Fashion’s Fake(ish) Crisis

0:04Hello and welcome to Fashion People. I'm Lauren Sherman, writer of Puck's Fashion and Beauty Memo line sheet. And today with me on the show is the king of luxury analysts, Bernstein's Lucasolka. It's earnings season. So we're talking the future of LVMH, what people should and shouldn't be copying about Hermes and what's really going to happen with Sabato and Gucci. Let's get started. Hey everyone. Hope you are having a great week. By the time you listen to this, I'll be in Chicago for a few days of selling sexy promo on Tuesday. I feel like Mark Maron on Tuesday, October 22nd at 7 PM. We'll be at Madison street books with Samantha limb a shots on Wednesday, October 23rd at 5 30 PM.

0:52We'll be at space five one nine space five 19 for a cocktail. And on Wednesday morning, October 23rd at 9 AM. If you're a Soho house member will be part of their fashion for breakfast series hosted by Travis Martin, who has set this all up for us and some TV segments too. I'm excited to be on WGN on Thursday. Hopefully it actually happens. A huge thank you to Travis. He's great. You should hire him. Appreciate all the stuff he's been doing for us because who else would do it? No one. So thank you, Travis. On Monday's line sheet, I have a bit of something for everyone. More details on the discontinuation of Poog, another podcast a lot of you listen to, what the LVMH employee shareholder program, they would call it a scheme in the UK, means for all of you who work there.

1:45And most importantly, a fun return to one of my favorite subjects, Ux founder Federico Marchetti. So the rumor is that Federico is trying to buy back Ux from the Uxnetta Porter group, which is being sold to my Teresa. I think the likelihood of that happening is slim to none, but it's a fun thing to speculate about and indicates that Marchetti is far from retired. I emailed him and said, Hey, heard you're trying to buy Ukes. Call me. He didn't respond. I also reached out to my tree, so they had no comment. So who knows? It's probably just like they had a meeting and it turned into a rumor, that type of thing.

2:24But it's interesting to contemplate. You know, he is only 55. So I think this is not the last time we've heard from Marketti. Also, I have a Gucci HR update in the issue, a caring earnings preview and a readout from the Academy Museum Gala where I stopped by on Saturday night. It's really glamorous. I'm not used to seeing that many celebrities in person. And my big takeaway was, you know, I've been to You obviously go to things all the time with tons of celebrities, but I don't go to a lot of red carpet stuff because I'm not a red carpet reporter. But what I would say is like as much in the same way, like Valentino was amazing in person.

3:05The images of the show were not great. And if you saw it in person, you'd understand that it was really, really good. And Luca actually talks about what he's hearing, the response about Valentino from the market later in the show. but I would just say like so many of the dresses that looked really, really good in person looked bad in the images because lighting is lighting. And, you know, you just can't tell like the Heim sisters in their Louis Vuitton looked amazing. I actually thought like pretty much everyone wearing Louis Vuitton looked really, really good. And I wonder they should just sponsor this gala next year.

3:40It was, it was, it was a huge night for them, but there were so many good people. You can read more online sheet. Let's get going with Luca. It was a really fun conversation. I even asked him about his own personal shopping habits. So make sure to stick around for that. Luca Soka, welcome back to Fashion People. Thank you very much indeed, Lauren, for having me here. I'm always so happy to see you. So this was a busy last week for you. Very busy indeed. with the start of the reporting season being quite eventful, let me just say, and with a lot of investors wanting to discuss the sector as a consequence.

4:26Yeah. So in your original note about the LVMH earnings, I always wait with bated breath for them to arrive in my inbox. You said that they missed badly on expectations, But then, you know, following up, obviously, you had a much more nuanced take. Obviously, they were down a lot more in sales in the fashion and leather goods sector than they had originally said they would be. But what do you make of it and what do you think it says about their business in particular that we can talk big picture? To be fair, they never said anything. So they were not a lot lower than they said they would be. they were lower than what we on the street and investors thought they would be.

5:12So I think consensus was at close to zero or 0.5 to be precise, and then they came in with minus 5%. I think that there are a number of reasons for this. First, the market continues to be difficult and the Chinese were decelerating in the second quarter relative to the first quarter. But the overall impression we get is that in the third quarter, they decelerated even more. I wonder if there was also an element at play, which was the professionals, the so-called Daigus buying in Japan and pausing on the back of the Japanese yen rebounding in the third quarter. They can deplete their inventory.

6:02The fact that sales to Chinese consumers went from plus 8 % to minus 5%, more or less, I'm saying, you know, relative to what LVMH had disclosed during the call, seems a bit abrupt, even in the context of relatively softer Chinese demand, especially when we take into account that the Chinese in the mainland were not declining a lot and all of the decline was concentrated in Japan, if I understood correctly. So maybe this is a bit of a magnified effect of what we could be seeing, because down the road, I'd expect that the professionals, either in Japan or elsewhere, will have to come back. and depending on how exchange rates go, they will buy in Japan, they will buy in Taiwan, in Singapore or elsewhere, or in Hong Kong maybe even.

7:02So that is the point I think worth of note. The abrupt nature of this decline was a little bit strange. And then of course, we need to take into account that when we look at company-specific issues, when we look at the momentum of brands like Dior, for example, it had been fading a little and so had momentum at Vuitton maybe a bit less so, which means that both brands have work to do when it comes to bringing more innovation to consumers. My impression was that in the aftermath of the COVID-19 pandemic, LVMH has done a lot bigger, bigger flagship stores, bigger fashion shows, the Pont Neuf fashion show, the sponsoring of the Olympics, big things, but maybe not enough newer, not enough bolder.

8:08And as a consequence, we've seen them busy changing some of their creative directors at Givenchy, for example, or at Céline. And maybe it could be the shift of things to come in other brands as well. Yeah. So someone said that like a lot of the executives internally and the executives who want to push things forward more than, And, you know, some of the more conservative executives feel like this was a sort of kick in the pants that like when things are going really well, you don't really want to change things. Like you said, it's bigger, but maybe not better. Whereas this dip will kind of give them a little bit of permission to shake things up and weirdly take more risks because they are so diversified.

8:56They can afford to take some risks. And it does feel like to me in there, we've talked about this before, the risk of luxury becoming a commodity. And it does feel like at a lot of the big brands in the LVMH portfolio and outside of the LVMH portfolio, everything started to look too standardized. And I was talking to an investor when I was in Paris who said, we have 20 years of bags. These closets are filled with 20 years of bags. you have to give them something new. How much do you think in terms of at these bigger brands, like Louis Vuitton is a unique proposition because I don't know if the creative director really matters.

9:40It gives them marketing attention, but it's not, that's not really what they're buying is into those creative directors visions per se. They're buying luggage and wallets and things, but at Dior, it feels like they've been sort of coasting. Do you think we will see more big changes? And do you think that this is a time of opportunity for Albion Beach? I think indeed our industry thrives on newness. You need to give people new reasons and new ideas and new products that you can wow them with and that are going to be powerful enough to attract consumers to the stores, all the more so at a time when demand is more guarded and more cautious.

10:29So indeed, I expect that there's going to be bolder approaches and some more innovation. After all, it's human that in the immediacy of the post-COVID pandemic, as demand was coming as an avalanche on luxury goods companies that they thought for a while they didn't have to change much because coping with this huge amount of demand was already a lot. Now that this avalanche is gone, well, I guess you need to go back to the drawing board and you need to do stuff that consumers will notice. They will turn their head. They will want to check that out in the stores. So I do expect that if we see it from the outside, I think within the company, this is very clearly a priority.

11:25And we already saw that this musical chair game with Celine, with Fendi, with Givenchy has already started. Yeah, yeah, for sure. It's very exciting for me and you. Uh, so fashion and leather goods makes up about half of LVMH's revenue at this point. I'm sure it used to be far more than that. It, you know, 15 years ago, do you think that we're going to see them continue to diversify to a point as we know, they're not thinking the next two years, they're thinking 10, 15, 20 years ahead. Do you think that in that time period, fashion and leather goods will sort of recede in terms of the portfolio and what is driving most of the revenue?

12:11If so, do you think they're going to invest more in hotels and media? And I don't know if media is a really good margin driver, but they do seem to be buying a lot of things. So how do you see their portfolio mix changing? And do you see it changing? Paradoxically, I think LMH is less diversified today than it was 20 years ago. Oh, really? Interesting. Yes. Because, you know, Wands of Spirits back then was a significantly more important contributor. Today, when you look at profits, at least, you see fashion and leather goods as the lion's share of that profit generation. Going forward, I definitely expect that fashion and leather goods will stay very relevant.

12:58It is clear that LVMH has invested significantly in jewelry, and jewelry brands are poised to become more important. Bulgari and Tiffany at the top of this, more so than watches. I also think that LVMH has huge synergies between fashion and other goods brands think Dior or think Givenchy, the perfumes and cosmetics division and the selective retail division think Sephora, so that you can continue to drive the development of beauty in your core brands through the fragrances and cosmetics business and the selective retail business. So I expect that beauty is most likely going to be an area of development going forward.

13:49And we saw the whole sector, if we look at what Hermès has been doing, if we look at what Caring has been doing, we saw the whole sector being focused on beauty as a way to attract the wider audience because beauty prices in absolute terms are quite accessible. What do you think about the fact that something like Givenchy, the fashion business and the beauty business are run entirely separately? The former CEO of Givenchy had worked at L 'Oreal for a long time, and yet he was not touching that Givenchy beauty business at all. Do you think that because of the way LVMH works and it's so siloed business to business, even that has even been the case for beauty and fashion under the same brand name.

14:44Do you think that we'll see more connectivity in this next phase of the group between those two parts of the business? Well, I think the advantage is that LVMH has a critical mass in beauty. Beauty has logic of its own with distribution, product innovation, competition that is very special to the sector. We saw in the past companies attempting to bring beauty closer to fashion and leather goods. Think Burberry when they bought back the license that they had with Interparfum. And that didn't end up well. I believe that one of the advantages here, in fact, is that you have very solid businesses and you can sort of operate those within the group as you would be operating them if you had a big licensee.

15:39but in fact, the licensee is within the group. The fragrances and cosmetics business is within the group and that is what drives the beauty business forward in conjunction, I think, with a partnership with Selective Retail, with Sephora. I think it's a major platform to enhance the market share and the visibility of the LVMH beauty businesses. Yeah, it's interesting that None of the beauty businesses that are other than Dior that are really dominant in the beauty conversation right now, though, are ones that LVMH owns. And I know market share and mind share different things. But, you know, Fenty Beauty was was like a top of mind for a long time.

16:28I'm sure it still performs well, but beauty is so cyclical. And so there's new so many new brands every single moment and LVMH, they actually haven't made a lot of acquisitions in that space recently. Could you see them, like I write a lot about what they're trying to sell in fashion or trying to buy in fashion, but do you think that they'll become more acquisitive or start to shed some of the underperforming brands that they own in the beauty sector as well? I think that there's a a logic to be beefing up this division, especially if you want to move into skincare, you need R &D, you need patents, and you could potentially find some of those in the companies that you can take out from the market and plug into your own business and to make them enjoy the big brands that you have and the retail network that you have They don't necessarily need to be big companies.

17:35They can be companies that can provide specific plug and play kind of know-how and products that you can then exploit at a broader level within your business. In fact, the fact that LVMH hasn't produced M &A in beauty is a testament to the fact that they have chosen to develop the beauty business organically, and quite successfully so, I should say, rather than go out and pay top dollars to buy Goodwill. yeah it's it's interesting i do wonder the kendo thing seems to their incubator seems to have fizzled out and brands like makeup forever and and other brands that they own aren't hitting the way they once did they still have benefit they have some brands and and obviously you're right the distribution platform of sephora is the is the golden ticket in beauty so it's fascinating In jewelry, really quickly, the absorption of Tiffany, I would say probably if you zoom out, it's been pretty successful.

18:42But there have been so many hiccups. And I hear things. I heard that they had a really good August. I hear from jewelry suppliers in Italy that they are buying up space in those factories for four years ahead of time. Like they're essentially saying, we want you to only produce our goods for the next four years, and we're going to buy you out for that period. So they're obviously investing heavily in it. I guess my question for you is, how do you think the Tiffany thing has gone? We know that the US is struggling and that's their biggest market. US and China are their biggest markets, and they've both been struggling the last two years.

19:26And A, how do you think it's gone? And B, do you think that when you look at consumer behavior patterns, that the high net worth consumer is going to be spending more on things like fine jewelry, which are more expensive per unit, but arguably a more valuable long-term? I think all in all, the Tiffany integration has gone pretty well. I think that LVMH has worked on many of the areas that we had thought would deserve attention, like for example, strengthening the shape collection, the lock series has been very successful. Silver has been leveraged and increased in price effectively. This is an entry price product that many brands would love to have and it is unique to Tiffany.

20:25In the high end, the Yellow Diamond collection as well as focus of communication more on the high end has enabled Tiffany to take what it should take, which is a higher position in the category, which is fully deserved given the quality of the stones that they bring to the market. Maybe an area which is yet to be addressed is watches. Watches, I think, is still a bit of an eyesore when we look at the Tiffany store. And talking about the Tiffany store, I think a lot of work has been carried out to improve and upgrade the retail network in the US and increasingly in Europe, where I think is the new front for Tiffany.

21:16So all in all, I think that things are going according to plan and the strengths or relative strengths of the American consumers has definitely helped, and the cyclical recovery in US spend should also continue to help. In 2025, as we expect that the combined effect of the Fed cutting rates and the November elections being or providing a bit more certainty about where things would be going, are going to prove to provide a boost to the American economy and therefore to consumer feel good. Yeah. So I agree with you, but I also think people have the sentiment around Tiffany isn't great. Like it doesn't feel like, and maybe that doesn't matter.

22:12And it doesn't, if you just look at the numbers, but when you think about, and I will, I want to move on to one of their competitors in a minute. But when you think about like what the core, that core customer, the fashion consumer who is driving the conversation that the broader customer is like the, the thing that I hear a lot from people in the industry here is that Tiffany sort of alienated the silver customer that they should be doubling down on the sort of entry market that they owned and also making silver feel really refined and exciting to a fashion customer. And then all the gold and fine jewelry and all that stuff will follow because the kind of rich people who follow the insiders would be interested in it.

23:02But you're saying that you think that that's kind of BS and that they are successfully reaching the broader market, which is what is important right now. Yes, I think that Tiffany, even before the acquisition, was quite visible in the entry price. In fact, a lot of the previous advertising was focused on entry price and silver for that matter. So I didn't feel that there was a need to stress that calling card, which remains very powerful for the brand. Maybe there was a need which also dovetails very well with what LVMH can do best to upgrade the brand and upgrade the business a bit. And it seems to be moving in that direction.

23:52Clearly, moving up takes more time and more effort than coming down, which I thought was very much what Bulgari was doing. So it's going to take maybe a little bit more, but I think that the direction of travel is correct. Okay, I believe you. I just think, I personally think that luxury is not necessarily, or a good brand or consumer excitement around a brand is not necessarily connected to price at this point. and that the teenagers who used to buy the Tiffany Lockett's are not as into it as they once were. And then also the industry insiders are buying Cartier or they're buying independent jewelers.

24:38And so that may not matter. And you're probably right. But it just feels like to me, they're missing out on something in that other price point that can still have great high margins and you can layer on the sort of million dollar purchases onto that. But what do I know? You know more than I do. No, no, no, possibly so. One also has to add to provide the full picture that as much as Tiffany has improved, Cartier and Van Cleef & Appel reigns supreme in the category. So let's make no mistake. We're still looking at runner ups. that they have for sure not reached the top of the category, neither with Tiffany nor with Bvlgari, I should say.

25:31Well, perhaps, and we can move on to our friends at Richemont, perhaps it will be the way that Dior is always chasing Chanel. Perhaps it's in terms of brand halo or what have you, that Tiffany will always be chasing Cartier and that's okay. and it still has a tremendous amount of value and prestige and all of that. Uh, on the matter of Richemont and Cartier and Van Cleef, and I wanted to ask you about Richemont's fashion brands really quickly and their earnings are not until November. So this is, this is far ahead, but, um, I am so impressed by what has happened at Alaya, which has, I think tripled or quadrupled sales in the past couple of years.

26:20Of course, they were very, very small, but they they're into the hundreds of millions now. And, and then at Chloe, it's still very early, but it seems like the, with the new designer, new CEO, they have tremendous momentum. I have friends who are buying those bags, buying those shoes. And two years ago, I, I had sort of said those brands are dead in the water. Essentially, They can't compete against the big labels at retail, in the stores, online. They don't have as much marketing power. They don't have as much distribution power. And yet those are the brands people seem to be excited about on, you know, the list index and things like that.

27:01I'm curious what you think about this. And it's funny because I don't know, forever, so many people wanted Richemont to sell those brands and they're still so small. But why do you think they are seeing a turnaround right now? I think that they have probably been on the front foot while the mega brands were busy counting the billions of euros of sales that they were achieving. If we look at Miu Miu, it's a similar pattern with a small brand also very much sought after and were received by consumers. these brands have worked on product and they've worked on innovation and they're being rewarded at a time when maybe the mega brands have taken the eye off the ball maybe they've also gone a little bit overboard when it comes to price increases and as a consequence they've been leaving space to competitors in a way and smaller competitors have been faster on their feet and they've been finding the right formula.

28:08We are looking at the top of the pyramid because clearly behind Alaya, behind Cloen, behind Miu Miu, there's plenty of small brands that continue to struggle. I will not mention names, but it's quite clear that there's a few of those. I can mention. But even outside of Richemont, I think you can find a few. So the success rate is not huge when you're operating a small brand. But when you do the right things, it is refreshing to see that especially the avant-garde consumers are very quick to reward you. Because they pay attention to what you bring to the market because they like the new content, because they like the new products.

28:57It's very exciting. It's a nice growth story.

29:22We'll see you next time.

29:33Hi, this is Jill Schlesinger, CBS News Business Analyst, Certified Financial Planner and the host of the Jill on Money Podcast. With the new year upon us, there's no better time to take control of your financial life. And the Jill on Money Podcast is here to help. It's your questions that make it possible for me to provide unconventional and I hope entertaining insights on your money and more importantly on your life. Follow and listen to Jill on Money wherever you get your podcasts.

30:06Moving on to two more companies that are going to be doing their earnings this week, I believe. Let's start with Hermes. Hermes is Thursday, right? Thursday, correct. So what do you expect really quickly out of Hermes, the brand that can do no wrong, the company that can do no wrong? I think that consensus is definitely in a very different place than what we've seen with LVMH in fashion and other goods, which was minus five. Here we find consensus at plus 10, plus 11, if I look at the Bloomberg numbers. So I believe that Hermès is likely to be at that level, if not better. Remember that they have quite a significant amount of pricing power that they've kept in their back pocket as they hadn't increased prices in the early time out of the pandemic, contrary, for example, to what Chanel had been doing.

31:12So this year, a pricing alone should provide around 8.5 % boost to growth, which is very handy to have at a time when consumer demand is quite subdued globally and at a time when we are suffering a cyclical slowdown globally. so that is good Hermes to some extent like Ferrari has long waiting lists for its most iconic products and that should also help flowing through this soft patch because if you were waiting for a Birkin or a Kelly bag and they call you up no matter the macroeconomic conditions you are likely to go to the store and pay up to get it. So this is a great way for Hermès to sort of smooth out their growth rate.

32:11And I expect that they should be ending the year on a very solid footing. One thing that's interesting about all these companies is they all try to copy each other. And what I think a lot of them don't realize is so many of them tried to get their prices as close to Hermes as possible because they thought, oh, people are willing to pay for that. We can convince them that our stuff is worth that as well. But Hermes has been so judicious about the way that they've done pricing that it's just interesting. I was having a conversation this past weekend about the industry is not full of leaders. It's full of followers.