Luxury companies are at the heart of a long-term consumer-preference trend

Published:28 March 2024 17:02 CET
Analyst:
Nadiia D, Content Manager, nadiia.d@adviscent.com

Fashion and sustainability are two concepts that have not aligned seamlessly in the past. Luxury companies willing to adhere to sustainable values and practices have a competitive advantage over their fast-fashion peers. With valuations reasonably attractive and a new economic cycle forming, the segment is worth a closer look. 

Despite being a beacon of creativity, the global fashion industry is plagued by a number of sustainability-related issues, including extensive water use, pollution, high carbon emissions, and textile waste. These issues have been exacerbated by the rise of ‘fast fashion’, i.e. the constant production of new, low-priced lines of clothing in response to ever-changing fashion trends. 

In addition to the environmental impact, working conditions in the fashion industry are often substandard, and the sector’s high competitiveness sometimes results in weak governance. 

However, partly in anticipation of new regulations, the fashion industry, and especially the luxury sector, is increasingly positioning itself in the sustainability movement. This shift is not only a nod to notions of environmental stewardship and ethical responsibility but also presents opportunities for investors looking to align their portfolios with sustainable ventures.

Indeed, the role of investors prioritising environmental, social, and governance (ESG) factors over profit maximisation should not be underestimated. It is they, arguably, who are providing the industry with the necessary funding and turning sustainable fashion into a ‘movement’.

Luxury brands have an advantage over their fast-fashion counterparts in implementing sustainable practices due to their often vertical value chains, which means that they have a better lever across all stages of production. Furthermore, the luxury industry’s focus on quality, craftsmanship, and durability is, in theory, more closely aligned with sustainable fashion principles, which inherently oppose the ‘throwaway culture’ by promoting timeless investment pieces.

It is worth noting in this context that the demand for luxury goods is increasingly less dependent on older generations. Excellent brands continue to gain market share and have even managed to keep or extend their gross margins in the recent economic downswing. This is due to newly created wealth and younger generations entering the market. In China, for instance, almost 80% of luxury spending comes from customers under the age of 35, up from 66% just a few years ago. 

 Thus, the prevailing trend of consumers shifting their preferences from fast fashion to higher-priced luxury goods indicates a growing market for the companies that produce such goods. Of course, obtaining exposure to luxury fashion companies that adhere to sustainability principles does not guarantee superior financial returns. But at the very least, and leaving the moral imperative aside, sustainable initiatives can help luxury brands comply with environmental regulations, thus mitigating the financial risks posed by the failure to do so.

THE ENVIRONMENTAL PRICE OF FAST FASHION

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Source:

‘The environmental price of fast fashion’ (2020) by Niinimäki et al., TextileExchange, Industrievereinigung Chemiefaser, World Bank

LVMH MOET HENNESSY LOUIS VUITTON SE 

COMPANY PROFILE

• Louis Vuitton Moët Hennessy is the world’s leading luxury company. The group owns a portfolio of over 50 brands across 5 different segments. The largest profit contributors are Fashion & Leather Goods (75% of 2022 recurring EBIT) and Wines & Spirits (W&S; 10%). The other divisions are Perfume & Cosmetics, Watches & Jewelry (W&J), and Selective Retailing (SR). Its main brands include Louis Vuitton, Donna Karan, Loewe, Moët & Chandon, Krug, Hennessy, Glenmorangie, TAG Heuer, Zenith, and Sephora.

KEY RISKS

• Currency volatility (CNY weakness), which impacts global tourism spending.

• Management’s tendency in the past to acquire underperforming businesses at a high price.

• Potential tariffs on luxury goods imported from the European Union into the US; so far, the US government has announced tariffs on wine and selected spirits but has excluded fashion/leather goods. 

KEY INFORMATION AS AT 14.03.2024, 03:41 CET

ISIN 

FR0000121014 

Country 

France 

Sector 

Consumer Cyclical 

Subsector 

Cyclical Consumer Goods 

Currency 

EUR 

Price as at 12.03.2024 

859.00 

FY1 P/E 

27.94 

Dividend yield 

1.78% 

ESG category 

Responsible Investment 

Rating

Buy 

Source:

Bloomberg Finance L.P., Factset Inc., FIS Global Trading (Suisse) SA

HERMES INTERNATIONAL SCA

COMPANY PROFILE

• Hermès, founded in 1837, is a premier global luxury goods company. It sells silk, leather, perfumes, watches, ready-to-wear, and various accessories. It operates more than 315 exclusive stores and generates almost half of its revenues from Asia and Japan. Management is aiming to manage the company for the long term and its products are known for their quality and price.

KEY RISKS

• Lower fashion exposure compared to peers.

• Slower-than-anticipated growth in leather goods production capacities, the group’s most profitable product category.

• A slowdown in China, which is one of the major emerging markets driving the company’s revenues. 

PRICE AS AT 12.03.2024, 01:00 CET

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Source:

FIS Global Trading (Suisse) SA

HUGO BOSS AG 

COMPANY PROFILE

• Hugo Boss is a German-based menswear apparel brand operating in the premium segment through its two brands, Boss and Hugo. The brand was founded in 1924 and initially focused on uniforms. After World War II and the death of the founder, the company shifted focus to men's suits. Hugo Boss' sales are mainly menswear (90%). The company is globally present in 7,400 points of sale, with 63% of revenue generated in the European market, 22% in the Americas, 13% in Asia-Pacific, and less than 3% from licenses. It generates over 60% of sales through its own retail with over 2,000 stores globally.

KEY RISKS

• Hugo Boss sells more than 60% of its goods in Europe. Thus, if the economic environment darkens and/or the cost of living rises, the company may not be able to keep up with expectations after the strong turnaround over the past 18 months.

• Rising costs of raw materials may hamper the company’s gross margins.

• The company faces competition from online peers and new entrants. 

PRICE AS AT 12.03.2024, 01:00 CET

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Source:

FIS Global Trading (Suisse) SA

Equity table
Analyst:

Recommended instruments

NameISINSectorMarket Cap (m)RatingSustainability Rating
Toggle rowNameLVMH Moet Hennessy Louis Vuitton SEISINFR0000121014SectorConsumer DiscretionaryMarket Cap (m)295,339RatingBuySustainability Rating3
Toggle rowNameHermès ISINFR0000052292SectorConsumer DiscretionaryMarket Cap (m)161,877RatingBuySustainability Rating2
Toggle rowNameHugo Boss AGISINDE000A1PHFF7SectorConsumer DiscretionaryMarket Cap (m)3,699RatingBuySustainability Rating4
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