After going through one of the worst real economy crisis in recent history, Premium Brands companies are ready for the rebound. The second half of the year shall normalise growth rates of the industry. We expect that in particular the 4th quarter will display visible growth, since the world will regain its confidence in the economic stabilisation, and consumers will return into shopping malls.
2009 - after a very tough start...
Last year was rather challenging for Premium Brands, and 2009 started with an equally difficult pattern. During the first few month, consumer sentiment remained low and affected overall consumption, thereby affecting the business activities of Premium Brands companies. Consequently, a number of firms, amongst others Swatch, Richemont, Bulgari and Tiffany, continued to show poor stock performances. Starting with the Q2 reporting season and the improvement in macro data, things have turned more promising.
... Premium Brands ready for the rebound
Consumer stocks saw a marked rebound in the following months, with April very strong and a stabilization phase from May to July. Macro economic statistics stopped deteriorating. Consumer confidence improved, and companies recognized the worst was over. China offered particularly strong upside with encouraging statistics and continued consumption growth. For investors who closely followed the market, it did not come as a surprise that the mid-year financial data issued by Premium Brands’ companies were better than expected as sales stopped deteriorating and costs continued to shrink. Swatch, L’Oreal, Ralph Lauren, Tiffany, and PVH are telling examples and have all beaten consensus expectations significantly. But not all of the sub-segments did that well. Hotels continue to be comparably weak and had to push back their expectations for a recovery. Cost control and cutting exercises were the main focus of these companies, returning back to profitability being their key goal. A cautious and selective investment approach is key, since not all Premium Brands segments have managed to restructure efficiently.
Emerging markets continue to be growth drivers
The stock performance in the third quarter held up for Premium Brands companies so far. A particular look at Asian, notably Chinese markets is worth the effort. It demonstrates that demand continues to be strong, especially for established Premium Brands, such as Louis Vuitton and Omega (Swatch group). Local brands such as Ports Design also benefited from this trend, as well as domestic distributors such as Xinyu Hengdeli, a leading distributor of luxury watches, or Belle International, a leading manufacturer and distributor of premium shoeware. Despite a still weak global environment, some green shoots in the economy as well as companies’ focus on cost efficiencies offer improved perspectives for investors.
Stocks still far away from July 2007 levels - growth potential!
The market expects that the US Real Gross Domestic Product (GDP) for Q3 will see the first growth (+2.2%) for over a year, after three consecutive quarters with negative growth (the worst was Q1/2009 with -6.4%). China, a major market for Premium Brands, is expected to see GDP growth close to double digits (it actually never fell lower than +6.1% in Q1/2009).
Even though Premium Brands stocks showed good returns on a year-to-date basis, more upside is very likely. A few examples: LVMH, a French leading luxury brand is still approximately 20% behind its July 2007 position; Richemont 25%; BMW 30%. With the economy starting to recover, one can expect that the companies’ earnings multiples will start expanding, as is typically the case after an economic crisis. European luxury stocks should move towards PEs levels of 20 to 25x, from a lower 17 to 18x today. With earnings momentum accelerating and valuation multiples expanding, we can expect stock prices to outperform major equity indices in the near term.
Fund strategy
The winners in the crisis will be the companies that have control over distribution (pricing control, inventory management), cost structures that can be geared to lower demand, and exposure to Emerging Markets - China in particular. Also, companies able to gain market share are well positioned to make it through the crisis. In this respect, a company’s ability to innovate, advertise wisely and enhance customer loyalty will be key.
In conclusion, investments in Premium Brands companies are attractive for investors who focus on quality companies, with stable cash flow generation and a strong balance sheet, likely to outperform in an economic recovery environment. Given the heterogeneity of the Premium Brands market segment, investments in individual stocks are risky. Investments in the well-diversified portfolio of the PF(LUX)-Premium Brands provide an attractive risk-return profile. The fund invests in superior quality companies active in the high-end and upper-middle consumer markets across the whole spectrum of products and services. Its investment universe includes famous names such as Hermes, Lindt & Sprüngli, Puma and Swatch. As such it provides investors with the unique opportunity to take part in the success stories of companies exhibiting strong fundamentals and growth prospects. The fund seeks to generate superior returns through a well-diversified portfolio of premium brand companies by leveraging Pictet’s thematic expertise to identify, amongst the vast world of brands, the winners over the entire economic cycle.
