The retail landscape has changed significantly, and it’s not enough to have a brick and mortar store, or even an online presence. What’s critical now is giving consumers an experience to entice them to open up their wallets. Millennials are a coveted group, since they make up the largest sector of the U.S. population and are a generation that has a preference for experiences over things. As a result, luxury retailers are offering experiences that are social media-ready in an effort to target and engage a bigger audience.
Some examples: Louis Vuitton unpacked its “Volez, Voguez, Voyagez” (“Fly, Sail, Travel”) exhibition in downtown New York. Tiffany recently opened a real-life café, 56 years after the movie “Breakfast at Tiffany’s” made the New York jewelry store famous. Gucci has brought back its vintage logo belt.
The power of vintage
Similar to Louis Vuitton’s exhibition, luxury retailers are bringing vintage products and experiences to the forefront of their marketing strategy. This strategy evokes an emotion that can create or strengthen the relationship between the customer and the brand.
Louis Vuitton’s exhibition takes visitors on a journey back in time to when luxury ruled travel and passengers dressed up because they felt special and excited about going on an adventure. Therefore, the viewer wants to go along, feeling a sentimental bond with the brand and products. The exhibition opened is timed for the holidays and shoppers can purchase small goods after the exhibition in the visitors’ store, or at a nearby pop-up store.
When it comes to global demand for luxury goods, Hermes and LVMH are the industry leaders. They rarely offer discounts, either online or at brick-and-mortar stores, because they simply don’t have to. They know that their core consumer is willing and able to pay full price. Still, because of the strong demand for their products, their vintage bags can be found in the secondary market.
In a collaboration with StyleSage Co, which analyzes retailers, brands and products across the globe, Thomson Reuters discovered that two of the most popular vintage Hermes Kelly and Birkin style bags are averaging a current price of $16,894, and never get further discounted. The styles are highly coveted, and also traded on luxury resale sites like The RealReal, Fashionphile, What Goes Around Comes Around, and Neiman Marcus Last Call. Once introduced online, 5% of these bags sell out within two weeks, and are not further discounted.
Average prices
Meanwhile, across the other luxury brands, StyleSage Co, did discover downward price movements from a year-ago. This is likely due to the channels they’re trading in (like department stores), and due to currency fluctuations due to their exposure in Europe. Fendi and Mulberry have decreased prices by as much as 23%, and 22%, respectively. Meanwhile, Christian Dior’s (owned by LVMH) accessories average prices have gone up 27% compared to last year.
Exhibit 1: Discount and Change in Average Prices vs. Last Year
Source: StyleSage Co.
Coach has decreased its prices by as much as 16% compared to last year. But in an effort to escape massive product discounting and weak profits, they have proactively been removing their merchandise from department stores.
Jolly Christmas
Despite facing a tougher basis for comparison, Tapestry, LVMH, and Hermes are expected to see robust growth on both the top and bottom lines.
Exhibit 2: Mean Growth Rate Estimate YoY% for the Current Period
Source: I/B/E/S data
Analysts polled by Thomson Reuters are optimistic towards LVMH Fashion & Leather Goods growth this holiday season. This bodes well for the retailer since it is LVMH’s strongest business segment, and makes up the biggest portion of its total revenue (33.98%). What’s more, according to the StarMine Earnings Quality Model the retailer’s cash flow level and operating efficiency looks healthy. And, its credit looks strong, with a healthy credit score of AA-.
Exhibit 3: LVMH Business Segments as a % of Total Revenue
Source: Eikon
Richly valued
As an equity investment, Hermès looks as expensive as its Birkin bag. Our StarMine Intrinsic Valuation (IV) model accounts for the systematic biases that our quantitative research team found in sell-side estimates. Thus, the faster the expected growth rate, the more optimism bias. More-distant estimates are more optimistically biased than nearer ones.
For Hermès, after adjusting LTG estimates for optimism bias, the StarMine IV model places fair value at €195.20 per share. In contrast, the market price is €442.85 per share. Plugging in today’s price and solving for growth suggests that investors are optimistic. Hermès market expectations are high with an implied 10-yr CAGR of 19.6%.
Exhibit 4: Hermès Intrinsic Valuation
Source: Eikon
Still, the retailer is another favorite for the holiday season. Its Earnings Quality Score is a robust 99 out of a possible 100, which tells us that Hermes earnings are coming from sustainable sources, since it has strong cash flow, operating efficiency and accruals.
On the flip side, analysts polled by Thomson Reuters are bearish on Salvatore Ferragamo and have been lowering earnings estimates. The retailer is expected to see a drop of 51.1% in earnings. Its StarMine Price Momentum model suggests that negative stock price momentum is against the company, as it continues to get hit by negative FX impact. Also, customers are not gravitating towards its latest product launch.
Exhibit 5: Salvatore Ferragamo Intrinsic Valuation
Source: Eikon
