Live the high life with these luxury retailers

Indeed, the sector has ballooned into a multibillion pound business from which investors have been enjoying bumper returns. Last year marked the third in a row of double-digit growth, with sales totalling roughly €212bn (£181bn) - 5 per cent up on the previous year, and a 36 per cent increase since 1995, according to consultancy Bain & Company. What's more, revenues are forecast to grow 50 per cent faster than global GDP, averaging 6 per cent growth a year, to reach €250bn in sales by mid-decade.

"Twenty years ago the luxury industry was in its infancy. Now it has sustained remarkable levels of growth and that will continue," says Harrods managing director Michael Ward. "Customer transaction value has grown 80 per cent over the past few years and the bubble won't burst. Even in the darkest days of recession, consumer appetite for luxury was high and throughout the economic crisis we in luxury goods continued to invest. Consumers want to be part of the elite club, even in a small way."

True, Mr Ward does have a vested interest here, but he has a valid point in that luxury retailers are good at differentiating themselves from the churn of the high street. "The high street, which was once a diverse array of shops, has become a standard blueprint. It has lost understanding of service and the shopping experience has become devalued," he adds. Analysts at Bain agree, saying the key for winning in the luxury market over the next decade will be defined by a "relentless focus" on superior customer experience, flawless retail management and investing in top people.

It might seem odd, though, that given the global economic backdrop, luxury brands are doing well, while so many high street retailers are struggling. Actually, it's entirely logical. While the recession is hitting the masses, the rich are growing richer, looking for ways to spend their money to distinguish themselves from their peers. Affluent shoppers, meanwhile, aspire to own luxury goods and will save to buy that exclusive scarf or handbag, whatever the economy is doing. Meanwhile, the economic boom in emerging markets has created a burgeoning generation of wealthy, status-conscious consumers, more than happy to splash out on designer brands.

For instance, a quarter of luxury purchases globally are now made by Chinese shoppers, according to Bain, while Greater China accounts for roughly 13 per cent of the global luxury goods market. Moreover, while luxury spending in mainland China is slowing, the market is still expected to rise 7 per cent this year. Across south-east Asia, revenue is forecast to grow a staggering 20 per cent, while growing consumer confidence in the US will result in 6 per cent sales growth. In South and Central America it will be double that. Recent trading updates from luxury retailers support this trend. In the six months to June, Hermes International (FR: RMS), maker of the iconic Birkin bag, reported 14 per cent revenue growth as sales surged in Asia (which represents nearly half of total sales) and the Americas. Even European sales rose 14 per cent. Sales at Moët Hennessy Louis Vuitton, or LVMH (FR: MC), grew 8 per cent at the half-year stage, with good momentum in the US and Asia, while a first-quarter trading update from Burberry (BRBY) revealed an 18 per cent rise in comparable retail revenue, with double-digit store sales growth in Asia Pacific and the Americas and high single-digit growth elsewhere.

Global growth is thus becoming more evenly distributed and luxury brands are now refocusing on long-term sustainable growth strategies to cater to a more diverse range of tastes, says Claudia D'Arpizio, a partner at Bain. Perhaps this explains why there are so many multinational conglomerates in the space, such as LVMH, Hermes, Kering (FR: KER), Christian Dior (FR: CDI) and Prada (HK: 1913), which own a diverse array of designer labels, from Stella McCartney to Fendi. They've been expanding in recent years, too. LVMH boosted its holding in Hermes last month and acquired a majority stake in Italian brand Loro Piana, its biggest acquisition since purchasing Bulgari in 2011. The acquisition helps it tap into the market for the most expensive luxury goods, which account for the fastest growing part of the industry as consumers seek more exclusive items. The sheer size of these companies is helping to fund growth, something smaller luxury labels, like Mulberry (MUL), are struggling to achieve.

What constitutes 'luxury goods' is up for discussion, technically it's not a sector, but our own tailor-made basket of 19 luxury goods companies shows shares have risen on average 34 per cent in the past year on the back of double-digit sales and profit growth. These companies benefit from strong margins as the mark-up on luxury goods is high - gross margins average 66 per cent, net profit margins are around the 13 per cent mark, while operating margins average 20 per cent. Many are cash-rich, and few have any meaningful net debt. That said, superior growth comes with a price tag, with the average forward PE ratio at 21.

So what's the downside? Well, the biggest risk remains brand vulnerability, as LVMH is discovering with Louis Vuitton, which is a victim of its own success, and which Burberry experienced years ago when its iconic check pattern was adopted by so-called 'chavs'. That aside, the consensus is that luxury is still very much on the upswing.

IC VIEW:

Few UK-listed companies fit neatly within the luxury goods sector, but the changing dynamics of the retail landscape and shift in consumer demand from West to East are having a huge impact. Not only are brands evolving and maturing, but there’s also plenty of scope for further growth and consolidation. The world of high fashion might seem a bit meaningless, but if it’s returns you’re after, this sector is one to watch.