TheChek News Flow

This week, luxury’s biggest brands must demonstrate they have a plan to navigate China’s Covid Zero policy, a tumultuous global economy, the crypto crash and more. Plus, BoF tells you what else to watch for in the coming week.

When we talk about pandemic stocks, we typically think about e-commerce retailers or direct-to-consumer brands that rode the lockdowns to record results, and fell back to earth just as quickly as the world opened up again. Luxury brands have experienced a gentler version of this roller coaster. Their wealthy clientele never stopped shopping, and the post-pandemic consumer boom has fuelled big increases in sales and profits. But investors think the category is running out of track: shares of most big luxury firms, among the best performers in 2020 and 2021, have underperformed the wider market this year.

Investors can be (and frequently are) wrong. Still, when LVMH, Kering, Hermès, Prada and Moncler report quarterly results this week, each is likely to put their best spin on the latest numbers while managing expectations for the future. They’ll also need to offer up a game plan for navigating tough times ahead.

Below are five potential ways the luxury party could end, in descending order of threat level:

It’s not looking good out there. Inflation continues to rise in most countries, and GDP projections keep getting revised down (the US and Eurozone will report both indicators this week; see the calendar below for more). Fortunately, the one economic indicator that’s remained strong is the one that matters most for the fashion industry: retail sales, which continue to exceed expectations in the US and some other markets. Luxury’s best customers are also relatively insulated from the wider economic picture. Many won’t even notice a mild recession, or whether gasoline prices are $4 or $5 a gallon. But brands will feel it if middle-class shoppers trade down from Louis Vuitton to Coach, or worse yet, keep carrying around last year’s handbag. And a deeper downturn would squeeze even wealthy consumers’ budgets.

This week’s earnings cover the bulk of China’s “Zero Covid” lockdowns in Shanghai and other major cities. It won’t be pretty. Burberry reported quarterly sales rose just 1 percent after revenue in China plunged 35 percent. Brands like Gucci and Prada that have relied most on China for growth are the most exposed. That’s doubly true if China’s recent slowdown turns into a recession, or if its alliance with Russia turns into a broader move away from the West, luxury brands included. No wonder so many labels that once talked about China as the future are touting their ambitious American store expansion plans.

Speaking of expansion plans, mega labels like Louis Vuitton and Chanel have seemingly put to rest the old idea that luxury brands can only grow so big before they run out of new customers, or lose their cachet. That bit of conventional wisdom is due for another test, as LVMH and Kering are promising to boost their biggest brands’ sales by billions of dollars in the next few years. Even the biggest brands have new markets they can enter, from cosmetics to furniture and hospitality. The plan is to sell lots more clothes too: Kering says it will open dozens of Saint Laurent and Gucci stores, both in luxury hotspots and relatively untested markets (Kering’s investor day presentation in June indicated at least three new Gucci locations are planned in Ohio alone).

The euro is at parity with the dollar for the first time in 20 years. For now, there’s mostly upside for European luxury brands, which benefit from hordes of American tourists flexing their newfound spending power at the new Dior megastore in Paris. All those new Gucci boutiques in Ohio will be that much more lucrative for the brand, which thanks to currency fluctuations can charge 20 percent more for the same bag in Cleveland as it does in Milan. The downside is that the euro is weak for a reason: it’s acting as a proxy for the war in Ukraine, and the possibility that Russia will withhold energy supplies to the continent, triggering a recession.

Crypto millionaires and billionaires are some of luxury brands’ best new customers. Or were, anyway. With cryptocurrency and NFT prices crashing, some of the category’s biggest boosters, who once flaunted their wealth in head-to-toe Louis Vuitton or Gucci, are now fending off creditors. Brands say they’re still bullish on crypto, plowing ahead with NFT releases and plans to accept cryptocurrency in stores. One reason they can safely ignore the chaos is that none of these brands had invested all that much in the technology to begin with. If their next NFT project bombs, they can quietly drop plans for the next one. The reason crypto makes this list at all is that so many of the industry’s visionaries see web3 driving fashion’s future, from how we buy clothes to whether we wear them in virtual worlds in addition to the physical one. For that transition to happen, crypto needs to make a comeback.

The new store, designed by the Italian architect Vincenzo De Cotiis, stocks womenswear and accessories, and is part of an aggressive drive by Burberry to push deeper into the U.S. market.

LONDON — Burberry is ramping up its presence in the key U.S. market and aiming to appeal to locals and tourists alike.

A month after staging a mega-takeover of Neiman Marcus’ Atlanta store at the Lenox Square mall, the brand has moved south to Miami, and is set to open a store at Bal Harbour Shops.

The new womenswear store, which opens on Monday, is located on the lower level of the open-air luxury shopping mall and features the brand’s latest design concept by Italian architect Vincenzo De Cotiis.

“Bal Harbour is one of the most established and well-known luxury destinations in Miami, and is among the most visited shopping malls in the United States. It also caters to a broad range of both local and international customers. We are excited to bring our new global design concept to this iconic destination,” said Thibaut Perrin-Faivre, president of Burberry Americas.

The store, which spans 2,023 square feet, carries handbags and small leather goods, including the bestselling Lola and TB Monogram bags. The Lola features quilting inspired by the signature Burberry check, and color combinations ranging from classic black and beige to orange and peach pink.

There is also a selection of the spring 2022 pre-collection, including sketch-print T-shirts and hoodies, monogram map-print shorts and anoraks, dark brown chevron check oversize cardigans and miniskirts.

The store concept sees the house codes, such as the Burberry check, reinterpreted. There are mirrored ceilings with intersecting metallic grids and tiled checkerboard floors meant to create a sense of openness.

The facade features a blend of stone and champagne metal arranged in the signature house pattern and finished with black edging. Inside, the walls have been decorated in a trench-colored mosaic tile and reflective white lacquer, or covered in beige mohair.

The concept debuted a year ago at 1 Sloane Street in London, part of a new development by The Knightsbridge Estate. As reported, Burberry nabbed the key corner site overlooking Brompton Road and Sloane Street and was the first tenant to occupy one of seven planned flagships.

The immersive installation at the retailer’s Atlanta store was meant to showcase the latest Burberry TB Summer Monogram collection.

It was the first time in Neiman Marcus’ history that the entire exterior of a store was taken over by a brand. The outside of the Atlanta store at the Lenox Square mall was wrapped in a pattern that fused the Burberry check with the TB Monogram print. Inside there was a graphic, sculptural space that included the Burberry signature patterns.

At the time, Perrin-Faivre said that Burberry has “continued to unlock new possibilities” in the U.S. market. This year alone it has staged a takeover of its Rodeo Drive store themed around the spring 2022 collection; brokered a partnership with downtown New York City restaurant Lucien, and undertaken the collaboration with Neiman Marcus Atlanta in June.

As reported, Burberry has been doubling down in the U.S., and courting customers in smaller cities where demand for luxury goods is on the rise.

Despite Burberry’s many efforts, the brand’s sales in the U.S. slowed by 4 percent in the first quarter due to “very tough comparatives” with the corresponding period last year.

Julie Brown, Burberry’s chief operating and chief financial officer, said there was “good growth in outerwear with bags also outperforming” in the region, while U.S. customers have been moving to higher AUR [average selling price] categories.

“We haven’t seen any major pressure on [U.S.] consumers at this moment in time,” Brown said in response to a question about whether shoppers were spooked by surging inflation.

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Mark Milley says Chinese forces are conducting unsafe air and sea manoeuvres

The US military’s top officer said China was becoming more aggressive in intercepting military aircraft and undertaking unsafe aerial manoeuvres over the past five years.

General Mark Milley, chairman of the US joint chiefs of staff, said China was conducting “dangerous intercepts” against American military aircraft and ships, and was also targeting Canada, Australia, Japan and other US partners.

“The number of Chinese intercepts at sea and in the air has increased significantly over five years,” Milley told the Financial Times and The Associated Press aboard his aircraft as he flew to Asia for visits to Indonesia and Australia.

The Chinese military has become “noticeably more aggressive in this particular region”, he said.

Milley declined to provide specific figures about the total number of incidents, but said the volume of unsafe intercepts — such as when a Chinese fighter jet comes close to a US aircraft — had risen in “equal proportion”. It was unclear to what extent the rise was due to China responding to expanding US activity in the region.

In May, a Chinese J-16 fighter flew very close to an Australian spy plane, releasing chaff, including pieces of aluminium, that was sucked into the engine of the P-8 surveillance aircraft.

Milley said he discussed unsafe intercepts when he spoke to his Chinese counterpart, General Li Guocheng, in the first call between the generals since President Joe Biden took office.

Li responded by warning the US not to engage in “provocations”. The Pentagon stresses that it is operating in international waters and airspace, but China wants the US to reduce its activity in the region.

Intercepts are just one of many contentious issues in the US-China relationship which is in its worst state since the countries established diplomatic relations in 1979.

Biden and Chinese president Xi Jinping are expected to hold a call in the coming days in which they are expected to discuss a range of issues including Taiwan, which has become a flashpoint.

Beijing warned the US after the FT reported that Nancy Pelosi, Speaker of the US House of Representatives, would next month visit Taiwan, a country over which China claims sovereignty.

China has signalled that it might respond with more than rhetoric if Pelosi visits Taipei, sparking concerns that Beijing could take military action, such as intercepting her plane with fighter jets. The White House is worried that the visit has the potential to spark a crisis across the Taiwan Strait.

Milley visited Jakarta on Sunday as part of the effort by the Biden administration to strengthen alliances and partnerships in the Indo-Pacific. The push is partly designed to reassure countries that the US intends to remain a strong presence in the region to counter China.

Ahead of his meeting with his Indonesian counterpart General Andika Perkasa, Milley said Indonesia was “strategically critical” to the Indo-Pacific given its size and geography. The four-star general is the first chair of the joint chiefs to visit Indonesia since Admiral Michael Mullen travelled to the south-east Asian nation in 2008.

Speaking after his meeting with Milley, Andika said that Chinese ships had also harassed Indonesian vessels.

Milley arrived in Sydney on Monday to attend a regional meeting of military chiefs. He will be accompanied by Admiral John Aquilino, head of US Indo-Pacific. Milley said the chiefs would discuss the situation surrounding Taiwan, including what lessons from the Ukraine conflict might apply to the island.

Speaking about the conference, which will be held on Tuesday and Wednesday, Milley said the “vast majority” of countries in the region wanted the US military to be engaged.

“We want to work with them to develop interoperability and modernise our militaries collectively, in order to make sure that, geostrategically, we’re able to meet whatever challenge that China poses,” Milley said.