Revenues vs Recession
How will high fashion fare against an ailing economy?
For the first time in over a decade, the US is facing an impending recession. Brought on by the pandemic and its unyielding after-effects, the global economy has plunged, plagued by supply chain issues, insurmountable inflation, and rising interest rates. And, with the Dow shedding nearly 20% of its value since the beginning of 2022, the market has edged into bear territory, signaling an abrasive economic downturn.
However, while tech, energy, and banking are all feeling the pain of a looming bear market, luxury fashion somehow remains unscathed. After being humbled during the extensive pandemic lockdowns, high fashion rebounded in 2021. As lockdowns lifted and consumer confidence returned, revenues at high fashion houses like Louis Vuitton, Gucci, and Saint Laurent exploded, beating their pre-pandemic numbers from FY 2019. Now, despite a rapidly approaching economic downturn on the horizon, luxury consumers aren’t yet feeling the squeeze, continuing to spend their way through uncertainty and mounting prices in the form of Christian Louboutin heels, Chanel purses, and Rolex watches.
French luxury conglomerates Richemont, Kering, and LVMH demonstrate this anomaly firsthand.
In its FY 2022 Annual Report presentation, Richemont, known for its jewelry and watchmaking prowess and whose brands include Cartier, Van Cleef & Arpels, and Piaget, among others, reported €19.2 billion in sales, a 44% increase from the already impressive €13.1 billion it accrued in FY 2021. The group’s net profits nearly doubled, from €1.3 billion in FY 2021 to €2.1 billion in FY 2022. Most notably, the company’s watchmaking division saw a 20% increase in revenues, while its jewelry labels saw a shocking 54% increase.
Kering also boasted massive revenue increases across the board. In its FY 2022 First Half presentation, the group posted total revenues of €9.93 billion, up an impressive 23% year-over-year. Furthermore, each of the group’s major labels also posted individually big gains, with revenues at Gucci, Saint Laurent, and Bottega Veneta up 15%, 42%, and 18% respectively.
Finally, French powerhouse LVMH yet again topped its already incredible results, showcasing total revenues of €56.5 billion for the first nine months of FY 2022, up 28% compared to the same period a year prior. Fashion and Leather Goods unsurprisingly remained the group’s top earner, raking in €27.8 billion in revenues and posting a 31% year-over-year increase. Selective Retailing, which includes global beauty retail giant Sephora, rose to second place in the group’s portfolio, earning €10.1 billion. Watches and Jewelry, Perfumes and Cosmetics, and Wines and Spirits followed, with €7.6 billion (+23%), €5.6 billion (+20%), and €5.3 billion (+23%) in revenue, respectively.
So, how has the luxury goods sector managed to beat the market?
CNBC claims that the ultra-wealthy’s spending insulates luxury brands from market trends. According to Milton Pedraza, CEO of the Luxury Institute, luxury brands often count on just 20% of its clientele—the ultra-wealthy and very wealthy—for the majority of their sales. However, while this small cadre of people will likely feel the effects of an economic decline later than the general consumer, they will nonetheless face increasingly tumultuous economic conditions, eventually causing them to pull back on their discretionary spending as well.
I believe that there are two central factors to luxury fashion being seemingly recession proof, neither of which revolves around the spending power of the ultra wealthy.
First, both general and elite consumers are still riding a post-pandemic high, with demand continuing to outpace supply. According to Vogue Business, this spending resurgence is due to ongoing pent-up demand following the pandemic, which continues to boost spending on travel and luxury goods across consumer demographics.
Stifled by months, or in some cases, years of solitary confinement and a lack of social contact, consumers have returned to shopping with a vengeance post-pandemic. Finally able to attend parties, go back to the office, travel, and meet up with friends, people needed clothes, shoes, and accessories to help them re-enter the society that had been forcibly closed off to them.
Second, as the stock market tanks, consumers see luxury goods as stable investments to ride out the volatility. Rather than buy shares that may shed 20% of their value within the week, shoppers are looking to Tiffany earrings, Cartier bracelets, and Hermès purses, as safehouses in which to stash their cash. As Fashion United UK notes, luxury brands that sell pieces known for retaining or increasing in value, such as the Hermès Birkin or Chanel Flap Bag, are some of the best positioned to weather a recession, as their products have proven to fetch excellent returns on their initial investment.
So, will high fashion continue to be a unicorn amid an impending economic crisis, or will it finally fall victim to the invisible hand of the market?
Though it has beaten expectations up until now, high fashion’s momentum will eventually come to a grinding halt along with the rest of the economy.
While conglomerates like LVMH and Capri are touting the desirability of their collections and the relevance of their companies’ values as the reason for their success, according to Vogue Business contributor Luca Solca, a senior analyst at Bernstein, high-end global luxury goods demand has just yet to normalize. Bernstein expects slower top line growth in the fourth quarter of this fiscal year, expecting to see luxury brands finally come off their untenable high.
The stocks of Richemont, Kering, and LVMH have already begun to show the wear and tear of obscene inflation coupled with crippling uncertainty. At the end of trading on October 24th, all three mega conglomerates closed down, with Richemont trading at $10.03/share, Kering at $45.18/share, and LVMH at $126.14/share. These numbers are a far cry from each company’s 6 month highs of nearly $13/share, $57/share, and $140/share, respectively.
And, although Richemont, Kering, and LVMH have been buoyed by ferocious post-pandemic demand and the allure of investment, Louis Vuitton, Gucci, and Chloé aren’t P&G, SC Johnson, or Heinz. Though their core client base will continue to buy from them no matter the economic condition, fashion labels inherently fall under the discretionary spending category, and thus are the first things most consumers pull back on in times of economic turmoil.
Ultimately, despite their impressive performance up until this point, high fashion is far from immune to recessionary woes. As interest rates continue to rise and inflation hits a forty-year high, demand for luxury handbags, fine jewelry, and designer clothing will evaporate as consumers look to cut back and hunker down in the face of what could be one of the most profound and prolonged declines of our lifetime.
In the face of a recession, Brawny will always beat out Birkins.