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What’s Next for the Luxury Sector?

The fate of the luxury sector lies in China's hands

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The luxury sector has been in the headlines this week, though the outlook for the sector has been muddled.

High-end home goods retailer Williams-Sonoma (WSM) beat earnings estimates on Wednesday, initially sending shares higher. Unfortunately, the details were a lot less impressive. Sales were up 12.3% and same-store sales increased 8.4% … but the retailer had to lower its prices — and thus its margins — in order to generate those sales, and management gave guidance that suggested the rest of the year would be tepid.

This came just a day after luxury jeweler Tiffany & Co (TIF) announced strong earnings and boosted its forecast for the rest of the year. But, most importantly, it was a surge in Chinese sales that pushed Tiffany higher. U.S. growth was actually a little on the sluggish side.

It’s never a great idea to draw firm conclusions from just two data points, but this has been a recurring theme for most of the summer. Last month, British fashion group Burberry (BURBY), announced a knockout quarter, with sales up 21%. Growth in China — Burberry’s most important market — was particularly strong.

Across the English Channel, Hermès — which trades on the France Stock Market under the ticker RMS — also surprised the Street. The French luxury group, best known for its leather goods and scarves, posted stronger-than-expected sales for the quarter led by a strong showing in — you guessed it — China. American sales have been decent, though far from spectacular. Any real success has consistently been in China.

Between sales in China and sales to Chinese travelers abroad, the Chinese consumer is the engine that drives this entire sector. European sales have held up fairly well, though this is in large part thanks to aggressive buying by foreign visitors.

Data here is a little hard to come by, as stores generally don’t track the nationality of their patrons. But as a telling case in point, Chinese visitors make up only about 1% of the traffic in London’s Heathrow airport, yet they account for nearly a quarter of all luxury goods sales.

But not all news coming out of China is good. Last month, Rémy Cointreau (REMYF), the maker of high-end French cognac, announced disappointing sales stemming from a sharp decline in China. Rémy, which makes the ultra-high-end Louis XIII cognac, gets more than 40% of its sales from China. As goes China, so goes the company.

What are we to make of all this?

Article printed from InvestorPlace Media,

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