Surging Chinese Economy is Powering Luxury Spending Boom

The Chinese are loving their luxury goods again. 

High-end jeweler Tiffany & Co. (TIF) said Tuesday that sales in China -- where it operates about 30 stores -- spiked by a double-digit percentage in the third quarter, which was a bright spot in an otherwise lackluster three-month period. Tiffany isn't the lone luxury goods player seeing the Chinese return to their stores -- mostly on the Mainland -- after pulling back on lavish purchases of handbags and watches in 2015 as the economy cooled.    

French luxury brand Hermes (HESAY) , best known for its signature scarves and Birkin bags, reported more than 14% growth in Asia-Pacific sales due in large part to growth in China in its last quarter reported in November. Earnings reports from LVMH Moët Hennessy Louis Vuitton S.E.  (LVMUY) and Gucci owner Kering also highlighted faster growth in Asia in the third quarter. U.S. based handbag and accessories maker Coach (COH) called out double-digit percentage sales increases in Mainland China for the quarter ended Oct. 1.

The sales results come on the back of the worlds' second-largest economy delivering growth of 6.7% for the third consecutive quarter in October.

As a result of the momentum in China, once beat up luxury goods stocks could be worth a look according investment bank Saxo Group. The luxury industry is able to extract good profits, says Saxo Group, because wealthy consumers are less price-sensitive and willing to pay a premium for brands.

Peter Gamry, head of equity strategy at Saxo Group, wrote in a recent blog post that if China's GDP data is correct, "luxury growth (and thus luxury stocks) will go up, and likely faster than the overall equity market."

He attributed this to accelerated invested capital growth by luxury houses as economies accelerate. The luxury industry tends to consistently deliver some of the highest return on invested capital ratios, reaching more than 20%, "the industry on average delivers 2.5 times as much return as it pays for capital."

"On average, the industry is fairly valued with an enterprise value to invested capital ratio at around 3.2 and thus we see no major downside risk unless the global economy deteriorates from here," Gamry added.

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