Wealthy and upper-middle class consumers in the US and overseas have weathered the economic headwinds and continue to purchase luxury items, observes Elliott Gue of Personal Finance.
Although US consumer spending has slowed in aggregate, rising household incomes in rapidly growing emerging-markets have led to the emergence of a new consumer class with the will and the wallet to spend on discretionary items.
Inflation in China has also declined sharply since midsummer, suggesting that policymakers have engineered a soft landing for the economy without stalling economic growth.
We continue to recommend that investors focus on names that cater to the haves rather than the have-nots when allocating money to the increasingly bifurcated consumer-discretionary sector.
LVMH Moet Hennessy Louis Vuitton (LVMUY) is best known for its eponymous Louis Vuitton handbags and accessories. But the Paris-based luxury giant is also the caretaker of renowned brands including Thomas Pink, Donna Karan, Fendi, Kenzo, and Emilio Pucci.
The company’s fashion and leather-goods segment—which accounts for about two-thirds of total sales—posted 14% organic revenue growth in the first half of 2011. The division’s recurring profits rose 17% year over year in the first six months of 2011.
The outlook for EU economic growth has deteriorated since midyear, but Europe isn’t the only game in town for LVMH. European sales of fashion and leather goods increased just 12% year over year in the first half, compared to 21% growth in the US and an uptick of 22% in Asia.
Wines and spirits are LVMH’s second-largest business segment. Hennessy is the world’s leading cognac brand, while the 269-year-old Moet & Chandon remains the global leader in champagne. The wines and spirits division generated 13% more revenue in the first half of 2011 than in the opening six months of 2010, fueling a 27% surge in net income.
As is the case with Diageo (DEO), Asia is a major growth driver for LVMH’s premium spirits and drinks. As their disposable incomes rise, Asian consumers have embraced Western brands as status symbols.
The company’s champagne sales volumes rose 3% in the first half of 2011, while cognac sales volumes climbed 8%. LVMH hopes to build on this momentum by partnering with local firms in China to grow sales of high-end wines and spirits.
LVMH also does significant business in perfumes, cosmetics, watche,s and jewelry, though these products are less important to the bottom line. Watches and jewelry is the company’s fastest growing segment, posting organic growth of 27% in the first half of the year. A new strategic alliance with the Bulgari family and expanded watch-making capacity should spur higher sales of these popular products.
The stock has pulled back amid Europe’s sovereign-debt crisis. However, the region accounts for less than one-third of LVMH’s revenue, and foreign tourists account for a significant portion of the firm’s European sales.
LVMH Moet Hennessy Louis Vuitton’s ADR rates a buy under $36.
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