×

It’s time for luxury companies to stop blaming macro trends and become more sophisticated

A shopper walks through lower Manhattan in New York City.
Getty Images
A shopper walks through lower Manhattan in New York City.

The latest batch of earnings reports from the luxury giants were showstoppers - with stunning double-digit gains from Kering, the owner of Gucci, versus no growth from Burberry.

The polarised results raise the question – is it time for the luxury sector to move on from a tale of woe after the crackdown on Chinese consumption and the weak global growth which destroyed sales in recent quarters?

Standout performer Kering has been revamping its core brands – a tactic that has more than paid off with Gucci's comparable revenue soaring 17 per cent and Yves Saint Laurent's up by a staggering 33 per cent in the third quarter.


This compares to an underwhelming first-half report card from Burberry with no underlying growth - the only sexy movement coming from a significant drop in sterling. The results indicate the same old macro themes may no longer be the thread investors should focus on, and what is moving the needle is good, old-fashioned retailing: Strong brand marketing, good product lines, distribution channels and cost discipline.

In its earnings release last week, Italian luxury company Tods painted a picture of a "volatile and uncertain economic and financial environment", pointing to "persistent weakness of consumption in many important markets for luxury goods". Meanwhile British fashion group Burberry continued to blame macro drivers for its ugly set of numbers, citing slowing spending from Chinese customers globally and an uneven performance from the U.S.

But the commentary jars. French giant LVMH said both the U.S. and Europe had positive momentum while Asia Pacific ex Japan accelerated. LVMH wasn't alone, Kering said Europe was growing but specifically noted a significant pick up in the U.S. and Asia. The weak spot for both was Japan.

This begs the question, is a macro spiral being unfairly blamed for weak results? If the macro is just an excuse, it means bottom-up stock selectors may be able to extract more value from the sector.

The Bain & Co. Luxury Study released last week in Milan in collaboration with Fondazione Altagamma, the Italian luxury goods manufacturers' industry foundation, reinforced the narrative of a better backdrop for luxury. The report described the personal luxury goods sector as steady and, specifically on China, said that even the worst performing categories - watches and menswear -were improving. So what's the missing link for those with earnings disappointments this year from Swatch to Richemont and where the short sellers have circled; Tods and Ferragamo?


The private equity group's study pinpoints strategy as the problem – warning luxury companies they need a more sophisticated approach.

"The luxury market has reached a maturation point. Brands can no longer rely on low-hanging fruit. Instead, they really need to implement differentiating strategies to succeed going forward," said Claudia D'Arpizio, a Bain partner in Milan and lead author of the Bain & Company Luxury study.

"We are already starting to see clear polarization when it comes to performance with winners and losers emerging across product categories and segments," said D'Arpizio.

Part of the problem may lie with a fixation on geography over style. Luxury companies have pinned their strategies on Asian customers having deep pockets, setting up China expansion plans targeted at store growth in first and second tier cities to patch up a black hole in spending in Hong Kong and Macau. More recently Chinese shoppers have avoided Japan because of currency strength, but the U.K. is being favored by tourists making the most of a sharp drop in sterling. The trend indicates Chinese and other global shoppers will chase a bargain but it will again give luxury groups an excuse to blame regional volatility.

Brand revival and category expansion remain the bright spots in luxury strategies. Exane BNP Paribas headlined Gucci as one of the hottest names in its brand temperature gauge based on editorial coverage in print versus advertising spend, back in August. Since then the creative vision of Alessandro Michele has steered the brand to greater strength, and investors are enthusiastically eyeing margin expansion of 1.5 percent in the second half.

On show later this week is timepiece and jewelry maker Richemont, which reports interim results, and Hermes with third-quarter sales. Hermes already warned recently of a hazy outlook with plans to scrap its sales forecasts from next year in light of economic and currency uncertainty.

Luxury success stories raise the bar for the industry and shine the spotlight on those that continue to trip up on the so-called macro.

Karen Tso is an anchor on Squawk Box Europe and you can follow her on Twitter @cnbckaren.


Follow CNBC International on Twitter and Facebook.