Yearly Results Jumpstart Luxury

LONDON, United Kingdom — 2017 ended on a better note than expected, notably with strong results coming out from sector bell-weather LVMH. This prompted the Savigny Luxury Index ("SLI") to climb over 2 percent, whilst the MSCI gained 1.5 percent.

Big news

Good news from the big players so far: LVMH posted record sales for 2017 with a like-for-like sales growth of 12 percent, double the rate of 2016, with its fashion and leather goods divisions performing particularly well; Richemont and Swatch also impressed investors with solid sales growth in the last quarter and in the last year respectively. All three groups talked about a significant improvement of demand in China. This sentiment was echoed in Brunello Cucinelli's preliminary sales figures for 2017, which registered a 36 percent increase in Greater China. US-focused players Tiffany and Luxottica benefited from one of the USA's strongest holiday seasons in memory, which added momentum to both companies' sales performance for the financial year.

The bridging of online and offline retail, which has become the holy grail of 21st Century luxury retail, is taking another baby step forward. Farfetch is developing new technology that allows customers to flag a wish list of items via their phones when they stroll into a store, or even tell assistants that they do not want to be approached whilst shopping. The marketplace giant, which acquired iconic London multi-brand retailer Browns in 2015, is currently trialling the technology and plans to roll it out to select retail partners soon.

2018 has started with a bang for mergers and acquisitions, with a number of large scale transactions being announced. Richemont launched an offer to acquire the shares in Yoox Net-A-Porter that it didn't own — the terms of the deal valuing YNAP as a whole at 5.3 billion euros (about $6.5 billion). Kering announced its intention to spin off 70 percent of German sportswear giant Puma to its shareholders, with the group retaining 16 percent. There were also rumours that the luxury conglomerate was considering a split with Stella McCartney, with the designer buying back the group's 50 percent stake. In health and beauty, a tweet by India-based Patanjali Ayurveda's spokesperson revealed that L Catterton was willing to invest $500 million in the well-being brand.

Hedi Slimane has returned to the LVMH fold as creative and image director of Céline. Hedi will spearhead the brand's extension into menswear, fragrances and couture, with the goal to double the brand's sales to €2 billion within the next few years. Elsewhere within the LVMH group, Kim Jones announced his departure as menswear designer of Louis Vuitton, fuelling speculation that he might move to Versace or to Burberry.

Going up

• Prada gained almost 13 percent this month on the back of an improved trading environment in China, where the group has a strong presence.
• Ralph Lauren's share price was boosted by broker upgrades in anticipation of its quarterly results announcement, due in February. The stock gained 10 percent in January.
• Swatch's strong sales performance in 2017 and confident outlook for 2018 pushed the Swiss watch group's share price up 7 percent this month.

Going down

• Burberry and Mulberry were hit hard by the further unfolding of Brexit. Both companies saw a reversal of fortunes in their domestic market as the impact of a lower pound wore off and bargain-hunting tourists eschewed the UK for deals in other markets. Burberry lost 12 percent of its value whilst Mulberry lost 6 percent of its value in January.
• Safilo had its worst trading day in a year at the end of January, losing 7 percent of its value after yet another disappointing set of results. The company's loss of the Gucci eyewear license contributed to a halving of its projected EBITDA for 2017. Nevertheless, overall monthly performance of the stock in January was only slightly negative.

What to watch
We are getting some indications of what to watch in 2018 from the incoming string of results announcements. Overall optimism for the current year is being tempered by caution over currency movements, with the euro already appreciating against the dollar. Tensions in the Middle East and in Korea are also on companies' watch list. Nevertheless, China is back in the game and has seen the emergence of millennials as the driving force of a 20 percent growth in luxury sales in 2017. Millennials are more likely to shop from their smartphones and appear more interested in fashion (especially the fast-growing luxury streetwear segment). Saint Laurent has teamed up with JD.com to launch an online presence in China; we should expect more of this to come in 2018.

Sector valuation

Editor's Note: This article was revised on 7 February, 2018. A previous version of this article misstated that Richemont launched an offer to acquire the shares in Yoox Net-A-Porter that it didn't own, valuing the recently merged entity at £3 billion. The £3 billion corresponds to the amount of shares that Richemont has offered to buy, which is just over half of YNAP. This means that the offer should value the company at more or less the double of that.