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European Retail Briefing - April 2016
Analyst Comments
 
METRO
Last month we talked about Metro and its problems with Real. Hardly had the European Retail Briefing been published when Metro announced that it is going to demerge Media Saturn. We think this is a logical move. Media Saturn is a great business, well able to stand on its own. It is the European market leader in electricals and has long been the jewel in the crown of Metro’s retail businesses. 

So the great retail diversification of Metro through the 1980s and early 1990s has now been almost completely unwound. We have not attempted to work out what it cost the group, but it must have been expensive and had the group just concentrated on cash and carry it would surely now be in a much stronger position and would, presumably, have been able to distribute cash to its shareholders.

“Almost”, but not completely. One problem remains – Real. As we discussed last month, no-one seems to want it. Metro does not seem to have been able to find anyone to buy the business, but there are other options. It could pay another group to take it, or it might even be prepared to finance a management buy-out. But it seems unlikely that it will remain in the group for long.

LUXURY GOODS – INTO 2016
There has been a flurry of results from the luxury houses recently and as usual they are a mixed bag. We know that there is a problem in the Far East with a slowdown, especially in China, but just how serious has it been?

Bad results are always put down to “challenging market conditions” and the real challenge for the analyst is to assess whether it is the market that is difficult or the brand that is underperforming. There’s a further complicating factor in currency. The strength of sterling has made the Burberry figures look worse, but the weakness of the Euro has flattered the figures from the likes of LVMH, Gucci and Prada.

Burberry
Overall sales fell in the second half and like-for-likes were down 5% in the fourth quarter. The major problem for Burberry has been Hong Kong, where sales fell 20% (the third successive quarter of declines). Mainland China performed much better with sales up and retail revenue in Japan doubled. However, there was a fall in tourism from China and that affected sales in Europe.

Burberry is heavily biased towards clothing and both the core men’s and women’s ranges fell by 3%.

The company is very cautious for 2017.

LVMH
Fashion is a much smaller proportion of sales (36%) at LVMH and sales there were flat in the first quarter of 2016 on a constant currency basis (Burberry’s fourth quarter when like for like sales fell 5%). The other business segments (jewellery, wines, perfumery and “selective retailing) all reported mid-single figure growth. LVMH’s report was less detailed, but it also pointed to falling tourism hitting revenues in France and said that Asian markets “varied”, though Japan was strong.

Kering (Gucci etc)
First quarter figures (to the end of March) were not very exciting, but that hides an outstanding performance from YSL, strong figures from Gucci and an 8% fall at Bottega Veneta. Western Europe did well for Gucci and only Bottega Veneta complained about weak tourist flows. Overall, Japan did well and the rest of Asia pacific was flat.

Prada
Unlike the other three companies reported here, Prada’s year end is January and it has yet to publish its accounts and the first quarter does not end until the end of April. It has a somewhat complicated way of reporting its data and it takes a while to realise that profits actually fell last year by almost 30%. The pattern of sales performance was similar to the others, but worse – China and Hong Kong combined saw sales fall by 22% on a constant currency basis in 2015/16. Overall leatherwear was the worst performing sector.

Consistency
There is a consistent story from the first three companies and a similar performance. They appear to give a good guide to what is going on at the moment. The slowdown in the Far East is concentrated on Hong Kong and lower outbound tourism, especially to Europe. Otherwise luxury goods demand is holding up remarkably well. 

But even in difficult times, some brands can do well, as we have seen at Gucci, and the contrast between Gucci and Bottega Venta in the Kering figures could hardly be greater. Of the leading groups, it looks as if Prada is the one that is out of line. It’s worth mentioning that rapidly rising reported stock levels at Prada have been a cause for concern in previous years, but the 2015/16 accounts have not yet been published.

Where next?
The sheer resilience of the luxury market is impressive. The desire for aspirational goods is undimmed. There were major concerns that the well-publicised anti-extravagance campaign in China would hit luxury demand, but its impact would appear to have been limited, apart from in Hong Kong. But the economic slowdown has certainly hit outward bound tourism and it is probable that the terrorist attacks in Paris have had an impact as well. Elsewhere, demand is holding up well, though one cannot discount the underlying economic uncertainties.

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