The post pandemic boom is diminishing for luxury brands

Burberry and Compagnie Financière Richemont outstripped market expectations with their first-quarter results on Friday, buoyed by a post-pandemic spending euphoria and a joyous return to shopping in physical stores, except in mainland China.

But it’s unclear how long the buzzy mood will last before rising inflation, the threat of recession, and China’s economic policies in the medium term begin to weigh on the luxury consumers’ minds, and wallets, as they already have done with shoppers lower down the price spectrum.

The financial markets are already jittery. Shares in Burberry and Richemont both closed down on July 15 despite the upbeat results. Burberry sank 4.4 percent to 15.76 pounds while Richemont fell 2.8 percent to 98.06 Swiss francs. Earlier in the day, Richemont and Burberry had both published their results, and while those companies operate in different parts of the luxury market, the team at Bernstein offered a similar analysis of both.

In a separate report earlier this month, Bernstein had said getting out of the COVID-19 pandemic “is working like a massive feel-good boost: a global yolo attitude is creating an outsized luxury demand wave.” On Friday, Bernstein also referred to the strong numbers coming out of Brunello Cucinelli, and Swatch, in recent days. “This seems a good platform to enter the second half of the year, despite background concerns on macro and politics.”

In the first quarter, Richemont posted double-digit revenue gains across all product categories and regions, except for Asia-Pacific. At actual exchange rates, sales rose 20 percent to 5.26 billion euros, and at constant rates they were up 12 percent. Richemont said the U.S. was its largest single market in the three-month period. Sales climbed 25 percent to 1.34 billion euros at constant exchange, and accounted for 22 percent of Richemont’s overall revenue in the three months.

Richemont’s sales in Europe grew by 42 percent, due to “robust domestic demand,” and a return in tourist spending, primarily from American and Middle Eastern clients. Growth was strong across markets, particularly in France where sales increased in the triple digits.

Mainland China was a drag on growth due to COVID-19-related lockdowns, but other countries in the APAC region helped to mitigate those declines. Richemont didn’t update on trading, or its ongoing negotiations to merge Yoox Net-a-porter Group with Farfetch to create a new luxury platform.

Bernstein described Burberry’s performance, which wasn’t as robust as Richemont’s, in similar “yolo” terms.Like Richemont, Burberry also saw strong demand in Europe, with comparable-store sales growing 47 percent during the period due to demand from local clients, and sales to American tourists.

Both companies also witnessed a strong pickup in APAC markets outside of mainland China: Richemont reported an 83 percent uptick in Japan sales at constant exchange while Burberry noted that declines in mainland China were partially offset by “strong performances” in the recovering markets of Japan and the South Asia-Pacific region.

With a strong start to the fiscal year, these luxury brands are hedging their bets, keeping one eye on the macro scene and the other on growth. Burberry noted that its performance in mainland China has been “encouraging” since its stores reopened in June, and it is “actively managing” the headwind from inflation globally.

The company said it continues to target high-single-digit revenue growth and 20 percent margins, at constant exchange rates, in the medium term. Julie Brown, Burberry’s chief operating and chief financial officer, said the company is upbeat about its prospects in the region, where some 40 percent of its distribution was shut earlier this year due to COVID-19 restrictions.

Asked about Burberry’s decision to shut its Canton Road store in Hong Kong earlier this month, Brown said the closure was “in line with Burberry’s elevation strategy” in the region. Canton Road was the second major store that the British brand has shuttered in Hong Kong since the COVID-19 pandemic. The company first closed its flagship in Causeway Bay last year.

Luxury retail in Hong Kong has taken a big hit since the introduction of broader controls between mainland China and Hong Kong in early 2020, and the wave of social unrest that proceeded the tighter rules. Brown added that the 4 percent slowdown in Burberry’s U.S. sales was due to “very tough comparatives” with the corresponding period last year

Although Richemont didn’t talk about current trading, or its future prospects, the company’s latest numbers told an interesting story. The group, parent of brands including Cartier, Van Cleef & Arpels, Dunhill and Chloé, posted double-digit revenue gains across all product categories and regions, except for Asia-Pacific, which was hit by the China lockdowns.

At actual exchange rates, sales rose 20 percent to 5.26 billion euros. At constant rates they were up 12 percent in the April to June period. The U.S., which was driving those sales gains, has proven to be a cash cow for a while now. As reported, in the fiscal year ended March 31, sales in the Americas region climbed 79 percent and put it on par with Europe as one of Richemont’s most lucrative regions.

Asked in May about overall sales trends in the U.S., Richemont’s founder and chairman Johann Rupert said demand is “not just on the two coasts. Have you ever been to Midland, Texas, where they eat pan-fried steaks? Well, they buy watches there as well,” he said.

During the same call, Cyrille Vigneron, president and chief executive officer of Cartier, said the brand has been performing strongly in the U.S. across jewelry, watches — and every other category. Demand, he said, “has been very solid for the past year.

Richemont said that while sales in mainland China were 37 percent lower in the quarter, the rate of decline “softened” to 12 percent in June when restrictions were progressively eased. Demand for Richemont’s big-ticket items doesn’t appear to be slowing, either.

Jewelry sales were up 12 percent at constant exchange, benefiting from “thriving retail sales” at Buccellati, Cartier and Van Cleef & Arpels, while sales at Richemont’s watchmaking division increased by 10 percent at constant rates, driven by online and offline channels.

While most watch maisons and regions did well, Richemont noted that A. Lange & Söhne, Panerai and Vacheron Constantin continued to outperform the other brands in the watch stable. Richemont’s fashion and accessories houses, meanwhile, posted a 28 percent increase in the period, supported by strong retail and wholesale sales, and “sustained demand across the various brands and regions.”

Bernstein said Richemont’s double-digit growth — in the face of a double-digit decline in China — was “a testament to the continuing strength of high-end consumer demand.” They just can’t stop seizing the moment, at least for now.

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