The lifting of China’s coronavirus restrictions has injected the French luxury goods sector, no stranger to prosperity, with a fresh wave of growth. Kering, the fourth titan in the industry alongside Hermès, L’Oréal, and LVMH (Moët Hennessy – Louis Vuitton), revealed its Q1 financial results a few days ago. In the lexicon of investors, these four firms are collectively referred to as “KHOL,” an acronym reminiscent of “GAFAM,” which denotes American tech giants Google, Apple, Facebook, Amazon, and Microsoft.
Kering’s sales reached nearly €5.1 billion, a modest 1% increase from the previous year’s quarter, once portfolio and currency effects were accounted for. This sluggish growth is primarily attributed to persistent sales challenges faced by Gucci, the group’s flagship brand. However, Kering slightly exceeded analysts’ expectations, particularly as Q4 sales in the preceding year had shrunk by 7%. The Asia-Pacific region, benefiting from the gradual revival of the Chinese market, is driving growth for Kering, which, in addition to Gucci, is home to brands such as Brioni, Balenciaga, and Bottega Veneta.
Hermès, the venerable French purveyor of high-end leather goods and accessories, even reported “strong momentum” in Q1. Sales in Asia, excluding Japan, surged by 23%, mirroring the growth in overall group sales, which amounted to approximately €3.4 billion. Despite the political discourse surrounding decoupling from China, Hermès continues to thrive in the Far East. Last week, the company expanded and revamped its first-ever store in the People’s Republic, situated in Beijing’s Peninsula Hotel, where it has been operating since 1997.
Known for its coveted Birkin handbags, Hermès now boasts 27 stores in China. The refurbishment of the Peninsula Hotel store symbolizes “the house’s long history and confidence in the Chinese market and its dynamic capital,” according to a company statement.
For L’Oréal, the France-based cosmetics titan, the Far East holds considerable importance as a sales region. At first glance, the 13% increase in sales, amounting to roughly €10.4 billion in Q1, appears to have experienced a slight setback. The company initially reduced inventories, as reported. Last year, L’Oréal’s luxury division emerged as the strongest contributor, responsible for nearly 40% of sales, with growth accelerating further at the year’s outset.
A similar trend applies to the LVMH empire, which encompasses an array of fashion houses, handbags, watches, jewelry, luggage, cognac, and wine manufacturers. The conglomerate, owned by Bernard Arnault, the world’s wealthiest individual, posted a striking 17% surge in sales to around €21 billion in Q1. The revitalization of business in China played a crucial role in this development. “Asia is witnessing a significant recovery following the easing of health restrictions,” stated LVMH.
The luxury boom continues to resonate well in the stock market. Owing to their exceptional pricing power—Hermès, for instance, boasts operating margins exceeding 40%—LVMH & Co. shares are in high demand, particularly during periods of elevated inflation. Kering shares, recently the weakest among the “KHOL” stocks, have appreciated by nearly 19% since the beginning of the year. For L’Oréal and LVMH, the increase stands at 28% and 29%, respectively, while Hermès shares have soared by an impressive 34%.
The French benchmark index, the CAC 40, has also reaped the benefits, registering an almost 15% uptick since the year’s start, making it the unrivaled leader among global country indices, as emphasized by Olivier de Berranger of LFDE in a recent market commentary. De Berranger highlighted a “strong outperformance of luxury goods and non-basic consumer goods” in the eurozone, which are particularly well-represented in the CAC 40.
France’s “KHOL” stocks have repeatedly shattered records in recent months, with LVMH breaching the symbolic $500 billion mark for the first time this week—a feat no European company has achieved before. In euros, Arnault’s industry leader stands at approximately €440 billion, far surpassing Danish pharmaceutical group Novo Nordisk (€340 billion) and Swiss food behemoth Nestlé (€315 billion).
LVMH, L’Oréal, Hermès, and Kering collectively approach the threshold of €1 trillion in stock market value, a remarkable accomplishment by European standards. However, this figure appears modest when juxtaposed with the United States, where Amazon alone boasts a market capitalization exceeding €1 trillion. Collectively, the “GAFAM” group’s stock market value currently stands at around €7.5 trillion.
Opinions are divided on whether the luxury shares’ record-breaking streak is fundamentally justified and if it can be sustained. On the one hand, many high-end products made in France are unrivaled in their respective segments, fulfilling the need for distinction, particularly in emerging markets. On the other hand, future growth is already factored into the share prices.
The shares themselves have evolved into luxury items. While Kering may still appear affordable with a price-earnings ratio (P/E) of around 20, LVMH’s P/E has reached 30, L’Oréal’s 40, and Hermès’ a staggering 60. Consequently, investors purchasing these stocks today must demonstrate patience in order to recoup their investment.
