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Are luxury brands adding some sparkle to Christmas?

We look at some of the world’s biggest luxury companies in the run up to the Christmas season.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

We recently looked at how the UK’s different supermarkets are shaping up ahead of the festive season. But we don’t just loosen the purse strings on food at Christmas.

After last year’s subdued celebrations, people could be looking to make this year extra special and splash out on a bit of luxury. If so, this could be good news for big names in the sector.

Even without this tailwind, luxury names are still worth paying attention to. Rising inflation usually means people aren’t as tempted to spend on non-essentials. But uber-luxury items don’t normally face pressure with these kind of shifts in an economy. Their wealthier customers aren’t typically as affected by wider ups and downs.

With that in mind, we take a look at some of the world’s most premium brands and how they could be shaping up this Christmas.

This article isn't personal advice. If you're not sure whether an investment is right for you, seek advice. Investments and any income they produce will rise and fall in value, so you could get back less than you invest.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Burberry - Sophie Lund-Yates, Equity Analyst

Burberry has done very well over the last few years at managing a total refresh of the brand. It’s no longer synonymous with the infamous tan and black checked pattern from the noughties.

This is a core pillar of outgoing CEO, Marco Gobbetti’s, plan to position Burberry at the top of the value chain. It wants to be considered alongside the likes of Dior and Chanel, rather than the greyer area of mid-luxury.

Apart from protecting the brand, the higher price points should help boost margins too. Operating profit margins are expected to reach 18.7% by 2024, compared to 16.1% before the pandemic.

The festive shopping season could hold more importance for Burberry than usual this year. While luxury names tend to be a bit less reliant on bumper Christmases, the festive season’s still a tide that lifts lots of ships.

Burberry’s traditionally relied on long-haul international tourism for a large portion of revenue throughout the year. So far, the gap in sales left by travel bans has been partly filled by spending in home markets. But it’s important this continues, especially while uncertainty about long-haul travel remains.

If we’re hoping to see domestic customers holding down the fort, trends over Christmas will be a good measure of this.

Burberry 2020 sales by region

Source: Burberry Annual Report, June 2021

The improved positioning of the brand has been paying off, with half year revenue back at pre-pandemic levels of £1.2bn. But there’s a lot resting on the shoulders of incoming CEO, Jonathan Akeroyd, to continue the good work.

Looking longer-term, Burberry’s in a stronger financial position than it has been. Net debt, including lease liabilities, was £224m as at 25 September, up from £101m at the start of the financial year. It’s well below the group's target of 0.5-1.0 times cash profits.

Not only does that provide the fuel for store and product investment, but means the group feels comfortable enough to restart returns to shareholders.

Dividends are back, and the group's announced a share buyback too. If things go to plan, those could be extended.

We think Burberry has achieved remarkable things in the last few years, and is on stronger footing heading into the important festive season. A price to earnings ratio of 20.4 is in line with the long-run average. Keep in mind though, if long-haul travel remains subdued, we suspect there’ll be a lid on what Burberry can achieve.

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LVMH - Sophie Lund-Yates, Equity Analyst

It’s hard to know where to start with LVMH. This luxury conglomerate had annual revenues of €54.0bn before the pandemic. It’s responsible for brands like Louis Vuitton and Christian Dior, to Moet & Chandon, Dom Perignon and Hennessy, plus dozens more.

The most recent high-profile addition to the portfolio was Tiffany & Co, for a whopping $15.8bn. This stretched the balance sheet more than we’d have liked. But to the group’s credit, the assets seem to be doing well and trading has been better than we expected. This classic brand has obvious benefits where Christmas is concerned. Not least because the festive season is the most popular time of year for men and women to pop the question.

But aside from Christmas, we think LVMH is in a good position. LVMH’s sales are currently running 11% ahead of pre-pandemic levels.

LVMH Revenue

Source: Refinitiv, accessed 8 December 2021

Therein lies its power. Its brands are status symbols, and revenue tends to be much stickier than for traditional retailers. LVMH's mega-wealthy customer base also means it's able to weather a downturn in the economy better than some. Spending should be more reliable if things take a turn for the worst, although there are no guarantees.

LVMH also enjoys the benefits of a strong management team. CEO, Bernard Arnault, has been at the helm for decades. He’s also a majority shareholder, meaning the company is run like long-term success is personally important.

Not everything that glitters is gold, though. Much like other brands, LVMH relies fairly heavily on international travel, in airports as well as tourists. This side of trading is likely to take some of the shine off performance for a while.

There’s a shopping trolley – or rather luxury gift box – worth of attractions at LVMH. An unrivalled stable of brands and resilient customer base to name just two. But investors are paying for that strength. A price to earnings ratio of 31.3 is very demanding when compared to the ten-year average, even by LVMH’s well-oiled customer’s standards.

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VIEW THE LATEST LVMH SHARE PRICE AND HOW TO DEAL

Threadneedle European Select – Josef Licsauer, Investment Analyst

Funds are another way for investors to gain access to the luxury goods sector. They’re a way to invest in a range of companies within a single investment.

Threadneedle European Select, which also features on our Wealth Shortlist, currently invests around 13% into luxury goods companies.

The fund holds LVMH, as well as L’Oreal, which owns some higher end cosmetics. Fashion retailer Inditex also makes up part of the fund. It’s a retail giant responsible for Zara, as well as some luxury brands, including Massimo Dutti.

This way of investing is different to owning an individual company. Funds invest in a variety of sectors to offer more diversification, to smooth out some of the ups and downs of investing in individual companies.

Diversification – it takes more than a handful of stocks

For example, this fund also invests in technology and consumer staples businesses. The fund managers also have the flexibility to change the amount invested in each sector or company, depending on where they find the best opportunities. So, the amount invested in luxury goods could go up or down over time.

The fund has a concentrated number of holdings which increases performance potential but is a higher-risk approach.

You can read our latest update on the fund here.

Find out more about THREADNEEDLE EUROPEAN SELECT, INCLUDING CHARGES

THREADNEEDLE EUROPEAN SELECT KEY INVESTOR INFORMATION

Sign up to fund research

Investing in this fund isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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