Richemont's Cartier, Piaget and Panerai brands may have more mystique, but when it came to making money for shareholders in 2004 it was brands such as Amalgamated Appliances' (Amap) Hoover, Pineware and Sansui and Nu-World's JVC, Nu-Tec and Sunbeam that won the day.
As SA consumers went on a spending binge, Amap's and Nu-World's share prices responded, climbing 121% and 85% respectively. Results that followed justified optimism. Amap increased headline EPS 42% in the six months to December and Nu-World achieved a 39% increase in the year to August.
Results spoke of big volume growth. Though both firms reported percentage turnover increases in the lower 20s, Amap said product prices had fallen more than 15%.
But Amap's 7 p:e and Nu-World's 9 p:e suggest doubts that EPS at 2004's levels are sustainable. Amap chairman Jack Cohen disagrees, arguing that factors such as high consumer confidence and growth in the emerging black middle-class's spending power will underpin demand.
The future may not be as clear cut for global luxury goods group Richemont. Though its earnings continued to recover in 2004 from levels of two years earlier and its share price registered a solid 33% gain in euros (21% in rand), trends in luxury goods demand are fluid.
And fickle demand for luxury goods has proved capable of playing havoc with Richemont's profitability. Global economic woes, war in Iraq and the Sars epidemic cut the group's turnover 5,4% in the year to March 2003, sliced its operating margin from 12,5% to 7,1% and sent operating profit sliding 46%.
Richemont's sensitivity to fluctuations in turnover was again evident in interim results for the six months to September 2004. Compared with the corresponding period in 2004, a 13,7% improvement in turnover to euro 1,74bn helped boost its operating margin from 5,3% to 12% and operating profit 157% to euro 208m.
When its results were released in November last year, Richemont executive chairman Johann Rupert said group sales in October had risen 8% and that he expected a strong pre-Christmas season. But despite this upbeat prognosis, dark clouds are again appearing on the luxury goods market's horizon.
In the US, which accounted for almost 20% of Richemont's R14bn sales in 2004, the impact of rising interest rates on consumer spending is of concern. Higher credit and mortgage interest rates are eating into disposable income and, many economists predict, will turn off the mortgage refinancing tap, one of the biggest drivers of consumer spending.
Preliminary indications are that US consumer spending grew at an annualised rate of 3,1% between January and March, down from a 4,2% growth rate in the fourth quarter of 2004 and an average 3,5% annual rise over the past 20 years.
In Europe, where Richemont derives 40% of its revenue, the economic lights dim ever lower. In April the International Monetary Fund (IMF) cut its forecast for GDP growth in 2005 from 1,9% to 1,6%. Says jewellery industry body the Rapaport Group: "The climate is not conducive to fuelling discretionary purchases such as jewellery. Eastern European consumers are still buying basics and consumers in developed nations such as Germany and France have no incentive, or extra income, to buy jewellery."
Longer-term luxury goods purveyors face changing consumer attitudes. In the US, in particular, "luxury" is fast being perceived as what you do, not what you have. According to a survey commissioned by American Express: "Consumers at every income level, every age range, across the board, favour luxury experiences over home or personal luxuries."
Stronger demand in Japan, which accounts for 17% of Richemont's sales, appears unlikely. The Japanese economic recovery is again on shaky legs, and after expanding at 2,7% in 2004, its GDP is now forecast by the IMF to grow at only 0,8% in 2004, down from an original estimate of 2,6%.
China is seen as the big hope and already Richemont has 94 boutiques operating and generating about 2% of group sales. But many market observers believe the real potential lies in sales to Chinese tourists. Numbers are growing fast, with about 30m Chinese already venturing abroad and, predicts The Economist Intelligence Unit, the number is likely to hit 49m by 2008 and 60m by 2010.
It could be just what Richemont and other firms in the highly competitive luxury goods industry need to restore sustainable sales growth to the double-digit levels last seen in the 1990s. But given shorter-term uncertainties, some may consider it a safer bet to sell furniture to the Europeans. Furniture manufacturer Steinhoff has proved itself capable of doing this to good effect, even in the face of rand strength.
Despite deriving almost three-quarters of revenue from outside SA, Steinhoff has grown turnover at 21,7%/year since the rand hit its weakest levels in December 2001. Though EPS growth has been more subdued at 11,7%/year, dividends were increased by 83% between financial 2001 and 2004. Not surprisingly, the share was one of last year's best performers, gaining 64%.
SA's largest clothing and textile manufacturer, Seardel, has not been as successful in warding off the impact of the rand's strength. Adding to its woes are surging exports from China, not only to SA, but also to Seardel's foreign target markets. Regrettably, government intervention to assist the ailing industry has been a distant mirage.
Under the circumstances, Seardel, which saw its share price gain 23% last year, did well to increase turnover by a marginal 1,5% to R2,05bn in the six months to December 2004. More impressively, headline EPS lifted 44%, though this should not be seen as a sign of glowing prospects.
