Luxury retailers are making inroads despite a strong dollar and a shaky economy

Retailers and brands that cater to affluent customers are not entirely immune to the current macroeconomic challenges, which could become even tougher next year if recession fears materialize. However, higher-income households are fairly well insulated from inflation and other financial hardships, and this is reflected in higher-end store sales numbers.

So far this year, 95% of luxury brands in the US and Europe generated positive growthAccording to a recent study by Bain & Co., the luxury market could grow by 21% this year to reach €1.4 trillion ($1.45 trillion at press time).

According to analysts at Bain, luxury is entering a phase after streetwear, and brick-and-mortar stores are regaining their relevance. “A well-thought-out (and effective) ‘boost strategy’ has led to incremental price increases across the industry (approximately 60% growth from 2019-2022) without compromising volume growth,” Bain said in a press release.

For now, the strong US dollar is taking some of the wind out of the segment’s sails. And the pandemic has hampered the success of many luxury brands in China in recent years as lockdowns continue there. Much of this has been revealed in recent reports from luxury players Capri, Tapestry and Ralph Lauren.

Capri

Managed by Versace, Jimmy Choo and Michael Kors, Capri has a total of 2 sq.m revenue up 8.6% for the year to 1.41 billion dollars; adjusted for currency translation, total revenue grew by 17.5%. Gross profit rose 7.6% to $951 million, net income rose 12% to $224 million, and gross margin edged down slightly to 67.4% from 68% last year.

By brand, Versace’s year-over-year revenue rose 9.2% to $308 million; Jimmy Choo revenue rose 3.6% to $142 million; and Michael Kors revenue rose 9.2% to $962 million. The latter benefits from the desire to raise the product and raise prices, Capri CEO John Idol told analysts. During the quarter, the Michael Kors brand also launched “Michael Kors Pre-Loved,” an online platform for buying and selling pre-owned items from the brand.

The company enjoys particular strength in North America and Europe and in full-price stores versus online stores or retail outlets, Idol said. The company is also adding more sales partners to department stores in those regions after cutbacks due to the pandemic, leading to “a very significant uptick in business,” he said.

Capri is lowering its outlook for the rest of the fiscal year, however, “due to an increasingly uncertain macroeconomic environment, foreign exchange headwinds and the continued impact of COVID-related restrictions in China,” Idol also said.

GlobalData managing director Neil Saunders is similarly cautious about the company’s near future.

“Capri’s results underscore the continued resilience of the luxury sector, where despite many economic challenges, consumers continue to spend relatively freely,” he said in emailed comments. “Overall, we think Capri is in a good position. However, we are very cautious about the next quarter as we believe softer demand and poor exchange rates will hurt growth.”

Ralph Lauren

Reportedly, Ralph Lauren worn by the president’s granddaughter and her fiance at a White House wedding last weekend, exceeded expectations in the last quarter, with revenue rose 5% to $1.6 billion. The apparel brand largely maintained its full-year outlook with slight adjustments in light of the strong dollar, according to its press release. The company expects net income to grow in the high single digits and adjusted operating margin to be at the low end of a prior range of 14% to 14.5%.

Profits fell and net income fell 22.1% to $150.5 million. Operating expenses increased 7% year-over-year, primarily due to investments in marketing and higher compensation and selling expenses to support increased revenue and drive long-term growth, the company said. Retail turnover increased by 1.9% to 917 million dollars, wholesale – by 8.9% to 619.5 million dollars.

Adjusted for currency trends, the brand’s revenue increased closer to 13%, which Saunders called “good progress for the brand in most of the regions where it trades.”

That includes China, which Wells Fargo analysts said “was an unexpected bright spot” for the brand in the period, with profits there growing 30%.

“One of the things we’re most pleased with is the discipline with which Ralph Lauren is elevating its brand and offering,” Saunders said in emailed comments. “It is gradually shedding its reliance on third-party discount and mass-market channels and selling much more direct and through premium retailers that align with its luxury heritage and positioning. While we believe there is still a lot of work to be done on this front – particularly in reducing the exposure of some department stores that still treat their clothes like old rags – we believe the results to date show that we are firmly on the right track.”

Tapestry

Tapestry, which runs Coach, Kate Spade and Stuart Weitzman, last week reported earnings for its latest quarter grew 1.7% year over year to $1.5 billion; Without the influence of the strong US dollar, the growth was closer to 5%, according to the company’s press release. Net income fell nearly 14% to $195.3 million.

As with other luxury brands, shoppers have returned to in-store shopping this year. Tapestry saw slight single-digit growth in direct-to-consumer sales at constant currency, led by high-single-digit growth through brick-and-mortar stores. This offset a single-digit drop in e-commerce. However, digital revenue grew by more than 35% in two years and more than tripled from pre-pandemic levels in 2019, the company said.

Tapestry sales in Greater China fell 11% “due to Covid-related disruptions”, while revenue in North America rose slightly for the year. Gross margin declined to 70% from 72.2% a year ago due to transportation costs of $20 million, or about 130 basis points, and a foreign exchange impact of about 70 basis points.

By brand, sales for this period were at the level of Coach (up 4% currency adjusted); up 7% at Kate Spade (or 10%, adjusted); and was down 2% at Stewart Weitzman (or flat). But the currency headwinds are not fully accounting for the slowdown at the conglomerate, which has been growing rapidly for several years, Saunders said.

“[W]We are also seeing some early weakness in the North American market, which has traditionally been a powerhouse for Tapestry,” he said in emailed comments. “While spending has not fallen, there has been a slight decline in demand for high-end accessories and fashion among some middle-income demographics. ​​​​​​While we believe Tapestry is weathering this storm much better than other players, all signs point to a much softer year for revenue expansion.”