Against a backdrop where earnings estimates have been guided down in the second half of the year, th...
Against a backdrop where earnings estimates have been guided down in the second half of the year, the performance of some luxury goods companies in the US has been strong.
Over the year to 4 September 2001, Tiffany is down 1.5% in dollar terms, compared to the S&P, which is down 14%. Coach, which designs, produces and makes luxury leather goods, is up 7.56% from 31 January to 31 August, compared to the S&P 400 mid-cap index, which is down 5.88% over the same time period.
Susan O'Brien, head of US equities at First State Investments, says this performance is counter-intuitive of the economy as a whole. In this tough economic environment, she says, it is these stocks you would expect to go in the tank. However, consumer confidence in the US has not been as weak as was expected which, she argues, is why this area has outperformed.
Guy Thornewill, fund manager at Zurich Scudder, says another reason luxury goods have performed well is interest rate cuts to which stocks like these react positively as investors anticipate an economic recovery.
He believes the outlook for the sector depends on consumer spending. If it gets weaker, he argues, it will adversely affect the performance of these companies.
Thornewill says: 'Normally in an economic downturn, consumer spending is lower than it is now and companies like this would have reported worse numbers. This time around, spending has not been falling through the downturn. The key to whether they continue to do well is whether or not this spending continues.'
O'Brien, says signs are beginning to emerge that the consumer may be becoming less confident. Figures out earlier this month show that consumer confidence is at its lowest point since April 2001.
Jonathan Price, director of US equities at JP Morgan Fleming Asset Management, says the key with all luxury goods is global brand awareness. He adds that companies have to have this rather than just geographical awareness if they want to be a true player in the market.
Price says: 'Tiffany manufactures half of what it sells, it has a good management team and brand loyalty, which can transcend an economic cycle. In Japan, Tiffany has the good store sales at a time of economic recession and sales are up 10% on average year on year. So, if you have an operation that has strong brand loyalty, it will not be the case that it struggles in an economic downturn.'
Price says Tiffany had a decent run from mid-April until now but its price is coming down from last year's high levels. He says that from its low of approximately $7 in mid-October 2000, Tiffany went to a high of approximately $44 around the beginning of 2001. As at 4 September, its price stands at $31.8.
O'Brien says Ralph Lauren has flat performance over the year to date, against the 14% fall in the S&P 500. Other stocks that have done well include Gucci, LVMH and Bulgari ' all European stocks.
Thornewill says one reason some of the more expensive jewellers have done well is because the people spending in them are wealthy and not as affected by problems in the economy.
• Sector holding up against US weakness.
• Consumer spending remaining strong.
• Positive reaction to interest rate cuts.
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