Investing in Women’s Best Friends- Luxury Bag Brands

Just as Marilyn Monroe famously declared, “Diamonds are a Girl’s Best Friend”, through her song released in 1953.

Since then, there are now a few more additions to the best friends list, namely the luxury bags. We are not too well versed but based on our research, the few that would add a smile to a girl if they are able to add to their collection would be top of the list, Hermes, followed by Chanel, Christian Dior and Gucci.

We are going to analyse 3 companies that never have a price discount and are able to hike prices consistently, yet there is great demand for their products. The 3 companies we will be touching on would be Hermes, LVMH and Christian Dior. Chanel would be a good candidate but unfortunately, they are privately owned.

For Hemes, they have positioned themselves nicely as it is almost impossible to get a Birkin bag if you walk into their stores. Most have to get it from the secondary market.

Source: Seeking Alpha

Of the 3 brands, LVMH is the most complicated in terms of ownership structure as could be seen from the diagram above. They have a minority stake in Hermes and a majority stake in Dior. 

 

Luxury Goods Outlook

The growth outlook for the luxury goods market would be likely in the single digits of 6%-8% and could reach EUR360- EUR380 billion by 2025 based on the forecast of Bain and Company.

The revived luxury market has been powered by the resumption of local consumption, the dual engine of China and the US and the consistent strength of the online channel. Younger customers (Gen Y and Gen Z) continue to drive growth and together are set to make up 70% of the market by 2025. 

Source: Bain and Company

The view of Bain and Company is in line with Statista numbers but the latter is on the more conservative side.

The global luxury goods market is expected to increase from US$309.6 billion in 2021 to US$382.6 billion in 2025 at a CAGR of 5.4%. Even though cutbacks on discretionary spending and an uncertain economic climate triggered by the COVID-19 pandemic resulted in a sharp fall in demand in 2020, the resurgence in Chinese spending and the increasing dominance of millennials and Generation Z is expected to drive the market in the medium term. 

Source: Statista

With the industry outlook for luxury goods likely to show sustained growth, we will have some tailwinds, though it is not going to be a huge one with astonishing growth if we are keen to invest in this sector.

 

Charts of the Luxury Brands

Source: Investing.com

From the charts, let’s say it is not only women’s best friends but also every investor’s best friend. They have been on a steady ascent despite the Pandemic, Fed Tapering and recent Tech rotation.

 

Financial Ratios

Let’s take a look at the fundamentals and financial ratios to see if they are in the value zone and worth accumulating.

Stock	Price to Earnings	Debt to Equity	Return on Investment	Price to Book	Current Ratio	Dividend Yield	5 yrs Sales Growth	Market Cap/ Price
Hermes	58	0.2	25	16	3.5	0.37%	5.8%	127 billion/ 1220
LVMH	30	0.73	14	7.5	1.23	1.42%	11%	348 billion/  695
Christian Dior	24	2.25	27	7.7	1.23	1.5%	8.3%	118 billion/  658

Source: Investing.com

Looking at the numbers, there are no real bargains for grasp as the lowest PE is at 24. The debt to equity level needs some explanation as it includes the capital lease- likely rental of stores. If we take off the capital lease, Dior would have a debt to equity ratio of 0.8, Hermes nearly zero as it does not have long term debt and LVMH will be around 0.35. 

The growth rate coincides with the forecast which we have touched on earlier- in the 5%-8% range. LVMH managed to outpace which could be due to their active acquisition of brands.

Dior’s credit risk seems the highest among all but it has registered all-time highs in their revenue and income in the latest FY- more than double their operating income. That is really commendable given one of the most uncertain economic conditions and the travel industry taking a big hit. What is to be seen would be will it be sustainable?

The return on investment for both Hermes and Dior are similar and it shows this is a good industry with great margins– if you are one of the few classic brands that would last. As for LVMH, due to the wide-reaching scope of businesses under their ownership structure, their return on investment margin is in the mid-teens which is still decent and also provide them diversity.

From a valuation angle, Dior would look most promising especially with the latest numbers showing fantastic growth. Moreover, they have rebranded to make the brand more appealing to the younger crowd and it seems to be working out from their sales growth. 

As for Hemes and LVMH, we would not deem it as a reasonable price to pay based on their current valuation. But no doubt, both have a quality business model especially Hermes where the demand always surpasses supply. We just have to wait for the right price. 

 

Summing Up

With great price inelasticity characteristics, the luxury bags are not only a fabulous gift but also an ideal investment that would boost our investment returns. Just as with diamonds, the Hermes and Diors would form a great friendship bond with most women.  

The luxury goods industry is likely to see a revival back to single-digit growth based on estimates by Bain and Company and Statista. 

On the whole, the industry has been resilient to most market shocks through the past 5 years. 

We have touched on 3 brands that are known to not have any price discount, it shows their positioning as the best of the breed- Hermes, LVMH and Dior.

Based on the valuation, we feel Dior is trading at a reasonable price and it is showing good growth momentum based on the latest FY figures. For Hermes and LVMH, we have to be patient and wait for the right price rather than making an impulse buy.

For the coming Valentine’s Day, you could look into gifting a Dior share instead of the bag to your loved one. Hope it sits well with this gesture.

 

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