The Surprising Sector Benefitting from a Growing Global Middle Class

U.S. consumers have been enjoying luxury retail for years and a growing global middle class could translate to a big bump in luxury spending worldwide.

When you imagine consumers splurging on $100,000 handbags and luxury goods, odds are you’re thinking of only the wealthiest citizens of the globe. The jet-setting 1% or 0.1% that live a life that most people can only dream of.

The truth, however, is that some of the biggest growth in luxury retailers is being driven by not a growing elite class, but a growing middle class that’s interested in spending a little extra for the same status symbols the domestic middle class might occasionally indulge in.

You might think that Jeff Bezos or Elon Musk or Bill Gates is the richest person in the world.

But the trophy passed to Bernard Arnault, the French tycoon who got his start in luxury by acquiring Christian Dior in 1985 and then went on to capture Louis Vuitton and other premium names under his luxury group Louis Vuitton Moet Hennessy, better known as LVMH (LVMUY). It’s one of three luxury stocks I’ll examine today.

This January, LVMH purchased Tiffany & Co. Tiffany operates 326 stores globally in countries such as the United States, Japan, and Canada, as well as certain regions of Europe, Latin America and Pacific Asia.

For many Americans, it’s a sad development since it ends Tiffany’s 182-year reign as the leading stand-alone luxury brand in America. Tiffany’s had been struggling a bit as revenue was coming in at a slower rate as the company was in the midst of a turnaround.

Meanwhile, LVMH and other luxury titans were weathering Covid-19, the slowdown in Japan, turmoil in Hong Kong and the trade war without breaking a sweat.

This brings me to some interesting trends going on in luxury consumer markets that are making them deeper and broader than you might expect.

It’s not just the super wealthy, the so-called top 1%, who are driving luxury sales; it’s also the emerging global middle class that will splurge for a few luxury items as a sign of status.

The Economist predicts that by 2030, 93% of the world’s middle class will reside in emerging nations, controlling $6 trillion in buying power, and a nice chunk of this will go to luxury products. This trend seems to be happening around the world – including in America. So with Tiffany’s stock off the luxury investment menu, you should look to LVMH as an (admittedly relatively expensive) luxury stock alternative, and consider two of what I call “pink sheet blue-chip” stocks, Hermes and Burberry.

One reason I like these stocks is that their lower-end products start around $100 -$200, within the reach of the emerging middle class, while the companies have demonstrated strong pricing power with their higher-end products.

Another plus is their brand strength with a key market – Asian tourists with money to burn.

“It’s the global traveling luxury consumer that is dominating,” says Burberry Chief Financial Officer Stacey Cartwright.

Let’s do a deeper dive on these two emerging luxury stocks.

Hermes International (HESAY), a French luxury goods maker going back to 1837, is partially owned by LVMH. While Hermes crafts a wide assortment of belts, shoes, fragrances, handbags and gloves, it is best known for its iconic premium silk scarves and ties.

An elegantly crafted Hermes scarf is highly prized and priced and this translates to impressive profit margins. The company made a big splash by introducing a sari for India. The sari is a silk cloth draped around a woman’s body and is a must for many Indian women for special events and formal evenings.

Hermès bags are handcrafted and are priced at an eye-popping $150,000. The company sells its products through a network of 310 stores, including 219 directly operated stores worldwide. Revenue in the first quarter of 2021 was up 38%, with Asian revenues ex-Japan surging 94%.

Burberry (BURBY), meanwhile, was founded in 1856 and this iconic British brand and its products share many of the characteristics of Hermes.

I remember well that Japanese shoppers during the 1980s could not get enough of Burberry’s bags, ties and coats and the same is now happening throughout the Pacific Rim. A survey of high-end department stores by Credit Suisse suggests that Burberry’s brand is equal to that of Chanel, Louis Vuitton and Hermes.

Burberry’s stock is on a price-to-earnings basis the least expense of these three luxury stocks even as same-store sales were up 32% in the last quarter on a year-over-year basis. Its strategic plan includes opening dozens of new stores in emerging markets.

All three of these luxury stocks are in strong uptrends and tap into sizable growth markets with healthy profit margins. Consider adding some luxury to your portfolio for 2021.

Would you rather have these luxury companies in your closet or your portfolio?


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