TheChek News Flow

Executive Summary

Gucci’s recent performance hints to a genetically different luxury world: that such a big

brand could grow at this pace has never been seen before. What is going on?

The change we are witnessing is far deeper than a mere design hit. New “streetwear”

aesthetics are hybridising with luxury goods and reshaping the market dynamics

of status symbols. We call this “New Luxury”. A generation shift and the internet

are the root cause. A new consumer cohort is ushering a natural drive to be different,

harbour new values and new ambitions. Digital is opening the possibility of creating

countless communities all around the world, with idiosyncratic interests, signs, and

codes. This new aesthetic is obvious, in your face, maximalist, irreverent.

‘New’ is a dangerous word for luxury goods incumbents. Industry fortunes in the recent

past have generally been built on notions of heritage, timeless appeal and inherent

product value, supported by craftsmanship and know-how steeped in history. The risk

of the “New Luxury” revolution is that heritage becomes a synonym of old – and

‘old’ is out, as ‘new’ is in. This threatens to change competitive dynamics, as it

weakens barriers to entry protecting incumbent luxury goods brands, and opens

the door to new entrants marketing new luxury icons. What has been going on with

luxury streetwear is a case in point: countless new brands have come to the party.

The ‘New Luxury’ world brings extreme polarisation (between brands that ‘get it’ and

brands that don’t); higher brand trivialisation risk (as adoption follows herd

behaviour and concentrates on a narrow set of blockbuster products — boosting their

volumes and exposure; new Luxury, like Old Luxury, still works on perceived

exclusivity); a new volatility (short-term brand loyalty may increase, long-term brand

staying power may reduce). Luxury companies are confronted by two problems today:

the poor man's problem — moving from uncool to cool; the rich man’s problem

— staying cool, once you have become cool.

Who is impacted by “New Luxury”? Footwear is most negatively impacted, as

sneakers are quintessentially streetwear. It is not surprising that companies like

Ferragamo — that have their origin and core equity in formal footwear — are under

most pressure. Suits and outerwear are also heavily impacted. In fact, suits, ties,

coats are antipodean to streetwear. Burberry and Hugo Boss are in the penalty box.

Brioni is too.

Leather goods are certainly not immune, not even Hermès. Leather goods are the

Trojan horse for the new streetwear aesthetics to reach mainstream older

consumers. Mega-brands like Gucci and LV are playing a key role in making the new

streetwear aesthetics mainstream and through it are finding a new “reason why”. The

mega-brand virtuous cycle still works, but the trigger for consumer adoption is not just

mere size and an incumbent dominant position, but the ability to convey the new

zeitgeist.

The big question is whether ‘new luxury’ should imply a lower multiple for the

sector. Most investors today value luxury goods stocks on the back of organic growth,

and match organic growth to PEs. But this assumes organic growth can be reasonably

sustained over time, and that dominant brands will always be there and will always be

relevant. What we are saying here is that luxury is more and more looking like fashion,

and this is not how fashion brands typically work. They work in a boom and bust

manner.

Companies with higher barriers to entry and lower brand trivialisation risk should

trade at a premium, because they would be more valuable to the long-term investor.

The market seems to be working this way, as we find a correlation between our “brand

health index” and valuation multiples. Successful short-term investment hinges on

anticipating inflection points in brand momentum, both to the positive and to the

negative. Or even, on anticipating how other investors will tend to change their

perceptions of self-help prospects for different brands.

We are the first to recognise Gucci’s brilliant turnaround and excellent momentum. The

Kering investment hinges on two key points: 1) ST, how to anticipate and trade

the trend in Gucci’s brand momentum. Previous experience suggests that once

organic growth reduces, the Kering multiple will compress; 2) medium term/long term,

how to price the increased risk of brand overexposure and trivialisation. We

prefer to err on the side of caution and start to top-slice on the Gucci rebound.

We maintain a higher target relative PE on LVMH, as LV is ‘doing a Gucci’ too, but

more prudently: through capsules (while maintaining the core offer on a mainstream

aesthetics), at a higher ASP (limiting volumes and exposure), with tighter price and

distribution discipline (producing and sustaining a better illusion of exclusivity).

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