period, LVMH's revenue resilience continued. And then Asia ex-Japan, which really was pretty much driven by China, was up organically almost more than 20% versus 2019. So we're comparing to a pre-pandemic quarter or year. It was still up double digits, more than 20%—a very healthy pace. And of course, China was LVMH's strongest market in terms of growth in the first quarter.

The views expressed are those of the research analyst as of July 2021, are subject to change, and may differ from the views of other research analysts, portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Investing involves risk, including the possible loss of principal.

As of June 30, 2021, Diamond Hill owned shares of LVMH Moet Hennessy Louis Vuitton SE.

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