Burberry’s fall in sales is just the start

I’ve written here several times about the luxury goods industry and our concerns that China’s hard landing alongside its changing political environment will affect sales across the board.

This week that view gained some traction as Burberry announced that like-for-like sales are not just flat but falling and that its profits would be “around the lower end of market expectations”. Burberry shares fell 18% and dragged much of the rest of the sector down with them. LVMH was down 4% at one point yesterday and Richemont 6%.

It is possible, of course, that Burberry’s stumble will be a one off. But it doesn’t seem that likely. Either way, the only surprising thing is that the fall off in the sector is a surprise to anyone at all. Not only has the Chinese hard landing been obvious for some time but it doesn’t take much of a leap to see that, as most recent luxury goods growth has come from China, a Chinese slowdown – both in economic growth and in the political gift-giving environment – was going to force a slowdown in luxury goods growth.

Also of interest should be the below charts (both taken from Bloomberg with the first put together by Mike Malone from Mint Partners). The first charts the prices of wine, iron ore, Burberry and Richemont and the second iron ore and Chinese stocks. 

 prices of wine, iron ore, Burberry and Richemont

 

 Price of iron ore and Chinese stocks

There are two things to note here. First, while iron ore isn’t a commodity most analysts have historically tended to pay much attention to, perhaps its time has come (note too that, while I am not sure I agree, some think it has bottomed – it recorded its biggest ever one-day gain yesterday). And second, if you hold shares in Richemont, you might want to think about selling them.

 

 

  • Beta Adjusted

    Agree. I used to cover luxury goods stocks at a hedge-fund. Was considering shorting BRBY a few days ago on back of comments from other players, Tiffany etc. but elected for Richemont instead – huge fixed costs from own retail network, very high-end product. Swatch is also a possibility (Omega very geared to China and they have high fixed costs in their production division). Burberry got *killed* post Lehman as apparell gets discounted to very low levels before the next product-lines are produced. BRBY itself could have a lot more downside (going to plug the numbers myself shortly), but beware its a potential M&A target from LVMH. Remy cointreau is another …

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