Inflation is not a luxury for luxury
Many quality luxury companies are largely protected from the impact of high inflation, not just by price power. Here because. The comment by Alistair Wittet, Comgest's European equity manager
For some companies, increases in labor and material costs due to inflation could reduce profits and undermine expansion efforts. In our view, however, inflation will have far less impact on quality growth companies which are expected to experience double-digit annual earnings per share growth over a five-year investment horizon. The reason lies in particular in the competitive advantages, which are usually accompanied by pricing power and high gross margins. This was also recognized by Warren Buffett, who used to say: "If you have the power to raise prices without losing market share to your competitors, you have a great company."
The pricing power allows companies to pass on the cost increase. An example of this is the global luxury conglomerate LVMH Moët Hennessy. The company increased the prices of its branded products by approximately four and five percent respectively in 2020. Although a decline in sales was conceivable, the relevant figures remained unchanged. This pricing power is also observable over a longer period. In 2009, for example, Louis Vuitton launched a women's bag with a purchase price of 400 euros. Exactly the same bag was among the best-selling in 2021, with a purchase price of 1,600 euros. There have been no changes in quality or design over the years. The high gross margins provide companies like LVMH and Hermès with the necessary foundation to innovate and invest in their brands so that they remain desirable over the long term.
Many quality companies create concrete added value for their customers by introducing new technologies or products. Take Essilor Luxottica for example: the company operates in the field of ophthalmic optics and, after years of research, has recently succeeded in developing spectacle lenses that slow down the progression of myopia in children by 67%. As a result, the company is able to impose price increases on customers that contribute to organic growth over the long term. Acquisitions are another source of growth, accelerating earnings growth over the long term. At LVMH, for example, sales have increased by 150% since the acquisition of Dior in 2017.
The demand for luxury goods globally continues to be led by China . As the middle class grows, so does the number of high-net-worth consumers buying expensive watches, designer clothes and luxury handbags from Western brands. But the big surprise is the growth of the market and the beginning of a structural trend in the European and US middle classes. In particular, during the Covid-19 crisis, consumers used their budgets, which were actually reserved for travel, for purchases in the domestic market. Furthermore, structural factors lead to greater popularity of luxury brands: the younger generation spent more on luxury goods during the pandemic and now see them as a status symbol.
Finally, it is not just the power of prices that provides many luxury companies with a shield against inflation. As rising prices lead to higher interest rates, balance sheet strength can also make a difference. Many high-growth stocks have low leverage, which protects them from rising debt costs or refinancing, which in turn gives them competitive advantages.
In summary, therefore, we believe that many quality companies in the luxury sector are largely protected from the impact of high inflation. We therefore remain confident in our philosophy and will continue to invest in first-class quality companies with sustainable long-term growth. In difficult economic environments, this approach is more beneficial than ever.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/inflazione-non-e-un-lusso-per-il-lusso/ on Sun, 09 Oct 2022 05:20:42 +0000.