During the Great Depression, so the saying went, life was so easy for the rich that they could afford to bathe in milk. A quick look at the full-year results of luxury retailer Christian Dior and its biggest investment, LVMH, appears to confirm that the rich are indeed having a comfy financial downturn.
Profit from recurring operations at LVMH jumped almost one quarter compared with last year. Its shares were unchanged on Friday, but since the collapse of Lehman Brothers, Dior has returned shareholders 75 per cent, five times that of the S&P 500.
There are two key indicators that suggest the prospects for chairman Bernard Arnault’s empire are strong. The first is that sales in the U.S. -- which comprise about one-quarter of the group’s total -- are back. Organically they grew 18 per cent in 2011; so confident was Louis Vuitton that it raised prices by 17 per cent. The second is the return of high-priced “hard luxury” goods such as watches and jewellery. After sales of these experienced quarterly falls of as much as 40 per cent during the worst of the downturn, last year revenues jumped 23 per cent.
But although customers with fat wallets have returned, Mr. Arnault knows that the group’s financial fortunes depend upon the middle classes which buy the aspirational brands that dominate LVMH. This is where Dior is benefiting from the global downturn. Low interest rates, particularly in the U.S., have handed many mortgagees a small windfall. With base rates likely to remain near zero for the next few years, the disposable income for this group will remain relatively high. Of course, there is the danger that customers may become so used to low interest rates that when they eventually rise, the shock will lead to a sharp decline in luxury goods sales. But with the developed world still lumbering, that downside appears to be some way off yet.
