Will The Joy Ride For Luxury Goods' Stocks Continue In 2018?

The luxury goods market had a lavish 2017 with impressive sales figures from top players. Given the continuing economic recovery, the momentum is likely to continue in 2018. Also, optimism surrounding steady economic growth, lower tax rates, strong wage growth and a robust earnings season hint at a brighter future for luxury stocks. Robust sales figures registered by a number of luxury brands in China along with an increasing number of millennials spending more on luxury goods bode well too.

A Stunning 2017

U.S. luxury stocks witnessed a robust 2017. The S&P Global Luxury Index has risen 34.76% in the last year. Shares of PVH Corp. (NYSE:PVH) have surged 62.4%, while Michael Kors Holdings Limited (NYSE:KORS) has rallied 67.02% in the same time frame.

The last 12 months were also great for LVMH-Moet Hennessy Louis Vuitton SA (OTC:LVMUY) , Ralph Lauren Corp. (NYSE:RL) and Tapestry, Inc. (NYSE:TPR) , which gained 51.35%, 34.44% and 29.31%, respectively.

While LVMH-Moet Hennessy Louis Vuitton SA, Michael Kors Holdings Limited and Ralph Lauren Corp. carry a Zacks Rank #2 (Buy), PVH Corp. and Tapestry have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Interestingly, it wasn’t only the domestic market but also the international space, particularly China, that saw companies coming up with a stellar show. Overall, the impressive performance of luxury goods was a global affair following a change in the tastes and habits of shoppers.

The overall global economy too was strong, which helped luxury goods’ stocks to grow. A good start to the holiday season in 2017 gave an added thrust to the share price of luxury brands that range from wearables, to handbags, belts, eyewear, sportswear and shoes.

Global Factors Influencing Growth

The overall picture for luxury goods was quite rosy in 2017 with the big players going all out to make their presence felt in the global market. One of the primary reasons was that most brands focused more on millennials, who are splurging on luxury goods pretty early.

According to a February 2018 survey report by Mindshare North America, 57% of shoppers are between the ages of 18 and 34, indicating that millennials are now the biggest shoppers.

That said, the optimism surrounding steady economic growth, higher wages, business-friendly policies by the government and an appeal for luxury in emerging economies cannot be overlooked.

Moreover, a number of luxury brands also expanded globally, which helped them come up with higher sales. While Tapestry acquired Kate Spade for $2.4 billion last year, Kors acquired Jimmy Choo for $1.2 billion to expand its presence in China.

LVMH-Moet Hennessy Louis Vuitton SA registered record sales for 2017 with a like-for-like sales growth of 12%, double the rate of 2016. The growth was driven by the stupendous performance of its fashion and leather goods divisions. Moreover, one of the best U.S. holiday season in years helped Tiffany rev up its sales.

China Powers Global Expansion

For global luxury brands, China remains the hottest destination. Most big names reported of benefiting from the China market in 2017 and 2018 too won’t be any different. And those who are yet to explore that market are fast gearing up to set up shop in China.

Per a January 2018 Bain & Co report, sales of luxury goods in China, which moved at a snail’s pace for years, escalated at the fastest rate in more than half a decade in 2017 and are expected to perform well in 2018. The report further says that sales of luxury goods in China touched 142 billion yuan ($22.07 billion) in 2017, increasing almost 20% from a year ago. The highly dynamic Chinese market helped brands like LVMH and Kors and Tapestry.

Global luxury goods purchases by Chinese shoppers jumped 12% last year to €84 billion ($104 billion), per Bain & Co. This surge in consumer spending is being attributed to the changing demographics in China. Those born after the adoption of the one-child policy in 1979, today comprise the highest number of shoppers.

Moreover, the millennials, who are setting new fashion trends, are the biggest spenders and most luxury brands are following them. At the same time, per a February 2018 BCG report, social media and word-of-mouth are the first and second sources of information for shoppers in China, with 49% and 30% share, respectively. Keeping that in mind, most global luxury brands are going the D2C (direct-to-customer) way in China. Last July, LVMH launched its directly operated online store that country. Prior to that, Kors and Burberry too opened e-commerce sites in China.

Millennials & Boomers to Power 2018 Growth

Millennials are dominating the changing preferences and habits of consumers as they comprise the highest percentage of shoppers. Naturally, focus on millennials will be the key to success for luxury brands in 2018. Millennials’ tastes and preferences are increasingly blurring the gap between premium and luxury brands.

According to Mindshare North America’s recent survey, 55% millennials are of the opinion that big luxury brands are losing their personal feel compared with 46% Gen X and 23% of Boomers. Hence most brands are addressing these perceptions and trying to meet the demands of millennials, who are trend setters.

At the same time, Boomers cannot be neglected as they are the ones with great spending impact in the market right now. So, while millennials are setting trends, Boomers have more spending power. Most luxury brands are trying to strike a perfect balance between the two.

Future Perfect

With positives such as a recovering economy, lower tax rates and business-friendly policies, luxury brands are poised for growth in 2018. The China market, which saw sluggish sales for years, is finally recovering with sales of luxury goods touching record highs. This certainly has made luxury brands optimistic about the China market and expansion plans are afoot for quite a few big names. Moreover, millennials have emerged as the biggest spenders and are expected to impact sales this year too.

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