Weakening euro may benefit fashion companies

A weakening euro may mean good things for fashion companies who's major markets lie outside of Europe. According to Bloomberg, the forecasting of a weakening euro and Swiss franc against the dollar is good for shares of European luxury-goods

companies. When a large proportion of sales come from outside the European union, like the US, Asia and India, operational costs remain in euros.

Richemont SA and LVMH are among stocks that would benefit if the currencies fall further from year-ago levels, said Bloomberg.

The newly-created Bloomberg European Luxury Goods Index, which includes LVMH and Swatch Group AG, has risen 357 percent since Nov. 18, 2008, while the Stoxx Europe 600 Index has increased 27 percent. The luxury index has outperformed the market by 6 percent this year; between Sept. 21, 2011, and Dec. 30, 2011, it underperformed by 18 percent.

Bloomberg’s luxury index is trading at 14.5 times Mesmin’s estimate for 2012 earnings, before goodwill and extraordinary items, and 12.8 times his 2013 calculation, compared with 19.3 times in 2007. The Stoxx 600 is trading at a multiple of 10.8.

This appeals to investors, particularly if the industry grows 10 percent each year through 2015 and there’s a positive impact from exchange rates this year, Mesmin forecasts.

Because these companies operate in Europe and sell goods worldwide, their sales convert to higher revenue in euros as the currency falls relative to the dollar. There’s also a gain to margins because profits grow more than sales given the euro cost base, Mesmin said.

Image: Euro
Source: Bloomberg