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Could 2022 be the Year of Pampering? That is, cashed-up consumers spending more on luxury goods and services to reward themselves after a few tough years.
I’m not suggesting we’ll all buy 24-carat diamond rings or eat caviar. Many are doing it tough, and there is the prospect of rising inflation and interest rates. Not to mention ongoing disruption and uncertainty from the Omicron variant.
Reports abound of Omicron affecting supply chains through labour and product shortages. Some retailers are losing sales, unable to stay open as long as they would like or stock their usual goods. Others are suffering as more people stay indoors as Covid infections skyrocket.
That’s the bad news.
The good news is that Omicron nervousness will create an opportunity to buy quality retailers at lower prices in the next few weeks. Market weakness is likely as investors assess the economic damage from Omicron and if infection rates will peak later this month or next.
Still, I expect higher spending this year on luxury items. House prices are booming and the share market should be back near its record high within months after Omicron subsides. An economic recovery and buoyant jobs market should also encourage spending, as should a high consumer savings rate.
Then there are travel-starved consumers who have excess cash to spend. Money earmarked for international holidays went into home renovations, furniture, cars and other products and services last year. That trend should continue this year.
The expectation that consumers would spend more on luxury goods as we came out of Covid underpinned my favourable review of Cettire in early 2021 for this Report. Shares in the luxury marketplace have quadrupled over the past 12 months.
I also wrote favourably on Autosports Group (ASG), a luxury car dealer, and Motorcycle Holdings (MTO), a retailer of Harley Davidson and other upmarket bikes. Autosports’ total return over 12 months is 26%. Motorcycle Holdings has returned 36%.
Lately, I’ve been researching jewellery stocks in Australia and overseas. In the US, jewellery store giant Signet Jewelers has almost tripled since the start of 2021.
Global jewellery retailer Pandora has recovered strongly in the past few years. The Danish stock badly underperformed between 2016-2020 but is back in favour as more consumers buy its charm bracelets and other products.
Movado Group, an American watchmaker, has also been on a tear in the past 12 months, after steep losses in the lead-up to Covid. Titan Company, India’s leading watch producer, has also rallied in the last six months.
There appear to be two main drivers of the recent gains. Less-than-expected disruption from Covid during the all-important holiday trading season. And consumers buying more jewellery for themselves or loved ones during the pandemic.
Yes, it’s dangerous to draw too long a bow with consumer trends. But it wouldn’t surprise me if people who have been overworked and stressed during Covid – and who have a little excess cash – reward themselves with jewellery. Or if more people spent a little extra on jewellery gifts for loved ones, having not seen them for a while.
Again, I’m not suggesting we’ll all race off to Tiffany & Co to buy expensive diamonds. Rather, that asset price increases during Covid and changed spending patterns bode well for a slightly higher continued spending on luxury goods this year.
Moreover, a pick-up in weddings this year after the end of social-distancing restrictions could boost local jewellery companies. Stronger wedding and festival demand for jewellery last year as restrictions eased buoyed overseas jewellery retailers.
Of course, an escalation of Covid cases from the Omicron variant could quickly dent jewellery demand, particularly if more retailers are disrupted because of staff shortages or new restrictions to combat the spread of the disease. But that risk is low.
Here are two ASX-listed jewellery stocks to consider:
I first wrote favourably about the New Zealand jewellery company for this report in 2017 following its Initial Public Offering (IPO) a year earlier. Michael Hill shares are dual-listed on the NZX exchange in New Zealand and ASX.
My positive view then was misguided: Michael Hill shares fell from $1.72 in September to as low as 24 cents in April 2020. That was the time to get excited about the stock, but like many microcaps, it had fallen off the radar of most investors, including mine.
Michael Hill has since recovered to $1.35. Gains in the past few months have been especially strong. In late December, Michael Hill upgraded its guidance, saying it had delivered sales growth and profit-margin expansion in November and December. The company’s first-half FY21 would be “well above” the comparable result a year earlier.
For all its share-price problems after listing, I’ve always thought Michael Hill had a good product for its target market. New management is doing an excellent job on the company’s turnaround after a few years of terrible results.
Michael Hill’s store footprint in NZ and Australia is mature. But there is excellent potential to expand the digital offering as more people buy pricier goods online. The company has a loyalty program consisting of almost 1 million members.
Prospective investors could be turned off given Michael Hill’s recent gains. It’s due for a share-price pullback or period of consolidation. But the price is back to where it was in 2017, despite Michael Hill earning far more than it did back then.
It’s an interesting stock for investors who are comfortable with small-cap investing (Michael Hill is capitalised at $538 million). More will be known when the company releases its second-quarter trading update on 14 January. That might be a catalyst for some selling and an opportunity for investors to buy at a better price in the coming weeks.
There’s a lot to like about Michael Hill. Like other international jewellery retailers, it is benefitting from stronger demand for its product. Long-term, management arguably has the company in its best shape in years.
I have written favourably about Lovisa several times for this report over the years. Like Premier Investments, Lovisa is rapidly expanding overseas and is an excellent retailer.
Lovisa is no Michael Hill or Pandora in the jewellery stakes. Lovisa’s target market is young women who want fashionable, disposable jewellery at a budget price.
I’ve spent a fair amount of time in Lovisa stores (more than I care to remember, thanks to a teenage daughter!) and am always impressed by their retail concept and store traffic. I can imagine teenagers spending more on cheap jewellery as they socialise as Covid restrictions ease.
Lovisa has starred in recent years. Its five-year total annualised return (assuming dividend reinvestment) is 40%. Over one year, Lovisa has returned 68%.
In its November trading update, Lovisa said comparable global tore sales for the first 20 weeks of FY22 were up 25.2% on FY21 (excluding stores that had to close). Total sales were up 46.1%.
Lovisa is expanding rapidly. It now has 570 stores in its global network, having opened 31 since the end of FY21. However, Lovisa said its store rollout this year has been slower than planned because of ongoing Covid disruptions.
That probably explains why Lovisa is down from a 52-week high of $23.07 in November 2021 to $17.47. Like other retailers, Lovisa might struggle to open some stores on time because of labour shortages and supply bottlenecks with store fit-out materials.
Further price weakness in Lovisa in the next few weeks would not surprise given Covid uncertainty and after the extent of its price gains in the past year. Lovisa needs rapid store growth to justify its valuation and Covid could slow its global rollout.
Any sustained price weakness this year in Lovisa could be a buying opportunity for long-term investors. Lovisa is one of few Australian retailers – and small-cap companies – with a rapidly expanding global footprint and in-demand product.
Lovisa deserves a spot on portfolio watchlists. A consensus analyst share-price target of $21.37 suggests decent upside in Lovisa at the current $17.47.
The consensus target looks a little overdone. I’m watching Lovisa closely to see if it holds about $18.20, a point of previous price support on its chart. If it breaks that support, the next stop on its chart is around $15.50 – a far better entry point.
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. All prices and analysis at 13 January 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.