Only the Best Luxury Brands Can Hike Prices -- Heard on the Street
January 27 2021 - 6:30AM
Dow Jones News
By Carol Ryan
One way to tell which luxury-goods brands are in fashion is
whether they managed to raise prices in the middle of a
pandemic.
LVMH Moët Hennessy Louis Vuitton reported resilient results
Tuesday, after the Paris market closed. While overall revenue fell
16% at constant exchange rates in 2020, the luxury conglomerate's
closely watched fashion and leather goods division did better.
Sales only slipped 5%, and operating margins were higher than in
2019. The unit is crucial as top brands such as Louis Vuitton and
Christian Dior generate two-thirds of the company's total operating
profit most years.
Price increases in particular protected LVMH's bottom line,
although other factors such as rent renegotiations also helped.
Louis Vuitton lifted prices on certain handbags by up to 6% in May
last year and a further 3% this month, according to Jefferies data.
At Christian Dior, prices were increased by up to 11% in some
markets.
Other top brands are doing the same. At privately owned Chanel,
its best-known handbag is now around one-fifth more expensive
globally than at the end of 2019. The latest increase was in the
U.S., where a classic flap bag now sets shoppers back by $400 more
than in November. Gucci, owned by LVMH's French peer Kering,
recently pushed through a 22% price increase on its Dionysus bag in
Korea.
Most years, luxury brands use price increases to offset
inflation in input and labor costs as well as currency moves. But
2020 has been exceptional. "Recent price increases have been pretty
aggressive...In normal years, a typical rise would be 5% to 6%,"
said Kathryn Parker, an analyst at Jefferies. The move boosted
profit as sales have been under pressure. LVMH's chief financial
officer Jean-Jacques Guiony told analysts that the company could
raise prices in 2020 because it was restrained in the previous four
years.
However, pricing power looks unequal across the sector. British
trench-coat maker Burberry didn't change prices on existing
products in 2020, and made only small increases in January this
year. This may be another sign that the company's turnaround is
fragile. Bottega Veneta, which is otherwise one of Kering's
most-promising smaller brands, has only increased prices modestly,
UBS data shows. After years of underperformance, it probably hasn't
yet built enough clout to drive up prices without losing
customers.
LVMH's stock has been exceptionally strong over the past year
and changes hands for 34 times prospective earnings, giving the
company a market value equivalent to $314 billion. Investors' high
expectations help explain why the shares barely rose at the Paris
open on Wednesday. Yet the company's capacity to keep profit
flowing in the face of widespread store closures offers reassurance
that it can continue to deliver -- even if shoppers pay the
price.
Write to Carol Ryan at carol.ryan@wsj.com
(END) Dow Jones Newswires
January 27, 2021 06:15 ET (11:15 GMT)
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