"We believe that demographics, social trends and greater brand penetration should sustain greater top-line growth than most consumer subsectors, despite current macro pressures," HSBC analysts Antoine Belge and Antoine Rambourg wrote in a report released Thursday. "We also think that investors are being overly pessimistic on the luxury goods sector and are greatly underestimating the impact of square-footage expansion, product mix and price increases."
The analysts noted that U.S. gains in excess of 15 percent logged in the first quarter by LVMH Moët Hennessy Louis Vuitton, Compagnie Financière Richemont, Burberry and Hermès are probably not sustainable. They forecasted a slowdown to 7 percent this year from 14 percent last year for European players in America. They characterized unemployment as a greater threat to strong luxury trends than the housing slump and turmoil in equity markets.
Still, the report highlighted strong potential in the U.S., with Japan and even Western Europe to fade in importance for European players. "We believe luxury goods are still far from reaching maturity in the U.S.," it stated.
Among factors underscoring growing luxury demand in the U.S. were: fast population growth among minorities, notably Hispanics; a keen desire for premium products among middle-class consumers, and expansion potential for brands into the heartland, especially the southwest and Florida.
Belge and Rambourg estimated that U.S. operations for European players are more profitable than those in Japan and Asia due to lower rent and staffing costs, along with longer store hours.
"In our view, China will become the most profitable region for luxury companies in the long run, but the U.S. should widen its profitability gap to Europe and narrow its gap to Japan," the report stated.
America accounts for about 20 percent of sales for European companies, but HSBC forecasted compound annual growth of 11 percent over the next decade, which would make the U.S. the second source of growth after Asia, excluding Japan.