Luxury retailers are just as tied to the global economy as any business but face the added hiccup of having to contend with changing fashion tastes as well as the health of customers’ wallets. Luckily for Burberry (LSE: BRBY) it has thus far only had to deal with the slowing luxury spending in China that has reverberated across the luxury industry.
Full-year adjusted operating profits dropped 11% for Burberry as anti-corruption measures and general financial turmoil in China led to a “mid single-digit decline in comparable sales” across the Asia Pacific region. This should worry Burberry as management has long held that future growth in the luxury industry will be driven by Chinese demand.
Although the medium and long-term outlooks for the Chinese economy is promising, even steady 6% GDP growth from the country won’t be enough to override the fact that 62% of Burberry’s revenue still comes from outside the region. Any slowdown in spending in the Americas or Europe will still hit the retailer hard. Although shares trade at a reasonable 16 times forward earnings and offer a solid dividend, continued stagnation in the developed world and slower growth in China will likely continue to send shares falling.
More pain ahead?
Ask any investor to name a cyclical industry and the airline sector will likely jump to mind right behind oil & gas producers. It’s no wonder then that concerns over sputtering global economic growth and a slowdown in leisure travel have sent shares of British Airline’s parent International Consolidated Airlines (LSE: IAG) down 14% year-to-date despite solid financial results.
IAG’s success in restructuring BA and Spanish carrier Iberia made the shares one of the top performers in the FTSE 100 over the past five years. Yet investors who’ve been burned by airline shares in the past are right to worry.
Airlines have certainly moderated their additional capacity growth, unlike in previous boom times, yet record orders for new aircraft across the globe can’t be ignored. Just as damning, the industry’s trade body, the International Air Transport Association, is forecasting slower global demand in the coming quarters.
Despite a solid underlying business that continues to increase profitability by focusing on high-margin transatlantic flights and cost-cutting, IAG’s fate remains tethered to continued global growth. After seven years of largely uninterrupted growth in the US and UK slowing considerably, I’ll be watching IAG closely but expect more pain in the future for the airline.
Growth could slow
Management at InterContinental Hotels (LSE: IHG), owner of the Holiday Inn and InterContinental brands, has attempted to avoid the cyclical nature of the sector by pursuing an asset-light franchised model. Roughly 83% of the company’s hotels are franchised out to third parties, relieving IHG of the costs related to daily upkeep, as well as shielding it from some of the downside of any economic downturn.
Fee margins of 85.2% from franchised hotels versus a still impressive 58.2% from managed properties illustrate how well this plan has worked for IHG so far. Yet, like airlines, success over the past few years, as measured by steadily climbing occupancy rates and revenue per room, can only last so long for the company. With shares trading at a pricey 20 times forward earnings and global hotel supply continuing to rise despite sluggish economic growth, I’ll be avoiding IHG shares for the time being.
