Global luxury retailers' earnings growth could double in 2017, Moody’s says

Moody's report looked at a sample of 11 luxury-product manufacturers comparing a broad range of financial metrics including revenue growth, EBITDA (earnings before interest, taxes, depreciation and amortisation) margin, share buybacks and dividends.
"A return to double-digit growth for the global luxury retail segment is unlikely until at least 2020, as the Chinese consumer boom has slowed, value-conscious consumers are now less likely to stand for price hikes, and competition from other sectors like travel and fine dining remains elevated," said Vincent Gusdorf, vice president and senior analyst at Moody's.
The overall credit quality of the luxury industry should improve slightly this year. Shiseido Company’s Moody's-adjusted debt/EBITDA will strengthen on the back of higher earnings and conservative financial policies. SMCP Group, which owns the Sandro, Maje and Claudie Pierlot brands, will see the most marked improvement in credit-metric terms on the back of new store openings and high like-for-like growth.
US companies Tiffany & Co and Ralph Lauren Corporation will cut capital expenditure and shareholder remuneration to maintain stable leverage in the face of a slowdown in earnings growth into 2018 as a result of a strong US dollar, department-store deterioration and operating issues. On the other hand, The Estee Lauder Companies Inc should perform well thanks to good international diversification and a portfolio of well-recognised brands.
Other factors facing the luxury-goods sector include rising competition, which is pushing some to improve productivity. Many luxury groups also intend to reduce their reliance on department stores, particularly in the United States, where companies such as Macy's Inc, Kohl's Corporation and Nordstrom Inc have been hit hard by changing shopping trends, lower mall traffic, and competition from online and off-price retailers.
Companies are also now putting the brakes on new store openings, with some choosing instead to focus on improving the productivity of existing stores. Others, such as Ralph Lauren Corp, are reducing their store portfolio. This decline in openings is credit-positive as it reduces fixed costs such as rent, improves the financial flexibility of luxury companies and bolsters cash-flow generation.
Luxury companies will also look to cut share buybacks when necessary to preserve their credit ratios, but pay-out ratios will remain high. Estee Lauder, which has a history of large and frequent share buybacks, will likely remain one of the most shareholder-friendly companies in the sector.
Mergers and acquisitions will continue to constrain ratings as luxury companies are now considering large acquisitions. The companies in Moody's sample will spend US$7 billion on acquisitions in 2017, compared with $2 billion last year. 
Coach Inc's planned purchase of Kate Spade & Company for $2.4 billion, largely using debt, will be credit-negative. 
More positively, multi-brand groups may sell underperforming subsidiaries and improve their credit ratios.