For Luxury Brands, It Pays to Make Friends
A top-stitched Lady Dior handbag may top your wish list above a classic Louis Vuitton Speedy, but both of these iconic bags are owned by the same company —LVMH.
Brand names are all-important when it comes to luxury, but truth is, many luxe names need big pockets behind them to help buttress their fortunes during shifts in styles or shopping habits.
LVMH (LVMH) is the behemoth of luxury, claiming more than 70 brands across all luxury categories, from wine (Mo?t & Chandon and Krug) to perfume (Guerlain) to watches and jewelry (TAG Heuer, Bulgari). The Paris conglomerate is the biggest, but it’s hardly alone. Keeping fashion risk at bay with a closet full of brands is an approach more luxury brands are adopting, according to Erwan Rambourg, global co-head of consumer and retail at HSBC Securities.
MADRID, SPAIN - MARCH 14 (Photo by Juan Naharro Gimenez/Getty Images)
Just in the last six months, Coach (TPR) bought Kate Spade, Michael Kors (KORS) bought Jimmy Choo and LVMH gained control of Christian Dior (CDI) and purchased the Dior Couture brand in April. It’s a trend that’s likely to continue among “soft luxury” makers—that’s handbags, accessories, apparel— for a few reasons that Rambourg detailed recently at a small press gathering in HSBC’s Fifth Avenue headquarters in New York.
A big reason is that family-owned independent companies with climbing valuations are recognizing that today is a once-in-a-15-year opportunity to cash out. “The way valuations are today, they should be more willing than they had been,” Rambourg says. That could lead to stock offerings, but it’s also likely to lead to more mergers and acquisitions.
Another reason is that potential buyers have been accumulating cash as sales have improved in the last 12 months, he says. Like their smaller competitors, potential acquirers are typically family owned [the Arnaut family owns LVMH, the Pinault family owns Kering (KER) and the Rupert family owns Richemont (CFR)].
Family-owned companies don’t tend to give back cash to investors through dividends or share buybacks—instead, they hoard it or continue to diversify through buying other brands, Rambourg says.
The latter is the smarter strategy. “If you’re buying other companies, it enables you to hedge out your fashion risk,” he says. “We argue that the future in soft luxury is about multi-brand.”
Coach—which changed its corporate name to Tapestry last month—took a big step in this direction when it bought Stuart Weitzman in 2015 and Kate Spade earlier this year. Although all three brands arguably fit the accessible luxury category, HSBC expects Tapestry will become a “serial acquirer,” seeking brands that allow it to be less dependent on the fortunes and strategies of one name. In a recent report, Rambourg and his fellow analysts say the group is likely to “move swiftly from a mono-brand” to “America’s LVMH”—although with a “democratic luxury” bent.
Overseas, LVMH is unlikely to be in acquisition mode since it just scooped up Christian Dior. But Kering, which HSBC rates as a “buy,” meaning the firm expects the Paris-listed stock will rise, could be on the prowl.
Kering, also based in Paris, has succeeded thanks to Gucci, which has provided 70% of the conglomerate’s profits. But continuing to rely on Gucci is risky, Rambourg says.
HSBC’s report lists several private firms that are likely acquisition targets for any luxury goods multi-brands group (Consider Uggs, Chanel, Tory Burch and Paul Smith).
But could Prada (1913.HK) be a target? Rambourg doesn’t say, but he does point out how being part of a larger company might have saved Prada—“one of the few exceptional brands out there”—from being complacent in retail strategy and design. The luxury maker of bags, clothes and eyewear from Milan, has stumbled the last three years.
“The multi-brand environment allows you to systematically question yourself,” Rambourg says.
So who knows? Maybe Gucci’s Jackie bag and Prada’s Saffiano Leather totes will be sisters one day, and both brands could be better off for it.
Source Barrons