The doubling of gold prices in two years, along with US tariffs and a weaker dollar, have made it harder to defend gross margins for Tiffany owner LVMH and others in the high-end goods industry.

Tiffany is known for its modern style fine jewellery

“Each of these [factors] alone could be offset by the high-end branded jewellery players and watchmakers but all together, it becomes very difficult" to keep profit margins from being eroded, said Jon Cox, head of Swiss equities at Kepler Cheuvreux. Gold surged above $4,000 an ounce to a record last week as investors sought safety due to economic and geopolitical uncertainty and expectations of further US interest rate cuts.

“There is bound to be margin pressure,” Cox added, noting brands would likely implement price hikes to shoppers gradually. LVMH, the world’s biggest luxury conglomerate, is expected to report flat third-quarter sales when it reports on Tuesday, with a 4% decline in fashion and leather goods and 1% growth in watches and jewellery, according to a VisibleAlpha consensus figure cited by HSBC.

Jewellery brands, including LVMH’s Tiffany and Bulgari, Richemont’s Cartier, Van Cleef & Arpels and Kering’s Boucheron have recently outperformed stablemates focusing on fashion. At LVMH, first-half sales in watches and jewellery were flat and profit sank 13%. Its fashion and leather goods division, which includes Louis Vuitton and Dior, saw profit plummet 18% on a sales drop of 7%.

Watches and jewellery make up over 12% of LVMH sales, and fashion about half of group sales. Tiffany and Bulgari are among LVMH’s top five brands in terms of annual earnings, according to estimates from HSBC.

Despite gold’s sharp rally, the metal represents a small share of input costs for luxury jewellery brands, or just 10% of jewellery sales on average, according to Manuel Lang, equity analyst, consumer goods at Vontobel. That percentage drops to between 5% and 8% for designer brands at the very high end, said Bernstein analyst Luca Solca.

So, "even a modest retail price increase could take care of material gold price increases," said Solca. As brands seek to ease pressure on margins, they would need to be cautious about passing on price increases to shoppers so as not to erode demand, other analysts said.

For Swiss-listed Richemont, which focuses more on jewellery than rivals and has outpaced peers, that has not translated to upgrades to earnings forecasts due to factors like currency rates and gold prices, which were "completely out of their control," said Zuzanna Pusz, analyst with UBS.

Courtesy : Fashionnetwork