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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
There is little doubt that the luxury sector is showing signs of wear. But not every brand has crumpled, as evidenced by Prada’s runaway success. What separates the silk purses from the sows’ ears?
Some of it is structural. Super high-end brands — especially those that make less product than consumers want — are by definition defensive. Hermes’ 13 per cent sales growth shows it deserves its premium rating at 46 times this year’s earnings.
The sector’s behemoths — with the ability to command the choicest retail space and industry talent — also have a structural advantage. LVMH managed to eke out organic growth of 1 per cent — not quite sparkling but not terrible given its recent growth spurt. The group is 60 per cent bigger by revenue than it was in 2019.
It also helps to avoid faux pas. Gucci and Burberry are struggling to sell their turnarounds into a downturn. Burberry‘s plight is in part related to steep price rises, showing that the trend towards premiumisation has become harder to pull off.
But the real breakout star of this reporting season — Prada, with retail sales excluding currency fluctuations up 18 per cent in the second quarter — benefits from none of those trends. The Italian group is not super high end. It does not belong to the elusive group of brands with $10bn in sales. And it has been increasing prices harder than most. Its iconic handbag costs twice as much as it did in 2019, thinks HSBC.
Prada appears to have two things going for it. First, it is playing catch-up. Between 2013 and 2019, its revenues were broadly flat while LVMH’s rose 85 per cent. It was arguably under-earning compared with its brand. Indeed, even after repeated price increases its Galleria handbag retails for £4,000 or so — some 25 per cent cheaper than LVMH’s Capucines.
Secondly, its Miu Miu brand is having a moment. Google Trends, an analysis of search queries, shows a doubling of interest year on year, says JPMorgan, a fact that is reflected in its sales performance.
From an investor standpoint, being cool is not as enduring or therefore valuable as being legendary, or massive. Those are hard moats to cross, while the line between what’s hot and what’s not is perilously porous.
Yet Prada can use its momentum to strut through a tough time for the industry. And if it can also take advantage of this runway to build scale and improve lagging profitability, it may turn its ephemeral trendiness into a timeless look.