The Booms and Busts of American Luxury | Opinion, Luca’s Letter

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NEW YORK, United States — Today’s luxury market is about maintaining the illusion of exclusivity, while selling units by the millions. Shatter the illusion and brand cachet is lost — and with it goes growth, margin and, ultimately, value. While Europe’s luxury houses play a long game, working hard to maintain the perception of exclusivity, America’s large luxury players have adopted a different approach altogether, sprinting to sell as much as possible, as fast as possible, then suffering the consequences.

Indeed, the US luxury industry tends to follow a cool/not cool cycle: a brand is suddenly perceived as cool; the company goes all-out to distribute as widely as possible; revenues shoot up, followed by returns; then the brand becomes ubiquitous and is no longer cool. This has resulted in a luxury model based on higher off-price engagement, broader distribution and lower entry-level price points than is generally found in Europe. The financial returns can be exhilarating: analysis of the figures show fantastic progression among US luxury companies during the early years of this century, with returns on invested capital (ROIC) attaining heights unknown to European players. Then came the inevitable crash, sending returns at almost all US luxury companies back to the levels of the early 2000s.

America’s luxury players have been sprinting to sell as much as possible, then suffering the consequences.

This makes American luxury goods stocks volatile as they tend to trade on quarterly results. Fundamental investors interested in medium- to long-term prospects would need to bet on entering share positions when valuations, revenues and profits are at rock-bottom levels, when brands have purged the excesses of the previous cycle, in the hope that new management is able to ignite a new boom (and bust) cycle. Of course, buying into a brand before its initial rise is ideal. But at this early stage in a company’s life-cycle, hits are rarely easy to identify and the investment could fail.

The American luxury company whose model is closest to the European model is Tiffany. Its brand equity, especially outside the USA, is very strong. The company is not without its shortcomings, but these do not seem impossible to address: poor in-store merchandising, poor in-store experience, poor “exclusivity pretence.” There are also a number of avenues for creating value, for example, differentiated retail concepts for jewellery and silver — which could work well online — and developing its designer jewellery and watches offering.

The appointment of a new CEO to replace Frederic Cumenal, who stepped down in February, could usher in a new era for Tiffany and bring an end to the tug-of-war on strategic direction. At the same time, the company’s strong brand equity and untapped potential makes Tiffany an appealing takeover target for a large European player, especially given the prospect of a US “border adjustment tax.”

Of the rest, Coach is probably the most interesting company in the US soft luxury space. The company seems intent on revitalising its core brand while acquiring new assets that could drive fresh growth. Yet Coach is still highly dependent on its off-price business and so still tied to the short-cycle world.

Ralph Lauren’s experiment in injecting new “mass fashion” life into the decaying designer business model seems to have failed. Former H&M executive Stefan Larsson, who held the role of CEO at Ralph Lauren for less than two years, is now gone and we are back to square one. Meanwhile, Michael Kors seems close to the bottom — at least in terms of its stockmarket value — and the company seems likely to remain there for some time before there is any hope of another meteoric return.

Luca Solca is the head of luxury goods at BNP Exane Paribas.

This article appears in BoF’s latest special print edition: “America.” 

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