Luxury Goods Makers' Fortunes Are Split

"Rich Americans are still buying Swiss watches and other luxuries, but that isn't enough for some companies.

Shares of Rolex retailer Watches of Switzerland lost one-third of their value on Thursday after the company said operating profit for its current financial year could be 25% lower than guidance it gave to investors at the start of December. It is the luxury industry's second profit warning so far in 2024. Last week, trench-coat maker Burberry Group said weak demand would reduce its full-year operating profit by roughly 20%.

But Richemont, the Swiss luxury group that owns watch and jewelry brands Cartier and Jaeger-LeCoultre, is bucking the trend. Its Swiss-traded shares gained more than 10% on Thursday after the company reported an 8% increase in sales for the three months through December compared with the same period of 2022.

The difference between Richemont and Watches of Switzerland may be partly down to what they sell and where. The U.S. was a bright spot for both companies in the crucial holiday shopping season. American shoppers who spent overseas in cities like Paris and Milan last year are buying luxury goods at home instead. But Watches of Switzerland's domestic U.K. market, which still generates around half of its sales, is in a slump. Richemont's European business was also weak in the quarter.

Also, brands that cater to the wealthiest shoppers are more insulated from the luxury downturn. Sales of Richemont's high-end jewelry brands, including Cartier, Buccellati and Van Cleef & Arpels, rose 12% in the last three months of 2023.

Luckily, these brands generate the lion's share of Richemont's profit, because its fashion labels are in the doldrums. Sales at online luxury retailer Yoox Net-a-Porter fell 11% in the company's latest quarter. Richemont has tried to get this troubled business off its hands, but a deal to sell it to Farfetch was "scrapped in December.

Although Watches of Switzerland does make around 60% of its sales from three ultraexpensive watch brands -- Rolex, Patek Philippe and Audemars Piguet -- demand for the less pricey watches and nonbranded jewelry that make up the remainder of its business has dropped off.

The divergence in spending is backed up by card-spending data. Less-wealthy Americans have been forced to cut back on luxury purchases more dramatically than richer consumers. Shoppers who earn between $50,000 and $125,000 a year spent 8% less on designer goods in December compared with the same month a year earlier, according to Bank of America. Consumers who earn more than $125,000 a year trimmed their luxury spending by a more modest 3%. 

This trend is buoying jewelry sales in the U.S. at the expense of designer clothes and handbags.

In recent years, investors focused on how well brands were selling with American and Chinese shoppers -- the luxury industry's biggest spenders. Increasingly, shoppers' bank balances will matter as much as their nationality." [1]

1. Luxury Goods Makers' Fortunes Are Split. Ryan, Carol.  Wall Street Journal, Eastern edition; New York, N.Y.. 19 Jan 2024: B.10.