While Gucci Parent Company's Shares Decline on Disappointing 2023 Earnings, Why Hermès Outshines as Top Performer?

Over the last year, the luxury sector has become for Europe what Big Tech is for the US: a group of strong companies that keep growing even when the economy goes up and down.

Stock prices have recently seen a downturn, with participants at a luxury conference in Paris, organized by Morgan Stanley, noting a more moderate performance in the U.S. market, as pointed out by analyst Edouard Aubin. Despite this, luxury stocks have significantly outperformed this year, with LVMH stocks increasing by 10% and Hermès by 22%, both surpassing the 6.8% increase of the broader Stoxx Europe 600 index.

As the final reports rolled in with Kering Group, the parent company of Gucci, unveiling its financial performance for 2023, the luxury goods sector wrapped up a season of earnings disclosures. Hermès stood out as the largest beneficiary, while other luxury manufacturers experienced a mixed bag of outcomes.

Hermès, known for its iconic Birkin and Kelly handbags, delivered an impressive performance, outpacing its competitors.

In the fourth quarter, Hermès' sales surged by 17.5%. Last year, the company globally hiked its prices by about 7% to cover rising production costs, except in the U.S. where the increase was around 3%, and in Japan, where prices rose by double digits due to changes in the currency value.

Hermès planned to increase its prices by 8% to 9% globally this year. While other luxury brands like Chanel, LVMH's Dior and Louis Vuitton have also increased their handbag prices significantly since the pandemic, Hermès remains a leader in the high-end market.

Chanel's handbag pricing has neared that of Hermès in the last few years, yet they don't command as high prices on the resale market. Louis Vuitton, despite its vast reach and perfect marketing, hasn't been as successful in selling many handbags over the 4,000 euros price point, according to analysts from Bernstein.

High-end handbags, such as the highly desired Birkin bag which can cost over $10,000, are only within reach for those buyers who are generally less affected by shaky economic times.

Kering Group's shares tumbled by 14% last Tuesday following the company's profit warning, signaling a projected 20% year-on-year decline in Gucci sales for the first quarter. This anticipated downturn points to a 10% dip in the overall group's revenues for the initial three months of 2024. This development differentiates Kering from its luxury counterparts, LVMH and Hermès, both of which have not indicated similar setbacks.

Once Kering Group's shining star, Gucci experienced a surge in 2021, propelled by an early pandemic-era boom. However, the renowned fashion brand has faced challenges in maintaining its market presence, as even high-spending customers have become more budget-conscious due to rising inflation, gravitating towards more “quiet luxury” brands.

Kering disclosed a 4% decline in Gucci's sales on a quarterly basis in January. At that time, CEO Francois Henri Pinault emphasized the group's commitment to continued investment in its portfolio, including Gucci, despite the potential for slimmer profit margins, as reported by Reuters.

In an effort to revitalize the brand, Kering realigned Gucci's top management in 2023, with Jean-François Palus stepping in as CEO and Sabato De Sarno taking on the role of creative director, as part of a comprehensive restructuring plan. The company has announced that the Ancora collection, newly released by De Sarno in mid-February, has received a highly favorable reception.

One reason is that luxury goods companies are streamlining sales channels and building their own online sales systems.

This shift underscores the industry's recognition of the growing importance of direct-to-consumer sales and the need to provide a seamless and exclusive shopping experience, allowing for greater control over brand image and pricing strategies.

Since luxury brands are increasingly withdrawing from third-party retailers and e-commerce aggregators, third-party sales channels such as Farfetch have been squeezed in profits. LV executives claimed that consumers can either buy offline or online, and they would rather take more share in this zero-sum game.

According to online resale retailer The RealReal, Rolex watches and Hermès leather goods resale at prices higher than retail prices. For example, Hermès carefully controls the production and distribution of Birkin bags, making them highly exclusive and difficult to obtain. The bags are often made to order, with waiting lists that can span several years. This rarity and exclusivity contribute to the bag's desirability and high price tag.

The recovery of the Chinese and Japanese economies and the depreciation of the yen exchange rate attracted more customers.

Hermès said it had been "dynamic" in China, where investors have been worrying about a stuttering post-COVID recovery. LV's performance was also boosted by sales in Asia, including China, which accounts for 31 percent of the conglomerate's total sales. Despite the shadow of the pandemic, LVMH has doubled its Chinese clientele since 2019, prompting iconic brands in the group to increase their footprint in the country. Richemont said in its latest update that sales in China, including Macau and Hong Kong, were 25% higher, with Chinese tourists preferring to travel in the region rather than heading further afield.

Still, the divide in luxury may not be over. Kering is not the only company whose profits fell short of expectations. Burberry slashed its profit forecast in January due to a drop in sales. This company has always struggled to maintain the stability of its brand image; in terms of product strategy, its competitiveness in the ready-to-wear sector has been difficult to replicate across other product categories.