Coronavirus: No Effect on Luxury Sector Forecasts
With many luxury stocks trading close to record high multiples, we don’t see many compelling investment opportunities in the sector.
We believe the short-term impact of the coronavirus epidemic in China could have more severe implications for the luxury sector compared with SARS in 2002-04, given the much higher share of Chinese luxury buying compared with 17 years ago. We believe the share of Chinese luxury purchases increased from just over 2% global share at the time of the SARS epidemic to 35% currently. Further, while mainland China accounts for 11% of luxury purchases and Hong Kong for a low single digit, the bulk of Chinese luxury purchases are made abroad and can be hit by travel restrictions. Online channels (such as YNAP, part of Richemont, 4-star-rated Farfetch and the brands' own online channels) could be short-term beneficiaries as buyers refrain from travel and visiting department stores.
However, since epidemics tend to be short-term, we don’t see the epidemic having long-term negative implications on the sector’s earnings power. Should fears over the virus subside consumption and travel, put on hold, could quickly return to the market. Hence, we don’t expect to adjust our fair value estimates for luxury coverage downward. In mainland China, store rental agreements have a higher share of variable costs, compared with the global average, according to LVMH, which should protect profitability during the epidemic. We believe Chinese luxury consumption could grow at 5%-7% over the decade, boosted by higher-wage employment.
That said, with many luxury stocks trading close to record high multiples, we don’t see many compelling investment opportunities in the sector. We still see value in Richemont (wide moat, 4-star rating, revenue exposure to Chinese consumers 40%), Swatch (narrow moat, 4-star rating, sales in greater China of 36%), Dufry (narrow moat, 4-star rating, exposure to Chinese consumers around 6% and 13% of revenue in Asia, Middle East and Australia), Hugo Boss (narrow moat, 4-star rating, 15% of sales in Asia) and Pandora (no moat, 4-star rating, 9% revenues from China).
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Jelena Sokolova does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.