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Record-high gold prices could weigh on margins of luxury

brands

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The price of gold has doubled in two years

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Any price hikes by luxury brands will have to be gradual

By Mimosa Spencer

PARIS, Oct 13 (Reuters) - The doubling of gold prices in

two years, along with U.S. 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.

"Each of these 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 U.S.

interest rate cuts.

PRESSURE ON PROFIT MARGINS LIKELY TO MEAN PRICE HIKES

"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.

CAUTION NEEDED ON PASSING COST HIKES TO CONSUMERS

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.