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3 Luxury Stocks Benefitting from the Expanding Global Middle Class

The global middle class is expanding, and many of those consumers like to buy luxury items. And that bodes well for these 3 luxury stocks.

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Although Elon Must has retaken the title of “World’s Richest Man,” last year the trophy briefly passed to Bernard Arnault, the French tycoon who got his start in luxury by acquiring Christian Dior in 1985 and then went on to capture Louis Vuitton and other premium names under his luxury group Louis Vuitton Moet Hennessy, better known as LVMH (LVMUY). It’s one of three luxury stocks I’ll examine today.

A year ago, LVMH purchased Tiffany & Co. Tiffany operates 326 stores globally in countries such as the United States, Japan, and Canada, as well as certain regions of Europe, Latin America and Pacific Asia.

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For many Americans, it was a sad development since it ended Tiffany’s 182-year reign as the leading stand-alone luxury brand in America. Tiffany’s had been struggling a bit as revenue was coming in at a slower rate as the company was in a midst of a turnaround.

Meanwhile, LVMH and other luxury titans were weathering Covid-19, the slowdown in Japan, turmoil in Hong Kong and the trade war without breaking a sweat.

This brings me to some interesting trends going on in luxury consumer markets that are making them deeper and broader than you might expect.

It’s not just the super wealthy, the so-called top 1%, who are driving luxury sales; it’s also the emerging global middle class that will splurge for a few luxury items as a sign of status.

2 More Luxury Stocks to Consider

The Economist predicts that by 2030, 93% of the world’s middle class will reside in emerging nations, controlling $6 trillion in buying power, and a nice chunk of this will go to luxury products. This trend seems to be happening around the world – including in America. So with Tiffany’s stock off the luxury investment menu, you should look to LVMH as an (admittedly relatively expensive) luxury stock alternative, and consider two of what I call “pink sheet blue-chip” stocks, Hermes and Burberry.

One reason I like these stocks is that their lower-end products start around $100 -$200, within the reach of the emerging middle class, while the companies have demonstrated strong pricing power with their higher-end products.

Another plus is their brand strength with a key market – Asian tourists with money to burn.

“It’s the global traveling luxury consumer that is dominating,” says Burberry Chief Financial Officer Stacey Cartwright.

Let’s do a deeper dive on these two emerging luxury stocks.

Hermes International (HESAY), a French luxury goods maker going back to 1837, is partially owned by LVMH. While Hermes crafts a wide assortment of belts, shoes, fragrances, handbags and gloves, it is best known for its iconic premium silk scarves and ties.

An elegantly crafted Hermes scarf is highly prized and priced and this translates to impressive profit margins. The company made a big splash by introducing a sari for India. The sari is a silk cloth draped around a woman’s body and is a must for many Indian women for special events and formal evenings.

Hermès bags are handcrafted and are priced at an eye-popping $150,000. The company sells its products through a network of 310 stores, including 219 directly operated stores worldwide. Revenue in the fourth quarter of 2021 was up 70%, with Asian revenues ex-Japan rising 29%.

Burberry (BURBY), meanwhile, was founded in 1856 and this iconic British brand and its products share many of the characteristics of Hermes.

I remember well that Japanese shoppers during the 1980s could not get enough of Burberry’s bags, ties and coats and the same is now happening throughout the Pacific Rim. A survey of high-end department stores by Credit Suisse suggests that Burberry’s brand is equal to that of Chanel, Louis Vuitton and Hermes.

Burberry’s stock is, on a price-to-earnings basis, the least expensive of these three luxury stocks even as same-store sales were up 37% in the first half of fiscal-year 2022 on a year-over-year basis. Its strategic plan includes opening dozens of new stores in emerging markets.

All three of these luxury stocks tap into sizable growth markets with healthy profit margins. Consider adding some luxury to your portfolio today.

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*This post has been updated from an original version, published in 2019.

Carl Delfeld is a member of the Cabot investment team, and chief analyst of Cabot Explorer.