Written by: Susannah Streeter | Hargreaves Lansdown
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Clamour to bring back tax-free shopping for tourists is set to intensify as UK-based firms feel the pinch.
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Big brand power shows signs of waning as the fashion industry prepares for key catwalk shows.
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Ultra-wealthy are insulated from financial pain, but aspirational shoppers show caution.
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Importance of fashion industry to UK economy underestimated, even though it supports 1.3 million jobs.
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Going has got tougher for Burberry, Mulberry and Watches of Switzerland while Louis Vuitton owner LVMH shows enduring strength.
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Uniqlo’s Fast Retailing and Zara owner Inditex benefit as fashion fans trade down, but JD Sports has struggled amid discounting by rivals.
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The latest edition of the Switch Your Money On podcast focuses on big brand power as London Fashion Week looms.
From Paris to New York, Milan to London, February is a super-important month for luxury companies who hope their latest collections shown on the catwalks spark envy and desire among well-heeled shoppers around the world.
But this season’s shows come at a tumultuous time for big brands. A raft of firms has flagged falling sales growth in key markets where inflation has run riot over the past couple of years. China which has long been the engine of growth for luxury names has been misfiring. The economy has been weighed down by sluggish growth, with the fragile property market affecting wealth perceptions and dampening the willingness to spend big among the middle classes.
Items we might covet but don’t need are slipping down must-have lists. The latest HL Savings & Resilience Barometer shows that we’ve cut back on non-essentials and are buying roughly 5% less than we did before the pandemic. The level of luxuries we buy has dropped steadily since the start of 2022. But the ultra-wealthy are far more insulated from cost-of-living pressures finances have been improving for those at the upper end of the income spectrum.
This inequality is showing up in the varying fortunes of the big fashion players with the super-rich still snapping up LVMH’s stable of thoroughbred brands. As aspirational shoppers have tightened their belts and looked for inspiration from stylish names on the high street, Uniqlo’s parent company Fast Retailing and Zara’s owner Inditex have been enjoying a continued run of success, helped by viral trends on social media as fashion fans search for the latest looks at a fraction of the luxury price.
These fashion trends caused by cost-of-living headwinds will have a small but noticeable impact on growth. The importance of the fashion industry to the UK economy is often underestimated. It supports 1.3 million jobs and contributes $62 billion to UK GDP annually. Whether it’s retail or manufacturing, advertising or even NFT wearables in video games, the ebb and flow of disposable cash among different income brackets will show up.
As the going has got tougher for luxury brands, the clamour in the UK to bring back tax-free shopping for tourists as understandably been intensifying. Burberry and Mulberry have called out the government policy as being one of the contributing factors to falling sales. It does appear to be counter-productive given analysis by the Centre for Economics and Business Research which showed the removal of VAT-free shopping was costing the UK £10.7bn a year and putting off 2 million tourists from visiting annually. There is a glimmer of hope on the horizon that the government might have a change of heart. The Treasury’s Independent Forecaster, the Office for Budget responsibility is planning to publish its own review of the costs of the policy in March.
As models step out onto the catwalk faced under the glare of the media spotlight, the fashion industry will be hoping to keep its demands for tax relief in the limelight.
Shares in the spotlight as shine comes off big brand power
Burberry
Burberry’s shares have been sideswiped by concerns about aspirational shoppers tightening their purse string. They have fallen 47% over the past year and since the company issued a profit warning in January, they have lost further ground, down 7% year to date. There is some hope of respite in the UK market if tax-free shopping does return, with shares rising slightly as rumours have swirled this week but it’s going to be a long road back. The trading update for the 13 weeks to 30 December 2023, showed that revenue was down 2%. With sales falling in Europe, the Middle East, India, Africa, and the Americas but that was partly offset by growth of 3% in Asia Pacific. Given this drop in luxury demand and weak December trading, full-year underlying operating profit is now expected to be between £410-£460mn compared to consensus of £522mn.
It’s been a tough time particularly in the US, where consumers have been running down their savings amid a higher interest rate and inflation environment. Growth is also slowing in Asia following tougher comparisons. But behind the scenes progress is being made to elevate the brand and invest in new products which should help the company longer-term.
Watches of Switzerland
Shares in Watches of Switzerland have hurtled down a steep piste, falling around 63% over the past year, as worries about demand waning, and core customers turning more cautious have turned off investors. 2024 got off to a particularly bad start for the London-based watch seller with the share price dropping 45% since the start of the year, as the firm warned that its sales have been seriously dented prompting it to cut its revenue outlook for the full year. The clouds are threatening to hover throughout the year with the firm not expecting a swift recovery in consumer demand. It’s not just the financial toll of higher-interest rates weighing on sentiment, shoppers are being choosier about what to spend available cash on and are choosing a luxury holiday over a Rolex with revenge travel after the pandemic still a force to be reckoned with.
Mulberry
Mulberry has found it impossible to stay in fashion among investors, and its unsurprising given that group revenue over the crucial festive quarter fell 8.4%. What should have been a golden period of sales has been badly tarnished by cost-of-living headwinds among aspirational shoppers. In December, overall retail sales in the UK fell back much more markedly than expected – with volumes dropping by 3.2% Sales at department stores were particularly badly hit, where Mulberry has had traditionally a strong presence with sales volumes falling by just over 7% as people bought fewer gifts. The end of tax-free shopping has hit the group particularly hard, so news of a potential review of government policy helped shares regain some ground this week.
LVMH
LVMH, the global powerhouse of luxury brands has been weathering the ‘richcession’ better than its rivals. Its core customers are the ultra-wealthy, so are largely immune to the economic malaise caused by high borrowing costs in core markets, and China’s consumer confidence crisis caused by the ailing property sector.
It revealed some better-than-expected quarterly sales late last month, helping ease fears about a sharp slowdown, and leading to a rebound in its share price. It posted sales growth of around 10% around Christmas, which, while slower than previous years, is certainly not to be sniffed at. It shows the growing gap in the luxury market with the world’s wealthiest are still splashing deep pockets of cash on the most expensive leather goods with price tags out of reach of aspirational shoppers.
Uniqlo owner Fast Retailing
Uniqlo has shown huge prowess in winning over friends and fashion influencers with its focus on high style at value prices. This strategy has proved invaluable as aspirational shoppers have baulked at luxury brand prices and looked for inspiration elsewhere. Japanese parent company Fast Retailing posted a 25% increase in first quarter operating profit buoyed by strong overseas sales, particularly in Europe and North America and is on track for a third year in a row of record earnings. The brand has found a buzz among younger fashion-conscious shoppers helped by big hits like the ‘Mary Poppins’ style cross-body bag which went viral on twitter. Shares in Fast Retailing have risen 41% over the past year and are up 13% year to date, rising sharply amid the slowdown in the luxury brand market.
Zara owner Inditex
As fashion followers have looked to the high street for cheaper styles as cost-of0living headwinds continue to swirl, it’s provided a boost for Zara's parent company, Inditex. Sales grew almost 15% the first nine months of the year, with growth across all brands and regions. Being able to turn styles on the catwalk into trends in the shops faster than its peers means Zara - which accounts for the majority of sales - has become a go-to shop. That, in turn, helps support more premium price tags. Zara is a force to be reckoned with in the style playbook and it’s also had its finger on the pulse when it comes to store locations, closing smaller stores and focusing on bigger ones in prime locations. Investors have cheered its strategy with shares up 35% over the past year. Operating expenses are also rising at double-digit rates, any missteps will quickly hurt the still bottom line. There is some uncertainty about the immediate future, with shares falling slightly since the start of the year but longer term the group is in an enviable position thanks to its scale and formidable business model.
JD Sports
JD Sports has badly stumbled, as it was forced to operate in the face of significant discounting by rivals. The self-proclaimed King of Trainers found itself dethroned, after like-for-like sales growth came in at just 1.8%. Shares have fallen 33% since the start of the year, as investors assess further weakness ahead for the sportswear giant. It had been helped by Covid stimulus checks in the US which were used to snap up the latest styles, but that tailwind has ebbed away and now savings have also dwindled. Gone are the days of the post pandemic sales boom when shoppers indulged in some revenge retail therapy helped by piles of lockdown savings. JD Sports is known for stocking exclusives from popular sports brands such as Nike, Adidas and The North Face, but there are some worries that it will struggle to maintain this edge.
Looking longer term, growth is expected to stem from an expanding footprint, and there will be a doubling of store count in America over the next five years. However, there is a hefty – and growing – cost base which could make profit generation trickier. The company is reliant on athleisurewear and trainers staying firmly in fashion, and with politicians like Rishi Sunak donning a pair, it might dent the footwear in the style stakes.’’
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