'Conspicuous Consumption' Helps This Luxury Retailer Thrive

Status signaling with luxury items is built into our DNA...

Evolutionary psychologists call it the "costly signaling theory," in which animals like male peacocks expend valuable energy growing their vibrant plumage. They're showing the females that they would make good mates... The males have so much surplus energy that they're able to devote bodily resources to their aesthetics.

Humans also take part in something called "conspicuous consumption." This term, coined by economist Thorstein Veblen in 1899, involves buying and using luxury goods to enhance prestige. At the time, the Industrial Revolution had led to bigger accumulations of wealth than the world had seen before. And the nouveau riche began spending for spending's sake... to be seen and admired.

More recently, the advent of social media appears to have spread status signaling even further. Rather than conveying a true reflection of their lives, many social media users share curated messages about just how great their lives are with expensive goods and activities.

But there's another reason why luxury goods are always in demand...

They can also be used as a store of value. When you spend $20,000 on a watch, you don't just "spend" a huge sum of money on a timepiece. You also wind up having an asset worth approximately $20,000.

Values may fluctuate for individual pieces, but luxury jewelry is often a store of wealth. The Grand Duchess Vladimir of Russia used her royal station to amass a jewelry collection given as gifts and paid for by subjects to the crown. Her heirs could live off that wealth for generations.

While tastes in luxury goods will always change, the need for luxury and status signaling will never go away. In fact, the number of luxury buyers continues to rise.

Bain Consulting, which publishes an annual report on the luxury industry, estimates that the "luxury class" will grow from 390 million people worldwide in 2019 to 450 million by 2025.

And that's a great tailwind for today's company...

Founded by a South African businessman in 1988, Compagnie Financière Richemont (OTC: CFRUY) – more commonly known as Richemont – is the third-largest luxury-goods company in the world.

Based in Geneva, Switzerland, Richemont sells jewelry, watches, and other luxury goods to the global elite all over the world. About 47% of sales come from Asia, 23% from Europe, and 22% from the Americas.

Richemont bills its brands as "Maisons," based on their roots in fashion. (French companies like Christian Dior and Louis Vuitton are traditionally known as fashion "houses.")

And they contain a variety of product lines...

The company's jewelry Maisons include Van Cleef & Arpels, Buccellati, and Cartier. Under its watchmaking Maisons, Richemont includes A. Lange & Söhne, Baume & Mercier, IWC Schaffhausen, Panerai, and Piaget.

The company owns other non-jewelry brands, like leather goods from Dunhill, pens from Montblanc, and clothing from Peter Millar and Alaïa.

Diversification across brands signals great strength in this type of industry. While we would not claim to know which brands may catch on or fade in the next year, we feel comfortable that Richemont has enough big names to deliver consistent results.

The company is also adapting to the changing retail landscape...

Before the pandemic, many luxury retailers rejected the idea of using online shopping platforms. But COVID-19 provided the ultimate catalyst. Now, according to e-commerce expert Patrick Bousquet-Chavanne, "All the indicators point to a very profound paradigm shift."

Richemont acquired online distributor Net-a-Porter in 2018. Net-a-Porter is the central online hub for buying high-end luxury goods. Rather than let Net-a-Porter compete with its in-person stores, Richemont brought it into the fold to establish its online business.

In 2019 – the first year of reported results – Richemont's online distribution segment brought in $2.4 billion in sales. The following year, online distribution sales grew to $2.76 billion, before falling to $2.5 billion in 2021. Richemont's e-commerce business will continue to play a huge part in the company's growth going forward.

Financially, Richemont has built a fortress-like balance sheet with virtually no net debt. The company has $16.7 billion in total debt, which is offset by $16.2 billion in cash and equivalents. The remaining $500 million in borrowings could be paid with less than four months of earnings before interest, taxes, depreciation, and amortization ("EBITDA"). By contrast, the average company in the S&P 500 Index has levered up so much that it owes 2.4 years' worth of EBITDA. That says a lot about Richemont's financial health.

Between the strength of luxury assets and the long-term performance of Richemont, it's a stock you almost always want to own.

Sometimes investing is simple.