Even the Rich Are Feeling the Squeeze

LONDON -- If you're fabulously wealthy, you may be wondering what the fuss about the so-called Great Recession is all about. The rich have sailed through relatively unscathed, buoyed by low interest rates.

For evidence of this, you only have to look at the performance of luxury goods companies. A recession is usually a rotten time for them, as consumers cut back on the bling, and stick to buying the basics.

Not this time. Luxury goods companies have seen their sales and share prices soar. Until recently. Now it looks like the rich may finally be feeling the pinch as well.

Location, location
Luxury brands such as Louis Vuitton, Hermes, Gucci, Chanel, Hennessy, Rolex, Moet & Chandon, and Cartier can thank the emerging-market consumer for their snazzy showing.

Many of them now generate up to 40% of their sales from emerging markets, especially China, where newly rich consumers have kept calm and carried on spending as before.

FTSE 100 fashion favorite Burberry (LSE: BRBY.L  ) has looked cool and comfortable on the global catwalk, and now earns more than 20% of its revenue from emerging markets, up from just 6% four years ago.

Suddenly, its slip is showing.

Out of fashion
As befitting a top fashion brand, it is rather a discreet slip. Burberry's first-quarter trading update showed its total revenues rising 11% to 408 million pounds, up from 367 million pounds in the same quarter last year.

Retail revenue, worth 70% of its business, grew 14% to 280 million pounds. Sales didn't just grow strongly in Greater China, but in the U.K., France, and Germany as well. Although they were weak in the U.S., Italy, and South Korea.

But analysts demand a lot from their fashion houses; they had expected sales of 416 million pounds. Burberry's share price tumbled nearly 6%, accelerating the steady decline of recent months. After touching 16 pounds in mid-April, it now trades at under 12 pounds. However, that's still a lot higher than the 2.75 pounds they hit in 2009, in the slovenly depths of the credit crunch.

For whom the bellwether tolls
A large part of the fall was down to slowing sales in China. Stacey Cartwright, the company's finance director, said:

We've seen a slowdown in gift giving in China. That's small leather goods, cashmere scarves, but also trenchcoats. In China there is a political change later this year and we think some consumers are nervous about spending ahead of that change.

If luxury names are a bellwether for the emerging-market consumer, that Chinese hard landing could be gathering pace. Maybe the rich aren't so different from us after all.

Burberry bursts
Burberry is still committed to its China expansion. It has key store openings in Hong Kong and Shanghai later this year, as well as London, Milan, and Chicago.

But analysts have cut their earnings forecasts on the assumption that consumer confidence will only worsen, both in China and the eurozone.

Burberry is also in a potentially expensive spat with perfume maker Interparfums, which owns the license to make its Burberry Body perfume. It has threatened to cancel the agreement on Dec. 31, a move that would cost a cool 140 million pounds. That looks like a lot of money to me, although markets didn't turn their noses up at the news.

So is this the end of the line for luxury?

Mulberry bushed
Handbag maker Mulberry Group (LSE: MUL.L  ) also disappointed analysts last month, delivering annual revenue of 168.5 million pounds for the 12 months to the end of March, falling short of the 175.3 million pounds analysts were hoping for.

That was still a dapper 38% leap in revenues, and a 54% increase in pre-tax profits to 36 million pounds.

Like Burberry, Mulberry's share price has been full of swagger in recent years, rising an astonishing fivefold since January 2011, from 5 pounds to 25 pounds in April this year. They have since taken a handbagging, slumping to 12.76 pounds.

That's the problem with turning in a dazzling performance, markets expect more of the same, and are disappointed when they don't get it.

Fashion's hefty price tag
There's no need to panic and sell either of these shares. Both are financially sound companies that enjoyed strong profit growth in recent years (raising expectations perhaps a little too high). Both are investing in new factories. Both have a growing global reputation, with plenty of scope to extend their brand internationally.

Existing investors should sit it out and wait for the recovery. The drawback is that they won't get much of a reward for doing so, with Burberry yielding just 2.1% and Mulberry a distinctly uncool 0.4%.

Neither share looks cheap, either. Burberry is trading on a price-to-earnings ratio of 23, while Mulberry comes with an even more expensive price tag of 45 times earnings.

These two growth stocks have been hot stuff and they will be again. But if the rich really are feeling the pinch, you may be able to pick up them up at an even cooler discount. After all, I've always resented paying too much for fashion.

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Harvey doesn't own any of the shares mentioned in this article. The Motley Fool has a disclosure policy.
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