Millennials are a coveted group. The largest sector of the U.S. population, they are a generation that has a preference for experiences over things.
As a result, luxury retailers are targeting millennials directly, offering experiences that are social media-ready in an effort to target and engage a bigger audience.
The retail landscape has changed significantly in line with the preferences of millennials; it’s not enough to have a brick and mortar store, or even an online presence. What’s critical now is giving consumers an experience to entice them to open up their wallets.
Louis Vuitton, for example, unpacked its “Volez, Voguez, Voyagez” (“Fly, Sail, Travel”) exhibition in downtown New York. Meanwhile, Tiffany recently opened a real-life café, 56 years after the movie “Breakfast at Tiffany’s” made the New York jewellery store famous.
Millennials value emotional bonds
Louis Vuitton’s exhibition takes visitors on a journey back in time to when luxury ruled travel and passengers dressed up because it felt like an occasion.
Customers, including millennials, can then go along and feel a sentimental bond with the brand.
Similar to Louis Vuitton, luxury retailers are bringing vintage products and experiences to the forefront of their marketing strategy.
This strategy evokes an emotion that can strengthen the customer-brand relationship.
When it comes to global demand for luxury goods, Hermès and LVMH are the industry leaders.
They rarely offer discounts because they don’t have to. They know their core consumer is willing and able to pay full price. Still, because of the strong demand for their products, their vintage bags can be found in the secondary market.
In a collaboration with StyleSage Co, which analyzes retailers, brands and products across the globe, Thomson Reuters discovered that two of the most popular vintage Hermès Kelly and Birkin style bags are averaging a current price of $16,894, and never get further discounted.
The styles are highly coveted, and also traded on luxury resale sites like The RealReal, Fashionphile, What Goes Around Comes Around, and Neiman Marcus Last Call. Once introduced online, 5% of these bags sell out within two weeks, and are not further discounted.
Meanwhile, across the other luxury brands, StyleSage Co, did discover downward price movements from a year-ago.
This is likely due to the channels they’re trading in (like department stores), and due to currency fluctuations due to their exposure in Europe. Fendi and Mulberry have decreased prices by as much as 23%, and 22%, respectively.
Meanwhile, Christian Dior’s (owned by LVMH) accessories average prices have gone up 27% compared to last year.
Exhibit 1: Discount and Change in Average Prices vs. Last Year
Coach has decreased its prices by as much as 16% compared to last year. But in an effort to escape massive product discounting and weak profits, they have proactively been removing their merchandise from department stores.
Despite facing a tougher basis for comparison, Tapestry, LVMH, and Hermès are expected to see robust growth on both the top and bottom lines.
Exhibit 2: Mean Growth Rate Estimate YoY% for the Current Period
Analysts polled by Thomson Reuters are optimistic towards LVMH Fashion & Leather Goods growth this holiday season.
This bodes well for the retailer since it is LVMH’s strongest business segment, and makes up the biggest portion of its total revenue (33.98%).
According to the StarMine Earnings Quality Model, the retailer’s cash flow level and operating efficiency looks healthy. And, its credit looks strong, with a healthy credit score of AA-.
Exhibit 3: LVMH Business Segments as a % of Total Revenue
As an equity investment, Hermès looks as expensive as its Birkin bag. Our StarMine Intrinsic Valuation (IV) model accounts for the systematic biases that our quantitative research team found in sell-side estimates.
Thus, the faster the expected growth rate, the more optimism bias. More-distant estimates are more optimistically biased than nearer ones.
For Hermès, after adjusting LTG estimates for optimism bias, the StarMine IV model places fair value at €195.20 per share.
In contrast, the market price is €442.85 per share. Plugging in today’s price and solving for growth suggests that investors are optimistic. Hermès market expectations are high with an implied 10-yr CAGR of 19.6%.
Exhibit 4: Hermès Intrinsic Valuation
Still, the retailer is another favorite for the holiday season.
An Earnings Quality Score of 99 out of a possible 100 tells us that Hermès earnings are coming from sustainable sources, since it has strong cash flow, operating efficiency and accruals.
Analysts polled by Thomson Reuters are bearish on Salvatore Ferragamo and have been lowering earnings estimates.
The retailer is expected to see a drop of 51.1% in earnings. Its StarMine Price Momentum model suggests that negative stock price momentum is against the company, as it continues to get hit by negative FX impact.
Also, customers are not gravitating towards its latest product launch.
Exhibit 5: Salvatore Ferragamo Intrinsic Valuation
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