Luxury Goods Industry: Should one buy bags or Stocks?

When mentioning Luxury Goods, it is believed that the first thing that comes to mind is branded handbags.

In recent years, branded handbags have gradually transformed from a stable asset to an appreciating asset, especially top luxury brands like LV, Hermès, and Gucci. It is often joked that buying a bag is more profitable than buying Stocks.

If you had some money to invest in the Luxury Goods Industry ten years ago, which symbol would you choose?

• Classic branded handbags.

• Luxury Goods Stocks.

Some people may choose branded handbags because they can not only carry them when going out but also the classic models appreciate in value every year; the problem is that not everyone can afford them.

However, many people do not know that many of these luxury brands are publicly listed companies, so would Stocks be a better choice?

01 Industry Overview.

Luxury goods belong to non-essential items, in other words, these are products that consumers desire, but their absence will not affect their lives.

This is in contrast to essential goods, such as daily necessities, which consumers need to purchase every day.

Therefore, luxury goods are priced higher than ordinary commodities, not only due to higher quality, but also as a form of self-satisfaction and a symbol of status.

Currently, the five most valuable luxury brands in the world are Louis Vuitton, Chanel, Hermès, Gucci, and Rolex.

Except for Chanel and Rolex, which are not publicly listed, the other three are publicly traded companies.

The publicly listed parent company behind Louis Vuitton is LVMH Group (code: LVMUY), Hermès is Hermès International (code: HESAY), and Gucci is part of Kering Group (code: PPRUY).

Next, let's take a look at the businesses of these three companies and the performance of their stock prices in recent years.

02 LVMH Group

As the world's largest Luxury Goods group, LVMH was founded in 1854 and has a long history. The company has multiple Business divisions, including Fashion & Leather Goods, Wines & Spirits, Perfumes & Cosmetics, Watches & Jewelry, and Selective Retailing. LVMH's strategy is to continually expand its brand portfolio through mergers and acquisitions, owning over 70 luxury brands, including well-known names like Louis Vuitton, Dior, Fendi, Loewe, and Bvlgari.

The most classic style of LV bags is undoubtedly the Neverfull series. This series was launched in 2007, and over the past 10 years, the price has risen significantly, increasing from $940 in 2013 to $2030 in 2023, a growth of 116%.

In comparison, the stock price increase of LV's parent company (LVMUY) is even more exaggerated. At the beginning of 2013, LVMUY was $25.9 per share, and by 2023 (as of April 13th closing), it was $196.8, a staggering increase of 657%.

During this period, the S&P 500 had an increase of 184%. It can be seen that LV's handbag price increase underperformed the market, but the stock performance was better than the market.

03 Hermès

Unlike LVMH, Hermès has relatively few brands under its umbrella.

Hermès is a French luxury brand known for producing high-quality handbags, Trinkets, and leather goods. The Hermès brand was founded in 1837 as a small harness workshop in Paris and has now become a global fashion empire.

Hermès also has multiple Business divisions, with the largest product category being leather goods and saddle supplies (mainly the iconic luxury Hermès bags like the Birkin), which accounted for 43% of the company's revenue in the fiscal year 2022. The Ready-to-wear and Accessories department is the second largest, accounting for 27% of the company's revenue.

The most classic style of Hermès is the Birkin bag, named after British actress Jane Birkin, and it is one of the most popular handbags of the Hermès brand.

In 2013, the starting price of a basic Birkin bag was $8,000, and by 2023, the price had risen to $10,400, an increase of 30%. Meanwhile, the stock price of Hermès rose from $28.97 per share at the beginning of 2013 to $216.5 in April 2023, a staggering increase of 647%.

Similarly, the price increase of Hermès handbags lagged behind the market, but the stock performance was better than the market.

04 Kering Group

Readers may not be very familiar with the Kering Group, but you have probably heard of the brands under its umbrella: Gucci, Bottega Veneta, Saint Laurent, Balenciaga, and so on. In addition to these fashion and jewelry businesses, the Kering Group also has a sportswear business, such as Puma.

Unlike the long history of Hermès and LVMH, the Kering Group was founded in 1963, initially dealing in timber and building materials.

It wasn't until acquiring Gucci in 1999 that Kering entered the Luxury Goods industry, which can be considered a newcomer in this field.

Gucci is a brand under Kering that is experiencing good growth, featuring two classic handbag styles: Marmont and Dionysus. Since historical prices for these two bags are not easy to find, let's take a look at the performance of Kering Group's stock and the S&P 500 Index over the past decade.

The stock price of Yunji Group has increased by 230% over the past 10 years, slightly outperforming the S&P 500 Index.

05 Brand Value

For luxury goods companies, their core competitive advantage lies in their brand value.

Brand value can be measured through profit margins; the higher a company's profit margin, the stronger its pricing power, which simply means that consumers are willing to pay a higher premium for its brand, allowing the company's products to be sold at a higher price than those of other competitors.

Below are the net income margins for LVMH Group, Hermès International, and Yunji Group. It can be seen that Hermès has a higher net income than the other two, reaching 29.13%.

Accordingly, Hermès' stocks are more expensive than those of the other two companies, with a PE valuation of 63.64 times.

06 Risks

Finally, it is worth noting for investors that all investments carry risks, whether it be designer handbags or stocks.

The actual prices of designer handbags can be influenced by various factors, such as the type of leather, color, size, and market supply and demand conditions. Additionally, second-hand bags may also carry liquidity risks.

Similarly, the same applies to Stocks.

In 2023, the stock prices of LVMH and Hermès both reached historic highs, and their valuations have also surged. Currently, both LVMH and Hermès are at historically high valuation levels compared to the median PE ratio of the past 13 years.

Although Luxury Goods is a lucrative Business, it is also subject to cycles, and it is possible that time will be needed to digest the current valuations in the future.